What NOT to Do in Your Startup

David J. Muchow, Managing Partner at Muchow Law, shares important lessons that startup founders usually learn the hard way.

We are excited to sit down with David J. Muchow, the author of “The 7 Secret Keys to Startup Success” and Managing Partner at Muchow Law, a firm providing expert legal counsel to startups and other specialized clients. Join us as we discuss how to avoid common legal mistakes that can kill your startup.

David shares some of the secret keys he outlines in his book; practical advice on what not to do in a startup – lessons that startup founders usually learn the hard way once the mistake has already been made.

Join us as we discuss:

  • Intellectual property and other legal considerations that are important from day one
  • Common pitfalls that contribute to startup suicide and how to steer clear of them
  • Avoiding the common issues that arise in co-founder partnerships

David is a corporate lawyer, serial entrepreneur, and investor who helps companies grow from startup to exit strategy. He is also an Adjunct Assistant Professor at Georgetown University, as well as a founder of and General Counsel to a variety of foundations. He was previously a founder and CEO of SkyBuilt Power, the world’s first solar/wind plug-and-play pre-packaged systems for military, intelligence, and commercial customers.

This discussion with David J. Muchow comes from our show Startup Success. Browse all Burkland podcasts and subscribe to the show on Apple podcasts.

Find David on LinkedIn and visit Muchow Law.

Episode Transcript

Kate Adams – 00:00:01:
Welcome to Startup Success, the podcast for startup founders and investors. Here you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world, stories that will help you in your own journey. Startup Success starts now.
Welcome to Startup Success. My guest today is David Muchow, an award-winning corporate lawyer and business expert with over 30 years of experience helping businesses, especially startups. And he is currently a managing partner at Muchow Law. And he’s an adjunct professor at Georgetown. But I also want to talk to David a lot today about his book, which I listened to this week. And I really enjoyed it, “The Seven Secret Keys to Startup Success.” He touches on a lot of the things we focus on in this show. So I’m looking forward to the conversation. Welcome, David.

David Muchow – 00:00:59:
Well, thank you so much for having me.

Kate Adams – 00:01:01:
Thank you for being here. So you have a very interesting background and I wanted you to kind of walk us through that to get started and explain how that led you to what you’re doing today and the book you wrote for startups.

David Muchow – 00:01:15:
Well, as Kate mentioned, I’m a corporate Lawyer. My clients range all over from real estate development to tech to energy and so forth. But I came out of law school, worked for the Department of Justice during the Watergate years and I prosecuted firearms, explosive bank robberies and kidnap cases. So every now and then I run into a criminal, with a startup company that I’m representing where the money might come from a questionable source. And so while it doesn’t seem to be relevant, it actually happens sometimes. But I’ve worked with a bunch of different law firms. I teach Law Business and Entrepreneurship at Georgetown, and I’ve been CEO of a bunch of companies. I created the world’s first rapidly deployable solar and wind power systems for the CIA and the Military. And when I was growing up, I went to Law School and so forth, but there was a little bit of a seed of a serial entrepreneur in there somewhere. And so when I retired from the American Gas Association, where I represented a lot of major utility companies, I found my inner child, and I would recommend to anybody who wants to be a startup, think back to what they really loved to do when they were like 13 years old and couldn’t wait to get home from high school to go have some fun. And that’s probably where you ought to be, regardless of where you are. So I started buying, selling, and creating companies. And along the way, I worked with hundreds of them. And I noticed that so many of them make mistakes that I call startup suicide. They don’t even know they’re making a mistake. But there are lots of good books out there, about thousands of them actually, in the business space, about 2,000 a year, on what to do, but nobody had ever really written a book about what never to do to avoid startup suicide. So the gap I’m trying to fill here is a couple of things. One is that the information out there in most books is highly specialized in the business space. It’s okay, all about management. And if you look at the Amazon top 10 books, so many of them are about one aspect of management. 3:20 – 3:51But when you’re a startup, you’re drinking out of a fire hose, and you better know everything all at the same time, like finance and marketing and legal and how to build your product and so forth. So I thought it’d be very useful to create a book that walks you step by step through everything you need to do, not just business, but law, because law impacts everything. The quality of the air around you, the rug you’re walking on, the lighting requirements, everything is going to run into law. And you better know what to do or not to do, interviewing people to be employees, so you don’t get sued, and so forth. But to make it fun, because law and business can get boring, I’ve certainly written a bunch of boring, legal and business books. But what I thought I’d do would be create a character called Scooter McGee, who’s a professor at Georgetown, imaginary, and he’s a startup expert, but he makes some mistakes. And so after every chapter on marketing and finance and so forth, there’s a fun Scooter story that illustrates very clearly what kind of mistakes people need to avoid and how to do it right. Think of Harrison Ford in Raiders of the Lost Ark, who’s a regular professor, and then he runs into Coldfinger’s Gelato, who is the guy out to kill him because the professor’s got some secrets, and the beautiful fashion heiress Scarlett, who has some secrets of her own, and his marriage is on the rocks, and a lot of stuff is happening, and it just makes it kind of fun to read. So the idea is, if you want it all in one piece, and you want a quick read, it’s kind of fun. That will give you the legal and business step-by-step things to do and never to do. With appendices and graphs and all the simple stuff you need, model forms, that’s what I tried to do.

