Legal Tips For Startups: Advice From Experts in 2019

Small businesses in the US are thriving. The total number reached over 30.2 million in 2018. While there is no shortage of advice for those looking to start a business, startup founders often are still in the dark when it comes to common legal issues. Here is a curated list of legal tips for startups to help you succeed in 2019.

Lawyers are sometimes asked by those intending to start a business when to hire a lawyer. I like to compare the situation to when you should see a doctor. Many people dread the idea and want to put it off (particularly as they get older). But the conventional wisdom in both cases is that going early may be a bit painful, but going too late can be deadly.”

Edwin L. Miller Jr. “Lifecycle of a Technological Company

Choose the best business structure for your startup

Here are the most common forms of structure for startups and what you should know about them:

  1. Sole proprietorship: The fastest and cheapest way of starting a business. Caution: this is also the only structure where you will be personally liable for all business debts.
  2. Partnership:     You can either create a general partnership (where you will still be personally liable for business debts) or a limited liability partnership (where the burden of debt cannot be more than your share in the business). You should also know that one partner can act on behalf of all partners.
  3. LLC: An LLC is a hybrid between partnerships and corporations. LLCs provide the best of both worlds. You’ll pay lower taxes than corporations while still being protected from liability.
  4. C Corp:  (Or a regular corporation) will protect you with its limited liability status. This comes at the cost of increased difficulty in securing loans (without a personal guarantee), administrative and legal burden, and less privacy. You’ll also pay taxes on the profits of the company (corporate tax) and then taxes on your share of profits as well (income tax). Johnathan Rees calls this a “double whammy” in his book, Do Protect: Legal Advice for Startups.
  5. S Corp: S Corps enjoy the benefits of limited liability while being free from federal income tax. Shareholders are taxed upon their allocated share of the income.
  6. Nonprofit Corporation: Nonprofit corporations can get tax-exempt status by filing with the IRS. However, they still have to comply with most of the rules of corporations as well as special rules regarding how the profit is used/distributed.

type of business structures

For help choosing the right business structure, you can visit to review the various business structures available to you.

Name and protect your business and products

Each business structure has its own set of rules and regulations. For instance, most states prohibit and limit the use of certain words in corporate names. Words like banking, cooperative, trust, United States, insurance, pharmacy, national, medical, Olympic, etc. are restricted.

You should be able to find the complete list of these words on most of the secretary of state websites or by contacting the office where you will file for incorporation.

Another thing to note is that your state filing office may accept your business name even when it’s trademarked, as filing offices do not check state or federal trademark registers.

Here are some helpful tools for this stage of your startup:

  1. TrademarkNow: Get a list of names already trademarked as well as any risk factors associated with your name.
  2. Binded: A simple blockchain based software that will copyright your image for free.

Related: Blockchain Use Cases: 8 Ways The World Will Change

Get necessary licenses and permits

Depending on your business, you may need to obtain one or more licenses and permits from different levels of government.

Let’s start with two tax registrations at the federal level. First is the Employer Identification Number (EIN). It’s highly recommended that you apply for EIN, though sole proprietors and single-member LLCs may use their SSN in place of EIN. The other tax registration is Form 2553, only for those who want to elect status as an S corporation.

You must research and find out the details of each permit or license that you need. A good place to find out about your state requirements is where you can find a list of small business assistance agencies in your area.

You will most likely need to get permits/licenses if you’re dealing with food, liquor, or firearms or hazardous materials.

Prepare documents and evidence by calling state agencies related to your field and finding out what they require.

Get your taxes in order

No matter whether your business is organized as a sole proprietorship, partnership, corporation, or limited liability company, you’ve automatically got a silent partner: Uncle Sam.
– Attorney Fred S. Steingold, author of Legal Guide for Starting & Running a Small Business

There are three main business taxes that can apply to your business:

  1. Income tax: You’ll have to report your business income in your annual federal tax return. Different businesses will have to use different forms. Note that manufacturing businesses can be eligible for a significant tax deduction.
  2. Employment tax: There are quite a few employment taxes, also known as federal payroll taxes. Most of these involve withholding a part of the employees’ paychecks and paying them to IRS periodically.
  3. Self-employment tax: If you receive a salary or bonus for playing a significant part in the operations of your business, you will be considered an employee and will have to pay self-employment tax. This is separate from employment taxes but quite similar. Here’s a more in-depth explanation.

There are quite a few services and software that can help you with calculating and paying your employment taxes on time. Here’s a list.

Prepare to be audited

Small business owners are three times more likely to be audited by the IRS and in 80% of those audits, the business ends paying more. Keep Uncle Sam happy by recording everything.

A great resource to start your research about the taxes you’ll have to pay as a small business owner is the Small Businesses Self-Employed section found on the IRS website.

Here are some tools you can use to keep things organized and safe:

  1. Clerky: One of the best online software to file paperwork and be on top of important documents.
  2. Mint: A budget tracker and planner software for bills and business expenses.
  3. QuickBooks: One of the most popular accounting software among small business owners.

Finance your business and raise capital

Whichever way you choose to raise capital, be sure to document everything. Even gifts from family members and supporters as you can save on taxes.

If you have a business plan (which you should), you can start raising capital. The 12 most common methods of raising capital for startups are:

  1. Personal Salary
  2. Personal Savings
  3. Equity in Your Home
  4. Retirement Savings
  5. Credit Cards
  6. Buying on Credit
  7. Leasing
  8. Friends, Relatives, and Business Associates
  9. Supporters
  10. Banks loans
  11. Other Commercial Lenders
  12. Venture Capitalists

You can also look into SBA’s loan prequalification program if you belong to a demographic that has traditionally been underserved by the banking sector. Contact an SBA expert to improve your loan application.

Related: The 7 Deadly Sins Of Startups: Running Out Of Money

Get business insurance

It’s recommended that you look for a single insurance agent (aka insurance broker) who isn’t tied to any one insurance company. You want them to look at different vendors for quotes. When choosing an insurance policy:

  1. Look for multiple agents and don’t be afraid to ask for quotes.
  2. Make sure the insurance company is in good financial condition.
  3. The policy should cover all current and expected assets. In certain cases you may have to pay additional premiums.

If you’re manufacturing or selling a product that can injure the user, consider product liability insurance to protect yourself from litigation and damages.

If you’ve hired employees, you will have to buy workers’ compensation insurance (or some form of it) to cover injuries in the workplace.

