Launching a startup is exhilarating, but the path to building a successful business is riddled with pitfalls that can derail even the most promising ventures. We’ve seen thousands of early-stage companies navigate their journeys to building great companies and part of that journey includes the fundraising process, and we know that avoiding common mistakes can be critical to your success. Here are ten frequent missteps founders make—and our take on how to sidestep them to set your company up for long-term growth and investment.

1. Company Not Ready to Take Institutional Funds
   Many founders rush to raise money before their company is truly ready. In addition to business achievements such as having a unique solution to a real problem in a big market and the team to execute on a business plan for that solution that has product-market fit and traction, institutional investors expect a certain level of corporate maturity:  having the team in place and properly incentivized, having clear IP ownership, setting up the right corporate structure, having clean cap tables and financials, entering into proper agreements and documentation with third parties and organizing a data room. Before seeking venture funding, ensure your company’s operational and legal foundations are solid. This preparation not only increases your chances of attracting investment but also streamlines the due diligence process to complete that investment and supports your ability to scale after receiving that investment.
2. Ex-Founder Holds Significant Stake in the Company
   It’s common for early team members or co-founders to leave, but failing to address their equity can create major headaches. If an ex-founder retains a large stake, it can deter new investors and create governance issues.  Investors want to invest in companies with employee stockholders who have built value in the company and will continue to build value going forward.  Implement IP assignments, vesting schedules and repurchase rights from the outset, so equity can be reclaimed if someone departs early and no longer provides value to the company going forward. 
3. Capitalization Not Set Up for Growth
   A poorly structured cap table can stifle future fundraising and employee incentives. Make sure your equity is allocated thoughtfully: reserve enough shares for future hires, advisors, and option pools. Use separate classes of stock for founders and employees versus investors, issue and document all promised equity, and keep your cap table updated and transparent.  Using vesting schedules for all common stock and common stock awards.  Allocate equity judiciously to founders, management, employees, advisors, and contractors, as if you need your cap table for 5 or more venture rounds, not one, and a hiring plan consistent with the business plan of the company.
4. Intellectual Property Rights Not Clear or Not Protected
   Your IP is your company’s “secret sauce.” If ownership isn’t clearly assigned to the company, you risk losing control or being embroiled in disputes over your core assets, and investors won't invest in that. Use employment, consulting and service agreements with robust IP assignment clauses, and ensure all contributors sign them before work begins. Your commercial agreements with partners and customers should similarly be clear on your company's ownership and rights to your IP and the IP that is developed that is relevant to your business.  Protect your IP early and revisit your strategy as you grow. 
5. Looking Too Early and Desperate for Venture Funding
   Investors can sense desperation and it's a red flag from a basic diligence perspective. For example, if you approach VCs before you have traction, a clear value proposition, or a compelling team, you risk wasting your one bullet to make a real connection with an investor. Focus on building your technology and your product, validating your market and the fit of your product in the market, assembling a strong team, and getting traction before seeking outside capital.  It's okay to meet investors and potential advisors to start developing a relationship before you start fundraising, but frame your goal for that connection appropriately (e.g. you are not currently fundraising but want to introduce the company and team and establish a relationship) and communicate that so you can have a level playing field in your interactions.  
6. Allowing Too Much Time to Negotiate and Close the Investment
   Time kills deals. Prolonged negotiations and diligence reviews can lead to lost momentum, shifting terms, or even a failed round. Set clear timelines, communicate expectations, and keep the process moving. Participation by or competition from other investors, if managed correctly, can help keep things moving.  Be prepared with your business presentation, financials, organized data room, cap table, IP strategy, regulatory compliance plans and legal documents with all third parties (and know what is in there) to avoid unnecessary delays.
7. Not Diligencing Your Potential Investors and Partners
   Founders often focus on impressing investors, but it’s equally important to vet them. Not all money is created equal—look for investors and partners who bring strategic value, industry expertise, and a track record of supporting founders over time and over multiple inflection points of a company.  There is potential divergence between founders and investors over time.  Talk to their portfolio companies and understand their approach to governance, management oversight, follow-on funding, business changes and exits. 
8. Thinking Too Short Term and Giving Up the Wrong Terms in a Financing
   Don’t sacrifice long-term balance of control or economics for short-term cash. Understand the implications of terms like liquidation preferences, protective provisions, preferred director approval rights, other consent rights, rights to board seats, redemption rights, information rights, drag-along provisions and anti-dilution provisions and understand the implications of investor rights and side letters that may contain other special rights. Be thoughtful about what terms you give in early rounds that could make it harder to operate or change the business or get financing later.  Consult experienced counsel and negotiate for terms that align with your vision and protect your interests.
9. Allowing Your Investor Syndicate to Become Too Concentrated
   A concentrated investor base can limit future fundraising options and create governance challenges. Diversify your syndicate with investors who offer complementary skills, networks, and perspectives.  Having a mix of angel investors, financial investors and corporate investors and commercial partners can provide additional benefits. This not only strengthens your company but also increases your resilience in tough times.
10. Losing Balance on the Board and the Stockholder Vote Too Early
    Balancing control is critical in the early stages. While losing control of the Board may happen naturally over time, don’t cede board seats or voting power prematurely or for the wrong reasons. Structure your board to balance founder/management, common holder, investor, and independent representation.  Consider and use top-up grants, supervoting stock, Board consent rights and protective provisions judiciously. Control balanced with other stakeholder input allows you to execute your vision and navigate challenges while taking guidance as your company grows. 

Our Take

Building a successful startup requires more than innovation—it demands strategic foresight and disciplined execution. By avoiding these ten common mistakes, founders can position their companies for sustainable growth, attract top-tier investors, and have a real influence on their destiny. At Baker Botts, we help emerging companies navigate these challenges every day. If you’re preparing for your next fundraising round or want to ensure your corporate house is in order, reach out to our team for guidance tailored to your unique journey.