The 6 Figures Nobody Includes In Startup Financial Models

Every founder projects revenue. Almost nobody budgets for lawsuits, tax scares, unhinged partners, and costly mistakes.

Photo by Jakob Owens on Unsplash

I would say it’s been a rough week, but once you’ve said that five weeks in a row, it starts to sound more like this is simply the status quo these days. Nonetheless, I’ve definitely experienced more than a handful of personal and professional shakeups over the past few months that would push some people to opt-out altogether. To maintain privacy and confidentiality where due, I won’t go into the juicy details (there are many), but I will weave a few of them into the entrepreneurial lessons they’ve stirred up below.

If you’re a newbie founder looking to avoid destructive (and expensive) pitfalls, a current entrepreneur seeking peer-to-peer commiseration, or just a startup-interested person who’s here for the drama and would rather read about someone else’s pain than endure your own, this one’s for you. I’m delving into six startup secrets I’ve learned over the past decade or so — several of which have reared their ugly heads once again — in the hopes that you can learn vicariously through mine withought incurring these scars firsthand.

1. The Scariest Person In Every Room

Whether you’re the up-and-coming founder of a microscopic side hustle or a decorated CEO of an investor-backed high-growth startup, there’s one class of people we’re almost all afraid of — unless we are them: Lawyers.

As much as the law is here to protect people, I think it’s just as often (or more commonly) used as a predatory pawn or threat of intimidation to bully a less knowledgeable (or less resourced) party into submission. The craziest (but widely accepted) factor is the understanding that claimed ignorance of the law is not a reasonable defense against breaking it. That can be good or bad for you, depending on which side you land.

In my most recent entrepreneurial endeavors, I quickly learned that bypassing regulatory boards while producing or selling certain products puts you in illegal territory. If you’re starting a business in a risky or high-stakes field — think anything that could potentially harm (or worse) a customer or end user — then it may be worth checking into the industry’s regulatory requirements. A few examples:

• Health-related
• Building-related
• Food-related
• Safety-related
• Transportation-related

While those fields may seem like an obvious regulatory risk with legal penalties for skirting their requirements, lawyer-adjacent fears (and intimidation) span far beyond obtaining proper licensing…

If you’ve ever incorporated a company or filed a trademark or patent application, you may recall a familiar trail of emails, phone calls, and physical mail. They usually appear to come from a lawyer, a regulatory agency, or a legal liaison who works between perpetrators (you) and that agency. In very formal language, they claim that your application or entity is missing one crucial action or certification, without which you jeopardize severe legal or financial penalty. The bright side is that they, the hero, have swooped in to save you. All you have to do is pay their $500 fee and they’ll wave their magic wand and make the problem go away.

It sounds predatory, deceptive, and potentially illegal itself, right? Oftentimes it probably is, but many entrepreneurs go ahead and pay away these threats to avoid whatever real or imaginary penalty they may imply.

Having incorporated more than a couple entities and filed more than a handful of trademark applications in my day, I’m usually less inclined to pay a baseless bill like the above unless triple verified. However, I recently spoke with an entrepreneur who admitted to seeking out an exit specifically to escape the litany of lawsuits that followed her skyrocketing startup. Long story short, she felt the attention attracted by her venture’s explosive growth became more of a liability than an asset once the lawsuits started pouring in. Spoiler alert: She walked away with nearly nine figures, so even large startups can be intimidated by mounting legal fees.

2. This Takes Forever (But Delaying Is Worse)

Let’s talk trademarks. Depending on who you talk to, they’ll likely fall into one of two camps:

1. They’ll insist you’re way too early and don’t need to bother with trademarks until you’ve established a proven brand
2. They’ll be a trademark lawyer and claim you absolutely need them to ensure your trademark actually goes through

In my experience, reality doesn’t fall cleanly into either of the aforementioned buckets. Take it from someone who’s been involved with trademarks in every which way — from successful self-filing to unsuccessful legal representation to wishing I’d filed earlier, here’s exactly where so many entrepreneurs go wrong with respect to trademarking: They delay or overpay.