If you need to make a claim, start gathering evidence (pictures of the damage and receipts of assets you’ve lost). Time is of the essence so take action quickly. You can also create a comprehensive list of your property beforehand to aid you in the unfortunate event of losses.

Know the zoning laws

50 percent of all small businesses in the US are home-based. Before you set up your business in your home, you need to research the zoning laws of your area. They will decide the extent of business activities you can carry out inside your house.

Some laws may allow light or even heavy manufacturing while some may restrict or outright prohibit home-based businesses. This can be the case in more affluent neighborhoods with tighter regulations.

If you’re only planning to use a small room of your house as an office that doesn’t look out of place, you’ll be fine. Be sure to see if you can write off your home office when tax season comes around. But if you’re going completely rework your house to accommodate new business needs, you may attract an inquiry into your business from your local zoning officials

Try talking to other local businesses to see what they’ve found while setting up their own businesses.

Use business contracts

You WILL enter contracts, either oral or written. Here’s what you should know:

  1. If it’s important, get it in writing. Oral contracts are much harder to enforce in court.
  2. Contracts can be unfair but not illegal, so think carefully before entering into a contract.
  3. Misrepresentation or mistakes can be grounds for cancellation of the contracts.
  4. Contracts that you “can’t say no to” or those that you are forced into are not legally enforceable.
  5. If both parties have lost a signed contract, it can still be enforceable. In this case, you’ll need to “prove to the satisfaction of” a judge or arbitrator that the contract was signed contained the specific terms you’re trying to enforce.
  6. If you’re about to enter a large transaction, hire a lawyer from your field. Have them read through the contract first.

Here are some tools you can use to write, send, and review contracts:

  1. Shake: Easily sign and send legally-binding agreements for free.
  2. LegalSifter: Use a powerful artificial intelligence system to review your contract and find what’s missing.
  3. TermsFeed: Create customized privacy policy, disclaimer, cookies policy, EULA, and terms and condition

Understand how to deal with legal disputes

Fighting legal disputes is often the most expensive method of resolving a dispute. You may or may not achieve the results you want. Litigation isn’t your only option. Non-courtroom approaches like negotiation, mediation, and arbitration can save you thousands of dollars, headaches, and lost business.

Before saying “I’ll see you in court!”, try to settle the dispute by negotiating or mediating. Mediations are negotiations where an unbiased third-party facilitates the negotiation by giving advice. Some lawyers call them “turbocharged negotiations”.

Your final non-courtroom option is arbitration. With arbitration, an arbitrator or a panel will hear the case and make a final, legally binding decision but the process is much quicker while being less expensive than an actual court hearing. Fred Steingold advises considering arbitration when dealing with employment disputes.

If you’re looking for an arbitrator or a mediator, you may contact the American Arbitration Association or JAMS, or U.S. Arbitration & Mediation. You (or your opponent) can also hire your own arbitrator.

BONUS: Find the right lawyer

During the course of your business, you will require a lawyer’s services time and time again. However, only a small minority of these lawyers have sufficient experience working with small businesses. Fred Steingold advises against using lawyer directories, websites, and advertisements as your only source of information. Instead, go out and talk to your community of small business owners and look for referrals to create a list.

Find a lawyer who knows your business and is interested in it. Someone practical enough to understand how a business works and can help you capitalize on opportunities.

The other most important thing to note is the fees. Lawyers can charge hundreds of dollars an hour which can compound quickly into some hefty bills. Here are some tips on saving money on lawyer fees:

  1. Group your legal issues together and consult your lawyer in one go.
  2. Use nonprofessional help when you can. For instance, you or your employees can gather evidence, review receipts, write drafts, etc.
  3. Brush up your legal knowledge of your trade and ask your lawyer to be a coach.
  4. Maintain a good client-lawyer relationship and know your rights.

Here are some services focused on the legal needs of startups:

  1. RocketLawyer: Get access to millions of free legal documents, advice, and information.
  2. Upcounsel: UpWork but for lawyers. There are more than 5,000 experienced lawyers on this platform ready to give you advice and look over legal documents.
  3. StartupLawyer: Another service like RocketLawyer that provides information on a wide of legal topics related to startups.

The services we’ve mentioned are all great and plenty of businesses vouch for them. But nothing beats traditional face-to-face counsel. If you’re about to start talking to investors and potential business partners, you may want to look at a trusted firm like Walker Corporate Law.

Here are some links to the books that we used during research. We recommend reading them to get discover additional legal tips for startups.

  1. Legal Guide for Starting & Running by Fred S. Steingold
  2. Do Protect: Legal Advice for Startups by Johnathan Rees
  3. Lifecycle of a Technology Company: Step-by-Step Legal Background and Practical Guide from Startup to Sale by Edwin L. Miller Jr.

What Is A Technical Project Manager?

As a player in the programming or development industry, you may have heard the term ‘technical project manager’ being thrown around quite a bit, especially in recent times. If you’re working on a team project, it is likely that you will be placed under the supervision and guidance of a project manager who will be beside you every step of the way, which is why it is important to understand what the role of this individual actually is. So, what exactly is a technical project manager?

What Is A Technical Project Manager?

Technical project manager

The role of a technical project manager is to control, monitor, and ensure the proper execution of a business or company’s projects to which they have been assigned. The project manager would help the company schedule the project, distribute the resources, and ultimately view the entire process through a bigger lens. Also, to make sure that the goals are met through the technical aspect of the relevant project.

A technical project manager also has the ability to support the management of an IT initiative from a concept through to a concrete deliverable as a project with special technical knowledge.

What Are The Responsibilities Of A Technical Project Manager?

technical project manager

The life cycle of a project can be divided into five different phases: the initiation, planning, execution, monitoring/controlling, and the closing phase. The technical project manager has significant responsibilities in each of these phases that range from progress assessment to team management. The following below are some of the most critical responsibilities of a technical project manager throughout the project development and execution process.

A Technical Project Manager Must:

  • Identify the key stakeholders involved in the project and ensure effective communication and involvement.
  • Prepare a suitable project plan and schedule that the stakeholders and team members agree on and can follow.
  • Gather and break down the project requirements in terms of resources and monetary investment in order to determine the required budget.
  • Facilitate communication between the stakeholders and the developing team as well as among the team members for smooth and optimal functioning.
  • Make sure that the team members, stakeholders, or customers are satisfied with the progress of the project at all stages of its life cycle and the final product meets their expectations.
  • Identify any potential risks that may threaten the quality of the product or the project process and come up with effective strategies to counter them.
  • Take the necessary steps to maintain the high quality of the project.
  • Keep track of the progress of the development and ensure that the predetermined goals are consistently met.
  • Close the project after the customer’s expectations have been met.

