It is becoming increasingly more difficult for startups to survive. According to one report, long-term survival rates for startup companies have been plummeting over the past 20 years: Between 1994 and 2010, survival rates have declined from a nearly 100 percent survival rate in 1994 to just 25 percent in 2010. Separate studies performed by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation — a nonprofit that promotes U.S. entrepreneurship — found that of all companies, only about 60 percent of startups survive to age three and approximately 35 percent survive to age ten.
So, why do some startups fail and how can you ensure a successful startup. Harvard Business School Professor Noam Wasserman has written a book called, “The Founder’s Dilemma: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.” In the book, he has identified some reasons why startups fail. One of the major reasons startups fail is that they are co-founded by individuals who have a prior social relationship, not a prior professional relationship. According to Wasserman, such teams end up in disaster. Another major reason startups fail is that the founding teams divide the equity within a month of founding when uncertainty is at its highest.
While there are some factors that are beyond the control of startups, but may contribute to their demise, such as the economy or new government regulations, there are some things startups can do to help create a more stable company and one capable of surviving. Following are some of the factors experts say are likely to accompany a successful startup: (1) Starting the venture as part of a team and preferably with someone whom you have a prior professional relationship; (2) Drafting a business plan; (3) Starting the business on a full-time basis; (4) Starting a larger company, i.e., larger initial investment, greater number of employees, and greater size of assets; (5) Starting in a notoriously favorable industry; (6) Obtaining work experience in your targeted industry prior to starting your company; (7) Implementing and using a marketing plan; and, (8) Ensuring that financial controls are in place. These are important factors for startups to consider and implement, but what about the founders themselves.
In the thrill and excitement of starting a company, many entrepreneurs forget that they must protect themselves and their own survival. Following these rules can save a lot of future headache and may actually help your new company avoid some of the pitfalls identified by Professor Wasserman: First, protect yourself from the beginning by agreeing in writing on equity terms. Second, set up a business account and do not mingle your startup’s assets with personal assets. Third, protect any intellectual property by having everything assigned — in writing — to the company, and have all founders execute assignment agreements. Fourth, prepare a vesting plan and schedule and/or a transition plan in the event a founder decides to part ways. Fifth, hire a lawyer to review all documents on your behalf as your interests and the interest of your new company are not always the same.
The Law Office of Kristina M. Reed is committed to helping entrepreneurs and all small business owners achieve their dreams by providing the foundation needed for success. Our goal is to help you grow into a successful business. We are highly experienced in all phases of business law, from startup to profitability, and we can help guide your young company through all phases of its growth and success. If you have questions about your California business or startup, please contact us.