If you’re seriously thinking of trademarking a business name or a key phrase you’ll be using as a material differentiator in your marketing and sales activities (and you’re already putting money into that name or phrase), it’s definitely worth a trademark search. If available, and if that name or phrase could be appealing for use by a potential competitor, I would implore you to file an intent to use application sooner, rather than later. Once someone else files first, even as intent to use, there’s little you can do if they end up getting approved…

On the flip side, paying more for a lawyer to assist with a very basic trademark application is often overkill and rarely accelerates the process or significantly enhances your likelihood of success unless you were incompetent in your own filing. In today’s day and age (with so much free information at our fingertips), the average entrepreneur should be more than capable of filing on their own.

Lastly, be prepared to hurry up and wait. Trademark timelines tend to take many months — sometimes even years — between applications, reviews, and ultimate approvals, so it’s worth pursuing early, especially if you intend to remain in this venture for the long haul.

TLDR: Trademark timelines take much longer than most expect, but you’ll kick yourself for delaying if, in fact, a competitor swoops in and starts encroaching upon your turf before you had time to carve out or protect it.

3. One of the Worst Startup Mistakes (Can Cost 10x)

One of the worst pieces of advice was given to me by an alleged accountant in my first few years of business. I say “alleged” because having spoken with many accountants in the years since then, none have corroborated his advice. Nonetheless, he was an accountant for a trusted family member and professional, so I put weight in his counsel when he offhandedly said: There’s no need to file if you’re making under a certain threshold.

That line single-handedly gets thousands of newbie small business owners and side hustlers in deep you-know-what years later, so he must not be the only one perpetuating that advice. Point being, even if your startup is pre-profit, even pre-revenue, all-expense, the second you set up an entity or start doing business of any kind, you are obligated to file a tax return.

Oh, and in certain states, simply having a residence there obligates you to pay a few hundred up to thousands, even if you feel your business doesn’t really operate in that state. It seems we all have different definitions of “operate”, but the only one that matters is the one by each state’s franchise tax board, and they have shockingly broad powers when it comes to your money.

Years after starting and even closing down an entity, some of these tax boards can come looking to collect on money you never thought you owed. It’s amazing how a $0 tax bill can turn into a 5-figure failure to file penalty bill with fast-accruing interest that’ll make you regret the day you started.

The moral of the story: Not filing is the worst thing you can do, even if you make no money. Ask AI if you don’t believe me, but I’d hate for a $20,000 bill to start showing up in your mailbox when you least expect it, or worse, a depleted account with no prior warning. I don’t mean to scare anyone out of doing business, but I simply hope to arm you with the knowledge to prevent that type of startup trauma nobody should have to endure.

4. The Echo Chamber Effect

One of the biggest problems in business today is trust — or a lack thereof. Between AI and fake news, it’s almost impossible to trust anything at first glance. The worse news is that, due to powerful cookies and sophisticated retargeting, the echo chamber effect makes it hard to get an objective read on anything online these days, particularly in our own industry.

If you’re a founder who’s dabbled in some competitor research or curious about what marketing your industry peers are currently employing, it’s likely you’ve visited some of their websites, checkout pages, and social media profiles. Based on that, you’ve probably been followed around by their ads, and a not-so-savvy person might infer a few unproven conclusions:

1. Those companies have huge marketing budgets
2. Those ads are incredibly effective (definitely profitable)
3. All your target customers are currently seeing those ads

Here’s the truth: You have no clue how big or small their marketing budgets are. They could be a few bucks a day, but you happen to be one of the hot leads who clicked through all their online pages, and thus, you’re getting the most aggressive targeting.

Along those lines, you also have no clue how effective (or ineffective) those ads actually are. They might be testing the waters to see what works, they may not have received a single purchase conversion, and they definitely may not be profitable at all, despite how slick the marketing campaign might appear to the untrained eye.

Lastly, your customers may not have seen a single one of those peers or their ads. This all comes down to who your target market is, who your peers are targeting, and how broadly you both are soliciting leads and nurturing prospective conversions.