It is also important to remember that having someone managing effectively, leads to a better outcome and having bad management can have many negative effects on a company/business.


Ultimately, we can conclude that the role of a technical project manager is not to become invested in guiding the coding process or the programming aspect of the project. But, it is to monitor the various operations involved in the process, assess the progress, deal with the overarching, and specific technical aspects using their own specialized knowledge in their niche. Most importantly, a technical project manager main responsibilities are to guide and manage the complete lifecycle of a project.

The Risks Of Hiring A Freelance Developer

You wake up at 3 in the morning. Your heart is pounding — your mind is racing. You’ve just come up with the next big idea for an app or website that is going to change the world. ‘This is it!’ you tell yourself — ‘my big idea!’ The only problem is, your background is in something other than tech. Maybe you’re a physician, or perhaps a collegiate coach. Maybe you’re a contractor, teacher, or a full-time caretaker…all professions that require unique skill sets and expertise. But you don’t know a thing about apps or websites or block-whatever. In this blog, we will go over the risks of hiring a freelance developer.

The temptation of ‘cheap’

If you’re looking for a developer who can help you make your dream a reality, it may be tempting to prioritize your budget during the process. You may want to hire a freelance developer who charges low prices and is easy to access online. They all do the same thing, right? So why pay $100 per hour when another person charges $25?

Today, around 10% of all developers identify as independent, freelance, or self-employed. Since a tech expert can be expensive to work with, freelance sites like Upwork or Fiverr are appealing, especially since they present you with many more affordable labor options.

However useful these sites can be, there is a hidden risk. If you want to create a site or program that is successful in the long run, it can pay to invest in more expensive help upfront. A real, qualified developer with experience can be essential for making or breaking the results of your product. Here’s why you should consider it.

Top-talent developers can work faster

A budget freelance developer you find online may be able to offer you a low fee per hour. However, if the freelancer isn’t especially skilled at programming, it may take them many hours to finish the job. In the end, this extra time actually cancels out any financial benefit you could enjoy from hiring someone who is low-cost. 

If your budget developer charges you $25 per hour but takes 5 weeks to finish a project, you are better off hiring an expert who charges $100 per hour that can finish the job in one week. Not only can a top-talent engineer work faster, but they can also consistently produce higher-quality work

Quality work is super important

A developer who works freelance may have basic knowledge of how to build websites or apps. However, since they are working on their own, often times no employer has verified their competence or skill level. On the other hand, a developer working for a trusted company or agency got hired because of proven talent. 

When you hire an experienced tech expert, you know their skill level and ability has been verified. When choosing a developer, to skimp on the budget is equal to skimping on quality, which can result in a product that will ultimately fail. 

There are some on these sites who also pose as developers, but who actually are just there to make a quick buck. When the budget is small, you run the risk of hiring a scammer who will take your money, but not your calls. You need someone who will be accountable for their work and not disappear midway through the project. 

You want someone who understands the industry

When it comes to creating a tech product that’s going to succeed, you need to have the knowledge and an awareness of the existing market. The people helping you create your project should understand what competitors are doing, what trends are popular, and what new developments to expect. 

When you work with a freelancer, you won’t necessarily be able to rely on someone who understands the bigger picture and can help ensure you’re creating a product that meets a real need. On the other hand, when you hire someone from an agency or tech company, you’ll be working with someone who understands the business and who knows what it takes to succeed in the field.

Freelancers might require extra work on your part

A freelancer isn’t wedded to working with you. They could work with you on a project, then go work for your competitor the next week. So, to keep your information safe, you’ll need to take legal precautions, like drawing up non-disclosure agreements. 

Freelancers may also require more time to understand your project. This work on your part could end up costing you a lot of precious time and money.

How to safely and effectively hire a freelancer

If you simply don’t have the budget to hire an expert, or you want to give a freelance developer a shot, there are some steps you can take to ensure your experience is as successful as possible. First, find a freelancer’s portfolio to review their work and make sure they have the proper skills to create what you need them to. Next, if they work for a freelancer marketplace like Fiverr, read their reviews and make sure that other people have had a positive experience working with them. 

Check to see if you can find former clients of theirs, and check their references. Hearing firsthand that they know what they’re doing is a good way to verify they’re a good choice for your team. 

Get some help hiring freelancers if you’re overwhelmed

Finally, if this feels overwhelming to you or you’re not sure how to vet the freelancers you find, consider hiring someone with experience overseeing projects. A solution architect can help you understand the individual needs for your project and a project manager can help ensure the quality of the product. These experts can also handle the process of putting together the right team, so you can be sure you’re relying on pros to make your dream for an app or site a reality.

Step-By-Step Guide On How To Fail: 7 Reasons Why Businesses Fail

What are the reasons why businesses fail?  Every year, thousands of wide-eyed and optimistic entrepreneurs embark on a journey to create the next big thing. With passion ablaze and a belief that success is attainable, they set out to change the world. The brutal reality, however, is that most will fail.

A recent study by CB Insights studied the post-mortems of over 250 failed startups. They found 70% of tech startups fail, and 97% of seed or crowdfunded consumer hardware companies pull the plug. The odds are against success- but not without a silver lining. Every failure presents an opportunity to learn. We can glean value in terms of what to do and what to avoid.

Death Of a Startup

There are countless reasons a startup can fail. In our experience, a lack of knowledge and poor planning are often the most serious issues clients face. Even with boundless enthusiasm (and sometimes even a boatload of cash), it’s what business owners DON’T know that causes the biggest problems.

With an idealistic vision of what starting a company looks like, many new entrepreneurs avoid the thought that their business might fail. While confidence is always necessary, disaster awaits those who never take the initiative to safeguard their startup against common and avoidable mistakes. We’ve put together a list of the most prevalent issues plaguing new startups, with case studies for each.

1. Lack Of Market Need

Many startups fail simply because nobody wants what they are offering. They fail to do proper market research. 42% of the startups analyzed by CB Insights failed because there was no demand for their product in the market.

Start small. Conduct proper market research & feasibility studies, and utilize focus groups to find out what potential customers think of your product. The insight and feedback gained in this stage can be invaluable for your company.

