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10 Pitfalls to Avoid When Scaling

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10 Pitfalls to Avoid When Scaling

Scaling a business isn’t easy, but avoiding these 10 common pitfalls will help you to grow your business and set the right path towards exiting.

We work closely with many new businesses and start-ups. We see that time after time the challenges new ventures face are often similar, regardless of sector or the products and services they offer. The advantage of this is that with some forward planning, it’s possible to avoid many of the most common scaling pitfalls. Read on to discover the 10 pitfalls we see most often, and more importantly – how to mitigate and avoid them!

1. Due diligence panic

You never know when a great opportunity will come along. For that reason, you should always be ready to raise and sell. Mergers and acquisitions follow similar processes to fundraising, so prep early. Manage internal operations with a due diligence questionnaire or checklist and by setting up a due diligence room (an online space where you maintain all documents that will be relevant to a sale, acquisition or merger).

2. Company secretarial disasters

In the early stage of setting up a business, it is all too easy to focus on the exciting aspects of the venture like product development, marketing and expansion. However, there are critical administrative and secretarial processes at this stage that have to be done correctly. Mistakes in company structure, issuing share certificates, Companies House Filings and equity management can be costly. To minimise risks, carefully document and execute processes and involve accountants and lawyers at critical stages.

3. Founder fall-outs

Whether you start as friends, colleagues, business partners or even spouses, there is always the chance that you won’t always see eye-to-eye with your co-founders. You can minimise the impact of any disagreements by clearly modelling and agreeing on your ideal exit strategy (personal and company). Understand the metrics needed to achieve that exit and how much funding your business will need. Discuss early on dilution of raises and map everything out clearly on a cap table. Revisit your goals and metrics as often as you need to, to try and keep everyone on board.

4. Going overboard with the equity

There is only so much equity in any business and too many companies make the mistake of giving away too much too easily. You need to understand dilution and the market for your business. Consider if there are non-diluting funding sources that you could pursue. Where you do decide to dilute, make sure that you are getting a valuable return. And if things don’t work out you need a strategy for getting the equity back.

5. Being too thrifty with legal expenditure

Legal advice is not a ‘nice-to-have’ – it can mean the difference between the success or failure of your entire venture. You should view your lawyer as a strategic advisor and asset to your business. Work closely with your lawyer so that you’re clear on the risks that can be mitigated and the scope of your work together. Be wary of any advisor (legal or otherwise) that over-complicates matters without offering solutions. The best legal advice is often the simplest and most concise. Fixed fees and retainers are a great option if you want cost certainty for your business.

6. Losing control of raising

Fundraising is a critical growth step for many businesses, but it can get out of hand. Keep the process manageable by offering pro-rata pre-emption rights and tasking the Board with controlling the process.

7. Losing control of your exit

From the moment you start a new venture, you should always have your exit in mind. Review your ability to exit at every round – you don’t want to find yourself (personally or as a business) tied in and unable to sell. Avoid any restriction on creating competitive tension at exit. Be mindful also that strategic investors do not have the same gameplan as pure-play investors

8. Filling the wrong seats

The people in your business will ultimately decide the success of your venture. Every new addition to the team should add to your company’s strengths and build towards exit. Review your exit plan with each round of hiring and ensure that new appointments don’t take you in the wrong direction. Different senior roles and board positions will be needed at each stage of your business’ growth and your hiring should match your development. When hiring, be mindful of making equity awards too early and retain equity for later and critical hires.

9. Not protecting your IP

Your business is offering something new to the world; make sure that your creativity and ingenuity is protected. Consider how you can utilise registered protections (trademarks & patents) and contractual protections (confidentiality clauses across commercial, employment & consulting contracts) to uphold your IP. Where possible, implement operational protections too (limit information flow and identify trade secrets within your business etc). Assignment clauses across all employees and contractors are essential too.

10. Not adapting to growth

Perhaps the most intangible of our pitfalls is the inability to adapt and grow with your business. Things change as ventures scale. In early rounds, Founder control should be maintained. As you progress to later rounds, the Board becomes a greater asset as its make-up becomes more balanced with independents appointed. You need people in your business with experience relevant to your stage of growth. At all stages, ensure that those driving the company are clear on KPI and expectations.

Need help to avoid the pitfalls?

Knowing the potential pitfalls you may face as you scale is sometimes enough to help you avoid them. Much can be achieved with proper planning and clear goal-setting. However, sometimes you need some additional support.

At Seven Legal, we specialise in providing businesses with stage-specific legal advice to help them grow. We believe in offering practical and solution-oriented advice and work closely with our clients as their legal partners for the journey. To find out more, visit our client journey, or get in touch to find out how we could help your business.

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