ESTABLISH EXPECTATIONS AND COMMUNICATION PROTOCOLS EARLY
Founders and investors should align on expected growth from the beginning, key milestones, investment horizons, and potential outcomes. Those expectations may vary significantly depending on the company’s industry, stage, and business model. The parties should also agree on the frequency and content of updates, recognizing that communication needs may change as the company matures.
Regular communication can help investors provide introductions, expertise, and other resources before challenges become acute. Updates should include progress, setbacks, and specific requests for assistance, and investors should follow through on the support they have offered. Material legal, reputational, or potentially existential issues generally warrant prompt escalation rather than waiting for the next scheduled update, even if management is still developing a response.
STRUCTURE EARLY CUSTOMER RELATIONSHIPS WITH SCALE IN MIND
Early customers can provide critical revenue, market validation, and product feedback, but their influence can also create long-term constraints. Companies should assess whether requested product features and contractual commitments support a scalable strategy or effectively convert the business into a bespoke service provider. Feedback from prospective customers beyond the initial customer base can help test whether requested features address broader market needs.
Companies should set sustainable service and support expectations for long-term business growth. Particular care is warranted around exclusivity, most-favored-nation provisions, and customer concentration. Heavy dependence on a single strategic customer may limit future commercial or exit alternatives.
Free pilots may be appropriate in some circumstances, but companies should consider whether pilot customers are committing meaningful resources, such as capital, personnel, time, or data. Such commitments can signal engagement but do not guarantee conversion into a longer-term relationship.
MAKE DELIBERATE HIRING AND EQUITY COMPENSATION DECISIONS
Early-stage companies should prioritize personnel who can execute effectively in fluid, resource-constrained environments. Senior executives accustomed primarily to managing established teams and systems may not be the right fit for a company’s earliest stages. Before hiring to fill a capability gap, founders should understand the role well enough to define success and evaluate performance.
Companies should also carefully structure and document hiring, departures, equity awards, vesting, and any applicable repurchase arrangements. While startups understandably seek to manage legal expenses, deferring attention to these matters can create more costly diligence and cleanup issues in subsequent financings.
Equity pools and individual grants should likewise reflect anticipated hiring needs, company stage, and future financing plans. Grant benchmarks should account for comparable roles, geography, cash compensation, and company size. Companies should balance dilution concerns with meaningful incentives for key contributors.
CONSIDER FUTURE FINANCINGS WHEN RAISING CAPITAL
Companies should evaluate current financing terms in light of anticipated future rounds. While favorable market conditions may support higher valuations or earlier fundraising, an aggressive valuation can create difficulties if the company’s performance or subsequent market conditions do not support an equal or higher valuation in the next round.
Bridge financings are not limited to addressing cash shortfalls. They can provide useful capital when a strategic opportunity arises, a desirable investor becomes available between rounds, or additional runway is needed to reach a defined milestone. Management should nevertheless assess whether a bridge supports achievable progress or merely postpones addressing fundamental demand, product, or execution challenges.
EVALUATE CORPORATE VENTURE INVESTORS FOR LONG-TERM FIT
Corporate venture investors can offer business-unit introductions, industry insight, and access to potential commercial relationships. Founders should assess whether those benefits align with the company’s strategy and speak with other portfolio companies about whether the investor has delivered the promised support.
Diligence should also address the investor’s motivations, decision-making process, and approach to follow-on funding. A corporate investor’s decision not to participate in a later round may reflect changing business-unit priorities rather than a loss of confidence in the company. Early communication about the reasons for nonparticipation can help avoid misleading signals.
Companies should build relationships beyond a single internal champion and evaluate whether the broader organization remains a good fit if that person leaves or strategic priorities change.
WHAT TO KEEP IN MIND
- Align early on growth expectations, milestones, time horizons, and desired outcomes.
- Establish communication practices that surface significant issues promptly and turn investor support into concrete assistance.
- Scrutinize early customer arrangements for terms that could constrain scalability, future customers, financings, or exit opportunities.
- Match hiring and equity compensation decisions to the company’s stage, and document arrangements carefully to reduce later diligence complications.
- Evaluate valuations and bridge financings against realistic future milestones and capital requirements.
- Conduct diligence on prospective investors—particularly strategic investors—to understand their motivations, track record, expected involvement, and potential influence on the company’s long-term options.