Entrepreneurs often overlook the market conditions and variables — whether the market is ready for their product or not, the target demographics’ purchasing power, market saturation, etc. A good idea is not enough. The market must be ready for your product- whether they know it or not.

Case Study: Microsoft Zune (2006–2012)

Zune was designed to be Microsoft’s answer to Apple’s iPod. The reason Zune failed was simple — Microsoft didn’t understand the market. If they did, they would have realized nobody wanted Zune. It was a product that offered no innovative features nor did anything superior to its main rival. People didn’t want an alternative to the iPod. Late entry into the space and poor marketing efforts gave the Zune little chance to win. A portable MP3 player…new and improved? Nope.

2. Running Out Of Cash (And Giving Up)

The second biggest reason for startup failure –reaching the end of the runway with no take-off. Maintaining a steady cash inflow is extremely important but not all businesses can start pulling in money right from the beginning. Running out of capital doesn’t necessarily mean the death of your company- but not knowing how to adapt does.

Many successful companies run at a loss for extended periods of time. Running out of money from a seed or series-A round of funding is not uncommon. You’ve heard the importance of an MVP (minimum viable product) but if you lose sight of your companies USP (unique selling proposition), you’re toast. By effectively demonstrating the value of the product, a company can raise further capital and extend the runway.

Case Study: Tesla (2002-Present)

The electric car maker giant started on very shaky grounds. In 2002, Elon Musk started Tesla alongside SpaceX. He invested $90 million in the companies but it wasn’t enough, and costs kept increasing. By the end of 2008, Tesla was on the verge of bankruptcy. The obituary was written and the press was ready to announce Tesla’s death at any moment. But as we know, Musk soldiered on and Tesla prevailed. He was able to deliver the first Tesla Roadster and secured further capital to keep the company alive.

3. Lack Of Sustainable Growth

“When you stop growing you start dying.”-William S. Burroughs

Forward momentum requires constant growth. The day you cease to provide increased value to customers, you open the door for someone else to come along and steal your crown. Without the momentum to escape the competition, newcomers will push you out of the market. Without growth, economies of scale cannot be realized, and your costs will remain prohibitive to profits.

In an ever-changing world, sometimes growth means changing business models or pivoting in a new direction. When a product has run its course, entering a new market or a new industry can be the necessary growth to keep a company alive. A failure to pivot, or pivoting late, can mean death.

Case study: Blockbuster (1985–2010)

The ubiquitous, American-based company provided movie and game rental services with over 9 thousand stores globally. In 2000, a small web-based movie rental company called Netflix approached Blockbuster with an offer to sell their company for $50 million. The Blockbuster CEO, blind to the rapidly shifting playing field, dismissed their “very small niche business” model. In the following years, Netflix pivoted to online streaming, rendering brick and mortar rental stores like Blockbuster obsolete.

Blockbuster failed to pivot and now exists only as a memory to millennials, their parents, and the butt of online jokes.

4. Competition

When facing a lot of direct competition, there are certain steps you must take to cement your market standing. Failure to do so could seal your company’s fate in the startup graveyard. To stand out, one must offer something new or something much better than what already exists. Taking competitors into consideration and developing a proper marketing strategy is crucial. Perhaps most importantly, the product must be priced just right. This becomes more complicated as competitors attempt to undercut each other in an effort to lure customers.

If you’re a pioneer and first to the market, you’ll need to take a different approach. You need to make it hard for potential competitors to enter the market by creating barriers to entry. These include patents, government rights, access to specific distribution channels, economies of scale, establishing yourself as the market leader and namesake, etc.

While ignoring the competition is a recipe for disaster, obsessing over it is not healthy either. The mission should be to provide as much value as possible to the customer. If you can find better ways to give more to your customers, you will have a bright future ahead.

Case Study: Toys R Us (1948–2017)

One of the largest toy store chains (and a piece of children’s souls everywhere) shut its doors recently. The downturn began with a 10-year partnership with Amazon. Toys-R-Us agreed to pay Amazon $50 million a year plus a percentage of sales to serve as an exclusive vendor. With a massive level of sales, Amazon began allowing other toy vendors into their ecosystem. Toys-R-Us sued Amazon and attempted to launch its own website to sell toys online, but it was too late. Toys-R-Us failed to compete with other online retailers’ prices. Plummeting sales and mounting debt left Toys-R-Us with no choice but to file for bankruptcy in late 2017.

5. Poor Management

Faulty recruitment practices, internal conflicts, poor communication, and slow decision making are just some of the headaches that come with an incompetent leader backed by an unqualified team.

A common mistake business owners make is believing they can do it all on their own. As any successful entrepreneur knows, the truth is it takes a team. Everyone has strengths and weaknesses. The founder’s job is to know each employee and hire the appropriate team members.

Case Study: Pan American Airways (1927–1991)

Once largest air carrier in the US, all that survives is its iconic blue logo after it went out of business in 1991. Poor leadership and an inability to solve internal conflicts were the two big problems for Pan Am’s management. Over-investing in existing business models and a lack of innovation brought about the company’s downfall. These issues combined with corporate mismanagement, complications involving US regulatory policy, and the government’s inability to protect its largest air carrier lead to the going out of business in 1991.

6. Having a poor product

In the end, everything comes down to the product. Because of this, there are many ways to fail at providing value to the customer. Consumers must feel like they are getting more than what they pay for. If the product doesn’t offer enough value to justify the cost, people will either not purchase it, or return it. Proper marketing efforts and branding are required to present your product honestly. If a product is marketed in a way that misrepresents the true value of the product, customers will be unhappy and you lose their trust. If the quality is lacking, then you’ve already failed, and there won’t be much hope.

Case study: General Magic (1993–2011)

General Magic was a company associated with Apple and had one of the largest IPOs of the 90s. It boasted partnerships with companies such as Sony, Panasonic, and AT&T. It was the hottest and most mysterious company of its time, shrouded in secrecy as they created a highly anticipated product. In 1994, they launched multiple devices using General Magic’s innovative touchscreen interface — and they all failed. While they spent hundreds of hours developing and testing their technology, they didn’t spend nearly enough time testing the product with consumers. Turns out the market didn’t want a heavy, expensive mobile device with a dimly lit screen that was hardly usable outdoors.

