To support the growth of the ecosystem in a direct and constructive way below is a breakdown of the most frequent problems we have observed Latam founders face on the path towards scaling their startups, most of which have simple solutions.
Not prioritizing legal and accounting formalities from the point of inception.
Procrastinating on these tasks only delays—and usually worsens—the inevitable expenditure of time and funds in the long run. One of the best investments a startup can make is to engage a savvy accountant in the US at the onset of the project to advise on the structure, ongoing obligations, and how the structure might evolve as the company matures (e.g., the tax implications in the event of sale of the holding company or its subsidiaries).
Failing to protect intellectual property (IP).
The company must be the owner of its IP. To achieve this, all employees, consultants, founders, and advisors must sign a Confidential Information and Inventions Assignment Agreement (CIIAA), whereby each employee, consultant, founder, and advisor assigns all IP and other proprietary rights created during the course of its involvement with the company. Trademark registrations should not be overlooked: regrettably, founders often spend a significant amount of time building brands whose underlying trademarks are subject to disputes over their ownership.
Not consulting with a certified public accountant (CPA) in the United States.
The impact of not doing so can lead to errors in the organizational structure and failures or delays in filing required tax returns. We often see cases of projects that, due to ignorance, establish a holding structure that results in negative tax implications in subsequent rounds of capital raising. For a detailed breakdown of investor preferred jurisdictions and organizational structures in VC, see https://latamlist.com/escuela-del-sur-5-latin-founders-brush-your-teeth-wash-your-hair-dont-overthink-where-to-form-your-holdco/.
Forming the holding company before speaking with the lead investor.
Forming a C-Corp or Cayman holding company can unnecessarily cost thousands of dollars in taxes, formation costs, and maintenance costs if the chosen structure ends up not being the preference of your lead investor(s).
Not subjecting founders’ and key employees’ shares to reverse vesting.
Vesting protects founders and investors in the event a co-founder or key employee leaves unexpectedly. Many founders feel that vesting is something they should “give” to a prospective investor, and thus, put it off until it is requested by investors. Without subjecting their shares to a vesting schedule, there is nothing preventing a founder or key employee from “disappearing” with their shares in hand.
Not prioritizing the capitalization table (“cap table”) from day one.
The cap table is a historical ledger of all legal transactions that affect the equity interests of shareholders in a company. A founder with a deep understanding of their cap table will save big on legal expenses and become a better negotiator with its investors. There are several tools that provide support to entrepreneurs in putting together the cap table, including Carta, which is free for early-stage startups with up to 25 stakeholders and up to $1M raised. Prudent founders will take the lead on their equity management and cap table management, as over-reliance on their legal counsel inevitably and unnecessarily leads to bloated legal expenses.
Not keeping company files in order.
A complete and well-organized file of all legal documents must be maintained. Failing to do so will lead to increased legal fees and unnecessary delays, and in the worst case, might give your lead investor(s) cold feet. All documents must be duly signed, with all complete attachments, exhibits, and annexes. Preventive due diligence can save headaches or delays in closing a potential financing round.
Getting creative with legal or accounting matters.
Innovation, intelligence, and creativity—the very qualities that make your business successful—can cost you tens of thousands of dollars in unnecessary legal fees or even make your business unfundable if you decide to get creative with legal or accountants. It is better to leave creativity for commercial issues; standardized documents exist for a reason.
The most common errors that can have a negative and outsized impact are:
- Modifying the standard terms of a Y-Combinator Simple Agreement for Future Equity (SAFE).
- Significantly modifying the National Venture Capital Association (NVCA) standard priced round documents.
Hiring a finder.
Working with finders is not a standard practice in the venture capital market. Further, hiring a finder who is not registered with the Securities and Exchange Commission (SEC) as a stockbroker could affect your reputation or even expose you to fines. Never give “transaction-based compensation” to anyone who helps you find investors.
PAG.LAW has represented more than 600 entrepreneurs in the United States, Latam, and beyond in the last 6 years. Our position as industry leaders has imbued our team with a deep understanding of the market and its players
This article is not meant to provide legal or tax advice. It should be understood as a provocative, simplified overview to allow the reader to better consult its legal and tax advisors. Every individual, every company, and every situation is different. There is no “one size fits all” solution. Also, we are not tax advisors or tax experts and do not offer tax advice. Readers are advised to seek professional advice before acting on any information contained in this article. The author and publisher are not liable for any damages or negative consequences arising from any use of the information presented in this article.