Kate Adams – 00:05:07:
You did it. I really enjoyed the book. It’s very detailed. It outlines just the foundations of what you need to do. And then what we see on the other side of this is if startup founders don’t do these things, it can come back to bite them later. And I liked the story. It keeps it fun. It makes it entertaining. And something that really struck me was you said the seven secret keys. And I wanted to touch on that because what you mean by secret, if you could explain that to the audience, because I thought that was really interesting. And I see it a lot with founders.

David Muchow – 00:05:45:
Well, yeah, thank you. That’s an excellent question. So, secret in the sense that nobody really talks about them. Let me give you an example. When I learned how to snow ski, they take you up to the bunny slope, and they don’t tell you how to carve a perfect turn first. They tell you never point your skis downhill or you’ll end up and smash right into the lodge at the bottom of the hill, right? So these are the things that you’d have to pay a lawyer $500 an hour or more to find out about and are generally never disclosed to startups. And frankly, you know, a lot of the bigger law firms, they don’t want to deal with startups because they’ve got Toyota on the other line at, you know, $1,200 an hour. So what I thought I’d do would be to share some of these legal secrets that you only find out about when you hire a good lawyer with a lot of experience in the startup space. So all the little things to know, like how do you interview an employee and avoid EEOC problems? On the personnel side, again, you know, there are two really tough things to do in business. Aside from building a product or a service, you know, that’s the easy part sometimes. It’s raising money and how do you do that and avoid SEC problems? and all the other blue sky law problems that you have. Every state’s gonna regulate how you can raise money in that state. A lot of people just go out and say, hey, I’m just raising money from friends and family. I don’t need to do anything. My Grandmother sent me a check from California. I don’t need to do anything. Not necessarily true. And if you’re trying to raise money, the first thing you don’t want to do is go to jail because you just violated a statute, criminal or civil. So in every area, there are things like that, that just aren’t taught in business school. They’re not taught except when you make a mistake and then you call up your lawyer and you say, don’t ever do that again. I can maybe get you out of trouble, but the egg’s been scrambled. So those are the things that I want people to know about. Keep out of trouble. If you can survive that first year and not commit startup suicide, then you really have a chance to be successful. (6:46-7:46

Kate Adams – 00:07:47:
Right. And what I liked about it was they are in some regards somewhat dry topics, but you present them in an interesting way. They make a lot of sense. It’s easy to grasp and pay attention. It’s a fun book in that regard. It’s not like reading a textbook, which this could be in a sense. So let’s get into the seven. How did you focus on those seven? And if you could touch on what those are, I think that would be helpful for the listeners, just so they know.

David Muchow – 00:08:21:
You know, I started out with 10, and when I talked to Skyhorse, who’s the publisher of the seven secret keys to startup success, they said they had actually run some market research on titles and that the number seven is actually a more interesting title to readers. So I restructured some of the topics and came up with seven. So that’s, there was no magic to that. There are basically hundreds of secrets in the book, but I lumped them into those categories on the suggestion of my editor.

Kate Adams – 00:08:51:
Got it. And you touch on intellectual property, hiring, planning, marketing. I mean, you run the gamut and it’s all, you know, the keys of the foundation. Talk to us about this startup suicide and in your experience, why you think So many startups fail that first year or so.