7. Premature scaling

One of the first things founders do after getting established and raising capital is hiring. This is the classic pitfall of premature scaling. Simply put, premature scaling is expanding your business before your product is ready for the market. Founders will often feel the urge to spend money left and right on things that “feel” necessary, but rarely are. The focus is diluted away from the core product and market.

As a company moves too fast, technical debt grows out of control. For software companies, hastily written code that is “good enough” to launch an MVP becomes a weak foundation, vulnerable to frequent breaking. Sprint cycles turn from weeks to months, and the benefit of agility is lost. Pivots become harder and harder, and new features take a prohibitive amount of resources to build. Problems are swept under the rug, and eventually, they come back to bite.

Case Study: Groupon (2008-Present)

Groupon started in 2008 and allowed users to get discounted goods and services by buying as a group. It pioneered the concept of early adopters by introducing coupons to the Facebook and Twitter generation, becoming known as the “fastest-growing company ever”. It was seeing extreme success. As they rushed to scale quickly, things took a turn for the worse. Continual reports of huge losses drove the share price lower and lower. Groupon’s mistake was prioritizing new customer acquisition instead of customer retention. It sought to scale while not dealing with pre-existing issues. Although not dead, Groupon is hardly the behemoth it once was expected to be.

Will my startup fail?

The question you should be asking is — why do startups succeed?

Because the odds are against you, you should focus on the practices that improve the chances of success. We already know what kills startups-so do everything in your power to not make the same mistakes. But for guaranteed success, you need more.

1. Planning

In business school, they teach the functions of management-the first being planning. Proper planning leads to every other aspect of good management. A solid plan involves taking into consideration all the current variables at play as well as forecasting future variables. All bases must be covered. Planning also facilitates decision making, helping to avoid conflicts in the future.

2. Discipline

Discipline means that you do not lose focus, get distracted, or become lethargic. Far too often business owners either lose focus or get distracted with other things to the detriment of their business. Sometimes they even start new businesses or attempt to expand their startup while before finding its place in the market. A business in the startup phase requires much more attention than an established business, requiring founders to be proactive, as opposed to reactive.

3. Persistence

Like everything in life, startups will have its ups and downs. What matters is that you do not lose hope. Keep pushing forward while focusing on the vision — the value you are bringing to customers. The day you stop caring is the day you’ve signed up for a plot in the startup graveyard.

Summary And Next Steps:

An entrepreneur who spends cash wisely, understands and adapts to the competition, develops best management practices, focuses on the product, and grows their business sustainably is setting their company up for a higher chance of success. Although following these guidelines are not a guarantee for success, not following them is a recipe for failure.

The 7 Deadly Sins Of Startups: Lack Of Sustainability

This is part of a 7-part series on reasons why businesses fail.

Sustainable growth is a key sign that a company has matured past the startup stage. Although all companies should strive to obtain sustainable growth, not all of them will reach their potential and lack of sustainability in their business.

Two of the most important aspects of a new business idea an entrepreneur is told to look for is sustainability and scalability. Does the business have growth potential? If a business can continue to grow while maintaining sustainability, it will be able to scale.

What Are Some Risks An Unsustainable Business Faces?

If a company cannot reach a level of sustainability, it gives the competition an opening to take the lead.

  • Being pushed out of the market: Just because your company has lost its forward momentum, doesn’t mean the competition has. Rivals will continue to grow, gobbling up the market share. Some might even double down on their expansion policy in an attempt to drive you out of the market, eliminating you from the game.
  • Stagnation: Customers are always looking for more value. They are happy to pay as long as they feel are getting their money’s worth. But having a company with growth issues limits how much value you can provide to your audience. If you hit a ceiling and lose the ability to improve your product or service, your company will lose importance as others innovate and improve upon your business model.
  • Lack of economies of scale or prescaling: Economies of scale is a benefit that large businesses enjoy when they produce in large numbers. Each additional unit becomes less expensive to make. This relates to all types of industries. But a business that has no potential to grow will never reach the point where it can enjoy economies of scale. Almost all market leaders enjoy economies of scale in some form — it’s a huge advantage that allows them to maintain their dominant position in the market.

To Be Sustainable, You Need To Be Flexible

A business model that lacks flexibility will suffer in the face of a dynamic and ever-changing environment. Technology and trends can change on a whim, and sometimes the best decision is to pivot. This isn’t saying we advocate chasing trends…but the only thing worse than chasing a trend is chasing an old one. If the market has made it clear it has no interest in your product, you’ll need to adapt to find a need that isn’t being met yet.

Case Study: What Killed Blockbuster?

Lack of innovation, being insensitive to the market, and a business model that thrived on penalizing its customers — all of these things together brought the end of Blockbuster. Let’s address each of these issues one by 

With the rise of subscription-based services like Netflix, Blockbuster was facing serious competition for the first time. It tried to innovate but in the wrong direction. It launched DVD-by-mail service in an attempt to copy Netflix and claw back some of the stolen market shares. When Netflix expanded into a streaming service, Blockbuster launched its own video-on-demand streaming services but was too late. Netflix was the new champion.

Blockbuster’s failure to sense the shift in the consumer’s mindset blinded them to the changing environment. Even when Netflix proposed a partnership, Blockbuster’s CEO balked at the offer and Netflix’s founder was laughed out of the office. Who’s laughing now?

Blockbuster’s business model was inflexible and prevented them from pivoting and maintaining sustainability. The late fees which Blockbuster leveraged against its customers brought in a lot of revenue. Depending on your age, you may have memories of racing to drop your movie in the return slot by noon. When Netflix launched its subscription-based service, one that allowed people the freedom to return their movies when they wanted, people were quick to choose the alternative.

Case Study: Soap, Baking Powder, & Chewing Gum

Today, when the world hears the name Wrigley, it thinks of chewing gum. But back in 1891, it was known chiefly for selling soap. The founder, William Wrigley Jr., offered free baking powder as an incentive for merchants to carry his soap. When the baking powder became more popular than the soap, Wrigley smartly decided to pivot and start selling baking powder. Inspired by his previous marketing success, Wrigley decided to give out free chewing gum as an incentive to carry his baking powder. As you probably guessed, the chewing gum became more popular than the baking powder. Wrigley’s, the gum brand, was born.


Because it had a flexible business model, Wrigley’s was able to pivot quickly. And remember when we talked about being pushed out of the market before? Wrigley’s did that to its competition back when the financial recession of 1907 hit. At a time when all businesses were struggling to stay afloat, Wrigley Jr. mortgaged everything he owned to borrow $250,000 to launch an aggressive advertising campaign. The plan worked as Wrigley’s soon became the most popular and largest selling brand in the United States.