All that goes to say, we all live in our own digital echo chambers, and that can make entrepreneurship feel a lot scarier, our industry a lot smaller, and the market a lot more competitive than it really is.

5. This Red Flag Will Get 100x Worse With Time

I recently signed a contract that I’ve already come to regret. Ironically, from the first day this party was brought to me, I had an uneasy feeling. There were a number of red flags that gave me pause, and I wanted to bide my time and consider other offers. Unfortunately, between brokers, an adjacent business partner, and other decision-makers in the deal, I allowed that external pressure to force my hand and signed.

A few days later, the red flags only increased. Nonetheless, the brokers did what they do: They tried to smooth over the conflicts and drive the deal to completion. Once all financial terms were agreed upon — including the many concessions I didn’t ever intend to make, it was legally set in stone, and off my plate. Or so we thought…

Once a headache, always a nightmare, I suppose: The red flag-wielding party ended up causing further upheaval post-close, escalating from demanding to downright hostile, untrustworthy, erratic, and eventually illegal. The last thing I wanted was to have to pay lawyers to enforce a party to hold up their end, particularly when we had better options waiting in the wings. Unfortunately, that’s my punishment for ignoring red flags and allowing outside pressure to overshadow my better judgment.

Simply put, if a party, a partner, or an opportunity seems difficult from the start, before you’re in a long-term engagement, you should assume they’re only going to get 100x worse over time.

6. The Two Untrustworthy (Temporary) F-Words

One of the hardest things to decipher as an entrepreneur is whether a current aspect of your startup is fleeting versus long-term. To that end, the two most untrustworthy words that exacerbate that challenge are feelings and finances, especially since both have a relationship with the other. In specific, I’m referring to the fact that feelings can dictate your startup’s finances (or how you manage them), and vice versa, as your startup’s finances today can dictate how you feel about your startup’s future.

Here’s the underlying problem: Neither feelings nor finances are permanent, and thus, they aren’t necessarily the most steady pillars upon which to make long-term decisions. In fact, I’d argue both can be traps.

Feelings: How you feel about your product or business on a day-to-day or week-to-week basis can significantly impact how heavily you want to financially invest in the venture and how much risk you want to embrace or avoid. Nonetheless, those feelings can change on a dime, especially if they aren’t based on long-standing facts, but rather a financial snapshot of your business that reframes your daily emotions.

The takeaway: As hard as this is for founders, since we inherently aren’t emotionally detached from our startups, we should treat those day-to-day swings (be it feelings or finances) as ephemeral and deprioritize them compared to the long-term vision. You can’t extrapolate the day’s sales (or losses) too far into the future unless it’s part of a much bigger trend line that’s been played out for more than a few weeks or months.

Startups demand a steady hand, and that requires a degree of patience and objectivity that’s difficult for any person, let alone the founder with the greatest emotional (and financial) stake in the venture’s success.

The Serial Entrepreneur Advantage

My biggest professional regret — and one I stew over often in conversation with my fiance — is the fact that I didn’t start sooner. If I’m honest, there’s little I do today as a CEO that I couldn’t have done at age 18, 15, or even 13. Yes, that means pre-Wall Street, pre-university, even pre-high school, I could have likely gotten these mistakes out of the way and might have a couple more decades of experience under my belt. However, without a doubt, I would have made all of those mistakes just the same.

That’s the reality of entrepreneurship: Starting earlier doesn’t mean doing better faster. It simply means getting the messes out of the way sooner so you can start seeing successes in your teens or 20s, rather than 30s or 40s.

That, by the way, is the advantage of being a serial entrepreneur. Looking back, there’s nothing I could have — or should have — done to resurrect my first failed startup. It was a mediocre idea with subpar resources and an incompetent team (led by my novice founder self at the time), which I’d deem destined to fail. That said, the advantage to serial entrepreneurship is that you can avoid ever making the same mistake twice. If you don’t, you’ll make it until the consequence stings (or costs) so much that you’ll never make it again.

For those who’d rather not learn on their own dime or hope they can make their first venture a success, articles like these can at least help you skip the line a bit.