David Muchow – 00:09:14:
One of the major reasons, Kate, is that most startup people, you know, they’re type A, they’re hard driving, they always want to succeed, they’re never going to fail, and that’s their attitude. That can be a big mistake in one respect. One of the key characteristics of a good CEO is they got two ears and one mouth, and they should listen, and they should be humble. Just because you’re a really good drummer and you know everything about drumming and maybe you’re the world’s greatest coder and you’re doing a smartphone app does not mean you can direct the orchestra. You have no experience in violins. So you really need to be humble and listen. Get a good legal team, a good financial team, accountant, and I know you guys have some wonderful team members that you’re in that you use, which is super important, and that you build a team to make up for the fact that all of us are like a piece of Swiss cheese. We’ve got holes all over our knowledge base, and to avoid problems in areas you don’t know anything about, you need to be humble. And that, I think, is really one of the most important first steps. So you build a solid core team. You decide what slice of business you want. If you have a great invention, you don’t have to build anything. Maybe you could just invent it, license it out, sit on your yacht, and get royalties. I’m not saying it’s easy, but that would be a nice dream, right? So you can decide what slice of the overall business you want. You definitely want to get your paperwork in order because when you’re raising money and so forth, a smart investor is going to look and have a checklist of 150 items. And if it looks like you don’t have a business license, which a lot of people don’t even think about, then they’re going to think you don’t know how to run that railroad. And they’re going to forget you because the people investing in you may have a stack of 30 documents on their desk. They’ll spend 45 seconds looking at your executive summary, and it’s all over one way or the other. You need to protect your intellectual property. Do not go out there and start bragging about your wonderful new invention because the earth is flat. When I invented power stations for the CIA, my invention was only four days ahead of somebody in Denmark, but it was a multimillion dollar company. It was a pretty big deal to get it right. The earth is flat. Everybody’s thinking about the same kind of inventions at the same time. So you want to think about trade secrets and trademarks and copyrights and patents. And I walked through all the pros and cons of the way to do those things. Make sure that your offering documents have been reviewed by lawyers. Don’t just start taking in money or you’re going to get a knock on the door and a phone call from the SEC. Do market research. Talk to 100 people. Don’t go out there and say, hey, I want to tell you about my product. Go out there and listen. You want to listen. Say, hey, what are you using now in this space? How do you like it? Is it bad or good? How would you improve it? And keep adjusting and pivoting rapidly on your idea until you get it somewhat solidified. If you have an invention, then you’d file the patent. Do a patent search first. Don’t just spend $10,000 on a patent. Find out if somebody’s already invented it. It only costs you a couple hundred dollars to do a patent search. You can go on Google Patents and get about an 80% answer. It’d be better to get a more thorough search and hire a patent search agent. But those are the kinds of things that are just so practical that people miss.

Kate Adams – 00:12:44:
They do miss them. A couple of things really resonated to me in your answer, and that’s the listening. You talked about founders have a problem sometimes listening to the experts around them and taking that feedback. And so that can really impact their foundation success. But then also in their product side, we see this all the time. They’re so excited. They just developed the product without iterating. You talk about that right away in Chapter 1 in your first example. It’s so important. One thing about taking advice and listening that you touch on is co-founders, and we see that a lot in this book. The issue around when there’s two founders and they’re having issues, and any advice, insight you can share around that.

David Muchow – 00:13:36:
How much time do I have? Yes. When you’ve got a co-founder, a lot of times it’s somebody that you knew and played basketball with, right? And they’re your buddy and they know your families and all that kind of stuff. That is one of the worst ways to create a successful company. The guy you played basketball with in high school who’s now got some kind of a job may not know anything about finance. But you like him or her and so a lot of people go that route. A much better way to do it is to write up a position description. Here is really the qualities that I need. Am I going to need somebody who can go up to Wall Street and do a really big deal? And if so, this person better have the experience of actually doing a hundred of those. And figure out in a position description what you need before you get carried away by, hey, I’ve got a friend and he’s looking for a job and I’m going to help him out stuff, right? And have your partnership in writing. What I see as a lawyer, you know, I do a lot of triage work from things that have gone wrong with startups. And it’s like an emergency room some days, you know, oh my gosh, you know, my partner turns out he’s incompetent, but I don’t have anything in writing and I need to fire him. And how do I do that? It’s going to be hard and long is the short answer. So have a partnership agreement. Here is what everybody is going to do. Here’s a rational basis for their share of equity. For example, three guys get together and they say, shoot, how are we going to share the equity? I don’t know. We’ll just do it 30% each. I’ve been down that road myself personally and one guy just ran off to California and got a different job. And boom, there went 30% of the equity in the company and no way to get it back. Once you give out equity, you’re not getting it back unless that was part of the original contract to give it out. So your equity when you give it out to partners should be based on performance. It’s like, OK, what are you going to do? How many hours are you going to do it? How is your performance going to be rated? And then here’s how we’re going to vest you over time. Do not do it all upfront or you’re going to lose it. Just like in a marriage, your partners in the core of your business, you’re going to be spending more time with those people maybe than your significant others outside of the business. And 30% of marriages or more end up in divorce. And that’s what happens with partnerships. And the major reason is they have misunderstandings as to what they’re going to do and have to do and how much they’re going to get paid. For example, you’re talking to an employee on the elevator or your partner and they say, hey, I haven’t been paid, Mr. CEO. You know, it’s a startup, there’s no money. I understand that. And then the CEO says something really stupid like, don’t worry, I’ll take care of you. Oh, my gosh. Five years later, the company’s worth $10 million. And the CEO gets a call from a lawyer saying, hey, I represent an employee. You said you’re going to take care of them. Incidentally, they did 30% of the work in the business before, so we want 30% of your $10 million all into the future. So get the stuff in writing.