The 7 Deadly Sins Of Startups: Running Out Of Money

This is part of a 7-part series on reasons why businesses fail.

Time and money — two things we always seem to find ourselves short of. In the competitive arena of business, a company can be made or broken by how effectively it uses its resources. Or, they will be running out of money.  Too many startups have run out of cash and been forced to close up shop. Having a poor cash flow can signal the impending death of a company, and not preparing how to deal with it means certain failure.

Every company needs money to operate and survive. For most startups this is a problem since they are less likely to be profitable in the early stages, spending more than they make. A company with funding has an advantage of being able to operate at a loss for some time, but even that will provide a limited runway. It’s imperative that a company continually works towards becomes self-sustaining.

How To Survive When You’re Burning Cash

Until your company is self-sustaining, you must watch your cash burn. The limited resources need to keep the company afloat until the next round of funding or until positive cash flow is reached. A prudent entrepreneur will only spend on the essentials and save wherever she or he can. But for many entrepreneurs, emotions get in the way. In a desperate attempt to spawn growth, they end up throwing money in every direction — sometimes it pays off, many times it doesn’t.

Some might argue that running out of money is normal for a startup. The argument says that by playing it too safe, you run the bigger risk of missing out on opportunities that could potentially launch your business. Still, a failed pivot is highly likely to be the last song a startup sings. The best way to spend your valuable resources wisely is to have a well-formulated plan, like a development roadmap, which can help you and your team focus on your goals and avoid wasting money.

Every business decision needs to be made while taking certain factors into account. Your company’s ability to take on risk can determine whether or not a cost-intensive pivot is the right thing to do. So what should it be? Go for the risky opportunity and hope it pays off or keeping grinding the same ax, hoping you reach profitability?

Case Study: To Pivot Or Not To Pivot?

Women’s clothing store Vanity closed shop last year after being in business for over fifty years. The South Dakota based business declared bankruptcy and closed all of its stores. Why? They couldn’t keep up with the changing business environment. Low sales and diminishing revenue forced them to call it quits. Many stores at the time were losing the fight against online retailers and more niche brands.

It wasn’t just Vanity that was struggling to make enough sales. Many other clothing stores were dealing with similar issues. Even Target, the department store giant which was once known for quality apparel was now in a tight spot. Realizing the doomed path is was on, Target decided to pivot. It invested huge sums of money into rebranding and marketing to modernize its image. It paid off. Sales increased, share price increased, and most importantly, Target was back on the map.

Case Study: The First Electric Car Company To Not Fail?

Yep, we’re talking about Tesla. The founder, Elon Musk made his fortune by starting an online bank which later merged with PayPal. Musk invested $90 million into SpaceX and Tesla, yet stated in an interview that he expected Tesla to fail. When the 2008 financial crisis struck in 2008. companies like Chrysler and General Motors received billions of dollars in government bailout money. Tesla got only a fraction of the help and was still in need of a miracle. When all hope seemed lost, German automaker Daimler invested $50 million into Tesla. Even then, up until 2013, Tesla was operating with one to two weeks of the runway.

Even though the financial situation you’re in likely differs from that of Elon’s, there’s a lesson to be learned. Despite enormous obstacles, include severe financial hurdles, Elon kept up hope. Many entrepreneurs give up when their company is strapped for cash and the end feels near. In truth, for a startup to succeed, the team must remain focused on their mission. Only through the commitment to provide real value to the world can a team survive the storm and find profitability. Lose sight of the mission, and all hope will be lost.

The 7 Deadly Sins Of Startups: Poor Product Design

This is part of a 7-part series on reasons why businesses fail.

The Four P’s Of Marking: Price, Place, Promotion, And Product

Poor product design plays a big factor in startups failure. There’s a reason why a product is said to be the most important part of the marketing mix. In today’s world of cut-throat competition, producers have no alternative but to compete for the best offering in the market. Don’t mistakenly assume the other P’s can save you — inferior products cannot sustain on hype alone. Eventually, word will spread that what you’re selling isn’t worth the price.

Every year, thousands of startups fail due to offering a poor product. So, how do we ensure that our product is better than anything else on the market? We must step into the customer’s shoes and understand what makes or breaks a product. A product is your offering to the market, and you have to execute perfectly on the design, features, user experience, timing of the launch, and promotion.

What impacts the success of product design?

  • Value: Your product needs to offer more value than what you’re asking for in price. Value can be in terms of utility (usefulness), quality, customer service, design, and brand value. Customers should always feel like they are getting more than their money’s worth. Create more value for your customer than anyone else, and you’ll be successful.
  • Pricing: Failure to price a product correctly accounts for roughly 1/5th of startup failures, according to CB Insights. Price too low and your profit margins will disappear. Price too high, and you kill sales. The price point of your product significantly affects your revenue, so it’s important to get it right.
  • Timing: The same study by CB Insights found a mistimed product launch accounted for 13 percent of startup failures. The market, whether they know it or not, must be ready for the product. If you’re too early to market, people will struggle to see how your product relates to their lives and needs. Entering too late into a market can mean giving your competitors an insurmountable lead. However, if you time your launch just right and compliment it with the right promotion, you’ll have people saying “I’ve got to have that!”

Case Study: The Not-So-Magical Smartphone

General Magic was a hot tech startup of the 90s. They developed a handheld device— like a PDA, but with a touch interface and focused on communications. They essentially produced the first smartphone. However, despite technological breakthroughs, the final product was found lacking. The “phones” it made by partnering up with giants such as Sony, Motorola, and AT&T were not user-friendly. These large, heavy devices had screens that were difficult to read in the sun. And starting at $800, the price was far out of reach for the average consumer.

Although achieving significant advances in the communications technology sector, the usability issues and high price kept General Magic’s hotly anticipated device from reaching mass adoption.

Case Study: South Korean Success

Samsung is one of the largest companies in the world in terms of revenue. The conglomerate is the parent company of Samsung Electronics, Samsung Heavy Industries, Samsung C&T, and Samsung Engineering, Samsung Life Insurance, and more. Through careful planning, market research, and innovation, Samsung has created ultra-successful products. In the 2000s, Samsung went from being nowhere in the smartphone business to climbing to the top mobile phone manufacturer. By creating an incredible amount of value for consumers, Samsung has managed to capture nearly 50% of the Android-run smartphone business.

The 7 Deadly Sins Of Startups: No Market Need  [Importance Of Market Research]

In order to be successful, you must inspire the market to purchase what you’re selling. This becomes incredibly difficult if nobody has any use for your product! The importance of market research is critical as a startup. Too many businesses have failed to create anything of true value for the market. In an analysis by CB Insights, nearly half of all startup failures were due to lack of market need.

This is part of a 7-part series on reasons why businesses fail.

Importance Of Market Research

As confident as you may be in your idea or product, thorough market research is a must for any startup. There is simply no point in developing a product or service nobody will want. Market research must include establishing the need for your product, the competition, suppliers, relevant laws & regulations, information about the target demographic, etc.

You can’t assume people will want what you sell. Market research, feasibility studies, and focus group testing help to challenge your hypotheses. If you’re wrong about the market, it is absolutely crucial to find this out ASAP. If you’re on the right path, this data can also help tremendously in securing funding by demonstrating real demand for your product.

“The greatest tragedy of mankind is people holding on to wrong opinions… ” — Ray Dalio

So how do we get this right? Let’s start off by taking a look at a prime example of how to get it wrong by ignoring market need.

Case Study: Zune’d For Failure

microsoft zune

Microsoft launched the Zune in 2006, the Zune HD in 2009, and by 2011 the brand was discontinued. Zune was launched as a direct competitor to Apple’s iPod. Despite the aggressive marketing efforts by Microsoft, it had little success. The problem with Zune was that it offered nothing new to customers. Apple was already miles ahead of Zune in terms of technology, and there was no need for an alternative MP3 player. The iPod was first to market and Zune was never able to convince consumers to make a switch.

Lack of market killed Zune, and Microsoft failed to anticipate this due to a lack of market research.

Don’t let good looks fool you…Microsoft is not cool or trendy. These two words are generally reserved to describe Apple. Thus, their marketing efforts were focused on people who didn’t identify with the iPod. However, at this time most consumers either had the iPod or wanted the iPod. Microsoft was left with a rather small pool of potential customers. Not so good.

All in all, market research wouldn’t have turned the Zune into an overnight success, but it could have revealed the Zune’s likely failure. Microsoft might’ve avoided wasting time and money, or at least have produced a product people wanted.

Now let’s look at a company whose market research paid off enormously.

Case Study: Finger-Lickin’ Good Market Research


Kentucky Fried Chicken, more affectionately known as KFC, found its biggest market quite a ways from home — China. After opening the first store in 1987, and now with more than 5,600 locations and $5 billion in revenue in 2017, it has been warmly embraced by the country’s new generation. Fun fact: no other foreign fast-food chain enjoys this kind of success. KFC grabbed an 11.6 percent share while McDonald holds only 5.6 percent. The key to KFC’s success? Quite literally, it’s menu!

Just like this guy, KFC knows what’s up. Before entering China, KFC knew their traditional menu loved by so many in the United States wouldn’t work at all in the new territory. So a complete overhaul was initiated, creating a menu unlike anything in the US. Options such as shrimp sandwiches, matcha ice cream, congee, and soy sauce wings allow KFC China to cater to the new audience’s tastes and preferences. In a country where others were struggling to find decent footing, KFC trumped them all, thanks to a deep understanding of the market need.

The 7 deadly Sins Of Startups: The Effects Of Poor Management

What does management mean and the effects of poor management? For Henri Fayol, the famous French founder of modern management methodology, it is “to forecast, to plan, to organize, to command, to coordinate and control activities of others.” According to Supper Club, of all the companies that failed from 2011 to 2013, poor management was to blame 50% of the time. How do companies succumb to poor management? Let’s take a deeper look to find out.

This is part of a 7-part series on reasons why businesses fail.

How Poor Management Impacts A Startup

A report from the Chartered Management Institute (CMI) was able to establish clear links between poor management and startup failures. Here we list some of the ways management can be the cause behind the death of a startup.

Founders: A founders influence on the fate of a startup is hard to overstate. Disagreements amongst cofounders can result in one or, in many cases, multiple founders leaving which results in almost certain death of the business. Founders may have great ideas and limitless ambition but lack fundamental management ability. With a diverse range of responsibilities such as planning, organizing, staffing, and directing, management becomes complicated and easy to mess up. Additionally, many startup founders or small business owners do not have formal management education or training, making them even more susceptible to mistakes.

Poor decision making: Every decision has consequences. A string of consistently poor choices can culminate to technical debt and in the collapse of a company. It’s not just about consequences, however. Slow decision making can result in valuable opportunities slipping away. Ideally, decisions should be made promptly near the point of action and only by qualified personnel.

A myriad of additional reasons: Bad staffing practices, inefficient organizational structure, lack of quality leadership, and ineffective communication all have their roots in poor management.

What Are The Qualities Found In Effective Leadership?

We’ve talked about bad management practices. What about good ones? Here are some signs of healthy management:

· Consistent, constructive feedback
· Investment in the success and growth of subordinates
· Strong leadership by example
· Efficient utilization of resources
· Delegating tasks to the proper employees
· A purposeful vision for the future
· Openness to a delegation of tasks and trust of team members
· An authentic care for team morale

Case Study: Pan American Airways

Once the largest airlines in the United States, the once-iconic blue logo now shines as a reminder for the pitfalls of bad management. How did Pan Am, the largest international air carrier from 1927–1991, fail? A long string of poor business decisions by the management led to its downfall. Critics say that after the departure of Juan Trippe, the company started going downhill. A decline in the quality of customer service was the first sign. Foreign travelers began to avoid flying with Pan Am, and eventually, even Americans followed suit.

In 1980, Pan Am bought National Airlines for its North-South routes but made a series of mistakes. For one, they grossly overpaid for the acquisition due to a price war with another airline. Pan Am also bought a number of aircrafts that were not compatible with their operations. Finally, they failed to create a strong domestic hub. The whole deal was hasty and poorly handled.

Despite managing to eventually sell Pacific Division at a good price to settle debts, they were never able to capitalize on the sale due to painfully slow decision making. All this combined with their inability to adapt to changes in regulation, the crippled company crawled to failure.