Kate Adams – 00:16:48:
such important words of wisdom because we see this all the time. And there’s so many famous stories about this, you know, Facebook being one of them. And we always hear stories where, like you said, there are verbal agreements, conversations, people are friends, and then nothing’s in writing. And I really like how you talked about putting in writing what those partners are going to do and investing because you don’t see practical advice like that, but it would prevent a lot of these problems. Another area that you touch on that I thought was really interesting was ethics in the role of the startup founder and making that part of your culture in a sense early on. If you could touch on that a little bit because you provide such practical advice, but then touching on that I thought was very helpful.

David Muchow – 00:17:43:
Well, yeah, that is in The Seven Secret Keys, what I’ve tried to do also is to look into the inside of the brain and the attitude and the culture of the CEO, which is going to be reflected into everything the company does. And as a former prosecutor and someone who has defended Companies who’ve run into problems and lawsuits and so forth, if you try to cut corners and you are not ethical, it is going to catch up with you. And the longer you get away with it, the more serious the impact is going to be because you keep doing it at a bigger and bigger level until you are going to kill the company. And people want to work with people they can trust, even if the deal is not quite as good as somebody else’s deal, because you pretty much get what you pay for in life, right? And it’s not just about price. People want to rely. When we run into a speed bump or something bad happens as a CEO, I want to know this person is going to work with me to get us both over the hump. And the only way you can do that is to build trust and to be ethical. And it’s not about what you can do today to make a few more bucks. The other side of this is how do you manage yourself? And as a startup person, you’re drinking out of a fire hose, as I mentioned. And in The 7 Secret Keys, we talk about management zen. Let me give you an example. I was building stuff for the Army and DOD during the Iraq War. And one of my suppliers who does a lot of CIA stuff, all of which is urgent, you’ve got to have it or somebody’s going to die next week. I mean, it actually works that way. And I described this in the book. I would go out and say, hey, how are you doing today? And he would have this pained, anguished look because everything is coming down on him at once. And then he would take his hand and he just kind of brushed it across his head. And he said, you know, I just let it flow all over me. And I said, what do you mean? And he said, look, you can only do what you can do. It may not be good enough sometimes. Just acknowledge that you can’t save the world. Not everything is within anybody’s control. And you have to understand that once you do your honest best, you’ve done it. And you are going to fail sometimes and you are going to succeed sometimes. But you cannot control the world. Once you get the right adjustment in your mind to that, you’re not looking like somebody running around with their head cut off all the time, just putting out fires or your staff’s going to think you don’t know what you’re doing. They’re not going to rely on you because they figure things are out of control all the time. But when you get the right attitude and that is imbued in the culture and everybody picks up on it and they are not afraid to try something and make a mistake, then the company is just going to be a lot more successful. 18:58 – 20:32 or 19:54 – 20:32

Kate Adams – 00:20:34:
That’s so well said and I think that’s such an important aspect of this that is overlooked too much. Thank you. So we always wrap up the show with asking our guests to leave one last bit of advice or words of wisdom for those founders listening. It’s such a difficult journey that can be so challenging at times. Anything you can leave our guests with that are with us today.

David Muchow – 00:21:03:
I’ll quote Yogi Berra, if you don’t know where you’re going, you’re going to end up somewhere else. So have a plan, read The Seven Secret Keys to Startup Success. Pretty much everything you need is in there. Not everything, but most of it, all of the key things. You can do it. It’s not going to be easy. It’s going to be really tough. Some days you’re going to have 20 seconds between when you got some good news and when you found out there was a fire. But hang in there, you can do it and keep your life balance with your family and your loved ones and everything else along the way. Because it’s not just the destination. It’s the journey. And the journey is usually much longer than the destination. Because with destinations, you start all over again and you’re on another journey. So enjoy the ride. You’re going to learn a lot. Whether you fail or succeed, you’re going to learn a ton and find a way to enjoy it.

Kate Adams – 00:21:57:
Oh, that’s great. Thank you, David. That’s really nice words to end with. So for everybody listening, like I said, I listened to David’s book and really enjoyed it. It’s The Seven Secret Keys to Startup Success. David is also on LinkedIn. Any other contact info or anything you want to share, David, before we go?

David Muchow – 00:22:18:
Well, that’s nice of you to mention it. Thank you. It’s a hard copy, e-Book, and audiobooks. And it’s davidmuchowauthor.com is the website. And thank you.

Kate Adams – 00:22:28:
It was really fun. Thank you, David.

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