Case Study: The Toyota Way

How did Toyota, at one point the largest car manufacturer in the world, manage to rise to the top? It had a system in place, designed to provide employees with tools to improve their work. These 14 principles are known as the ‘Toyota Way’:

  1. Base decisions on a Long-Term Philosophy, even at the expense of short-term financial gain
  2. Create a continuous process flow to bring problems to the surface, eliminating waste through the process of continual improvement
  3. Use ‘pull’ systems (where a process signals the demand to its predecessor) to avoid overproduction
  4. Level out the workload to create consistency
  5. Build a culture of stopping to fix problems, to get quality right the first time
  6. Standardize tasks & processes for continuous improvement and employee empowerment
  7. Make problems visual so they cannot be hidden
  8. Use only reliable, thoroughly tested technology that serves your people and processes
  9. Grow leaders who thoroughly understand the work, live the philosophy, and teach it to others
  10. Develop exceptional people and teams who follow your company’s philosophy
  11. Respect your extended network of partners and suppliers by challenging them and helping them improve
  12. Go and see for yourself to thoroughly understand the situation
  13. Make decisions slowly by consensus, thoroughly considering all options; implement decisions rapidly
  14. Become a learning organization through relentless reflection (hansei) and continuous improvement (kaizen)

Bringing it all together

Many startups have failed due to the limited management abilities of the founders and leaders. Whether from internal conflict, poor strategy, or just a general lack of vision, if leadership cannot provide a strong foundation, failure is all but inevitable. However, with knowledge, cooperation, and strategy, leadership can inspire team members to grow and excel through leading by example.

The 7 Deadly Sins Of Startups: Premature Scaling

Premature scaling is one of the leading causes of startup failures. According to a report published by a company called, Startup Genome, premature scaling accounts for 70% percent of all tech startup failures. If your business isn’t growing, it’s dying. But, can growing and scaling too fast kill your business?

This is part of a 7-part series on reasons why businesses fail.

What Is Premature Scaling?

Premature scaling happens when your business expands faster than you or your product is ready for it. Over-hiring, unmanageable customer acquisition and rapid market expansion are common examples of premature scaling. With unmitigated growth, problems are more likely to get swept under the rug and become harder and more costly to fix down the line. This results in technical debt — a serious issue every startup needs to be aware of.

5 Key Dangers Of Premature Scaling


We often see startups allocating large sums of money to their marketing budget in an effort to acquire more customers. This is appropriate if the product is ready they have a proven business model. However, spending resources on customer acquisition before finding the correct market is a big mistake. You’ll fail to identify the target customers while dealing with hoards of unqualified, disengaged leads. This creates confusion and kills whatever momentum you might have gained.


Another surefire way to fail is selling a product that does not provide any value to customers. Companies try to sell an idea — while their product doesn’t really do anything new or innovative. Established brands can often fall prey to this by attempting to solve stagnation through market expansion. Hastily developed products with little real-world demand. Premature scaling also includes developing additional unnecessary features and investing heavily in the product before the market is ready.


The first thing many startups do when they launch is to hire more staff. Sometimes they hire specialists and managers when there isn’t even a need for those specific roles. Adding qualified personnel will only help when the demand is serious. To quote Paul Grahm — “If your startup is growing well, but there are some things you can’t do because you don’t have enough people, that’s actually optimal. That’s what it feels like in every great startup.” You should allow your team to reach their limit before adding new members. Hiring in a rush can often lead to lower-quality talent as well. If there’s anything that can make or break your business, it’s the personnel you bring on board.

Related: Superheroes for hire — secrets of the 10x engineer

Business model:

Startups often focus too heavily on profit, creating their entire business model with the singular goal of maximizing profit. Avoiding feedback and over-planing everything, the mission of the company becomes lost in an effort to squeeze every penny out of customers. Although this alone will not kill a startup, it can prevent a team from recognizing the potential that is hidden by the immediate opportunity for gain. In trying to be all things to all people, no core demographic is ever identified. This prevents a startup from ever reaching maturity with lifetime customers.


Too much, too early. An influx of cash can spell out trouble for undisciplined startups. Raising capital may be necessary for a business, but it can come with the temptation to spend unwisely — often worsening the other four aspects of premature scaling. Throwing money at problems rarely solves them long-term. Don’t expect problems to magically disappear once you have an investment — the added pressure of reporting to investors can negatively push founders further from their core value proposition.

Case Study: Groupon

Started in 2008 by Andrew Mason, Groupon allowed users to get discounted goods and services by buying as a group. It pioneered the concept of early adopters by introducing coupons to the Facebook and Twitter generation, becoming known as the “fastest-growing company ever”. It was seeing extreme success. The fact that they had to start a “Groupon addiction hotline” for over-enthusiastic customers puts Groupon’s popularity in perspective.

As they rushed to scale quickly, however, things took a turn for the worse. After filing a very successful IPO in 2011, continual reports of huge losses ($37 million at the start of 2012) drove the share price lower and lower. In just a few months shares dropped from $20 to $9 a piece.

Mason claimed the company was still in its early days, but the truth was Groupon had an unsustainable business model. Groupon’s mistake was prioritizing new customer acquisition instead of customer retention. They had too much money and they didn’t know how to use it. They didn’t innovate or come up with new ideas to retain their customers. They hustled to scale quickly while not dealing with pre-existing issues. They failed to grow the value they provided to customers. Although not dead, today Groupon is hardly the behemoth it once was expected to be.

Case Study: Amazon

Amazon was started in 1994 by Jeff Bezos, his wife, and a friend in their garage. They would check orders in the morning, buy the books in the afternoon, and by evening they would pack and ship the books themselves. They grew slowly, focusing on dominating one market, always careful not to scale too quickly.

They understood the importance of staying lean. In fact, some argue they were too prudent in the beginning. During their first Christmas season as a big corporation, Jeff didn’t hire any extra seasonal workers. This turned out to be a mistake as the number of orders skyrocketed. Employees had to work overtime. Some slept in their cars while others called their family to the warehouse’s parking lot so they could see them on Christmas. Having learned his lesson, Bezos vowed to never skimp on seasonal workers again.


Sustainable growth is crucial for any business. A growing company is met with increasing complexity and that brings the increasing risk for disaster. You can maintain a healthy pace by focusing on understanding existing customers before reaching new ones, continually improving the product, hiring quality staff only as needed, not chasing profits before identifying the target market, and raising and spending funds wisely. Although it may sound ideal to move fast and completely dominate an industry, more often than not this leads to an unsustainable pace and ultimately failure.