Articles

Five Preventable Mistakes That Can Derail Your Exit

By
Glenn Luinenburg

01/28/26

Let’s talk about face tattoos. Not the “bad choice in Vegas” kind. The ones you don’t see until due diligence—and by then, they’re hard to laser off.

In my 25+ years advising startups and venture-backed companies in Silicon Valley, I’ve seen more than a few “face tattoos”—avoidable missteps that delay or derail exits. If you’re building with an eye toward acquisition, here are five things you’ll want to avoid:

Equity Chaos: Poor Cap Table Hygiene

If your cap table is held together by spreadsheets, memory and hope—you’ve got a problem.

What I regularly see:

Equity grants issued without board approval or signed documentation
SAFEs or convertible notes with conversion terms that don’t match what’s reflected on the cap table
Conflicting cap table versions between founders, legal counsel and the equity platform
Advisors or consultants who believe they have equity—but nothing is documented
Founders issued stock without signed vesting agreements or IP assignments
Promises of equity made via email or offer letters, but never formally granted by the board
Missing or undocumented 83(b) elections, even where restricted stock is subject to vesting

Let’s talk about that last one. An 83(b) election must be filed with the IRS within 30 days of a restricted stock grant. Miss the window, and recipients may be taxed at vesting on the then-current (and possibly much higher) value. Worse, if there’s no evidence the election was filed, buyers will assume the worst—and may insist on indemnification or reprice the deal accordingly.

These aren’t just administrative issues. They can materially delay or disrupt a sale, trigger reps and warranties breaches, and reduce your leverage at the negotiation table.

Advice:

Use a reputable cap table management platform (e.g., Carta, Pulley).
Involve legal counsel in every equity grant, financing and conversion.
Make no equity promises outside of formal, board-approved grants.
Track every restricted stock issuance and ensure 83(b) elections are timely filed—and saved.

Cap table diligence is one of the first things a buyer will do. If the story your documents tell is incomplete or contradictory, the deal may slow, suffer, or even fall apart.

2. Intellectual Property That Isn’t Yours
You can’t sell what you don’t own. And yet, one of the most common—and most damaging—mistakes I see in early-stage companies is unclear or incomplete IP ownership.

Here’s how it happens:

A founder writes code before the company exists—and never assigns it to the company.
A contractor builds your early product without a written work-for-hire or IP assignment agreement.
An employee uses open-source code in violation of the license terms (hello, copyleft).
A key contributor developed IP on nights and weekends—but on a former employer’s laptop, under that employer’s policy.

Buyers, especially strategics and public companies, will ask one thing: Can you prove your company owns the IP? If the answer is anything short of a clean “yes,” the deal is at risk. In a best-case scenario, they’ll delay and demand cleanup. Worst case? They walk—or ask for a steep discount.

Advice:

Make IP assignment part of your culture from day one: founders, employees, advisors, contractors—everyone.
Use clear, enforceable invention assignment language in offer letters and consulting agreements.
Audit your open-source usage regularly, and stay compliant with license terms.
Be especially careful with anything created before formation—get it assigned to the company in writing.

Your product is only as valuable as your right to own, protect, and commercialize it. If you haven’t locked that down, everything else is noise.

Unclear Customer or Partner Agreements
Buyers want to acquire a business, not a negotiation mess. If your customer or partner contracts are inconsistent, overly customized or legally sloppy, it raises serious questions—and may chill a deal.

Common issues:

Customer contracts are negotiated one-off, with no standard terms or version control.
Some contracts include exclusivity, MFNs, or usage restrictions that conflict with others.
IP ownership, data rights, and assignment provisions vary—or are silent.
Agreements can’t be assigned without customer consent, complicating an acquisition

Buyers don’t want to discover, post-LOI, that key customers or partners have the ability to block or renegotiate the deal—or that you’ve promised different rights to different parties. If they can’t clearly understand your commercial obligations and rights, they’ll either pause, retrade the deal, or walk away entirely.

Advice:

Standardize your contracts early. Create templates with clean, founder- and investor-reviewed terms.
Avoid exclusivity or MFNs unless there’s a compelling strategic reason—and time-limit them when you do.
Make sure you retain all IP and data rights needed to operate and scale your business.
Include clear change of control assignment rights in every contract.

Commercial agreements should reflect the professionalism and scalability of your business. If your paper trail looks improvised, buyers will assume the rest of your operations are, too.

4. Toxic or Overly Restrictive Investor Rights
Investor protections are a standard part of early-stage financing. But when those rights are overreaching—or poorly structured—they can become landmines at exit.

Common problems:

Investors have broad veto rights over M&A, creating a built-in holdout risk.
A single early investor has blocking rights, even if they no longer add value.
Rights of first refusal or co-sale rights apply to exit transactions, requiring extra consents or delaying the deal.
Investor-favored board structures give disproportionate control to minority stakeholders.

These provisions may have seemed benign at the time—often buried in the protective provisions or tucked into a side letter—but they can become a major point of friction when it’s time to sell. Even if the acquirer is offering a strong outcome, an investor with control rights can grind the process to a halt or push for better economics.

And buyers don’t like uncertainty. If they sense misalignment on your cap table, they may walk—or push you to restructure the deal at your expense.

Advice:

Don’t over-negotiate control rights in early rounds just to close the deal.
Avoid giving permanent vetoes or blocking rights to any single investor.
Carve out change of control transactions from ROFR and co-sale rights.
Design your board with long-term governance in mind, not just deal-by-deal concessions.

The right investor protections balance governance with flexibility. When they tilt too far toward control, they stop being protections—and start being liabilities.

Employment and Compliance Landmines
Buyers don’t just acquire your product—they inherit your people practices. If your employment documentation or compliance history is sloppy, the deal gets riskier—and more expensive.

What trips deals up:

Contractors misclassified as employees (especially in California)
Missing or unsigned offer letters, NDAs, and IP assignment agreements
Poorly documented or contentious terminations—especially when no release was signed
Employee disputes resolved informally (or with severance) but without a formal waiver of claims
International contractors paid off the books—or in crypto—without contracts

These issues may seem minor when you’re building fast, but they’re red flags in diligence. Buyers worry about potential lawsuits, post-closing liabilities, and reputational damage. And if there’s evidence of a prior dispute—but no release? That’s a ticking time bomb.

Advice:

Classify workers correctly and document those classifications.
Use standard offer letters with confidentiality and IP assignment language.
Always get a signed release when resolving any dispute or termination involving severance or sensitive circumstances.
Keep personnel files complete and current—especially for high-risk exits.
If hiring internationally, work with counsel to ensure compliance with local labor laws.

HR compliance may not be glamorous, but it’s table stakes for an exit. If your people records are incomplete or you’ve left legal threads hanging, expect buyers to dig—and possibly retrade.

Final Thought
Every startup has its scars. That’s part of the journey. But permanent, visible missteps—the legal equivalent of a face tattoo—can limit your options when it’s time to sell.

The earlier you clean these things up, the easier your exit will be. And remember: even if you’re years from an acquisition, you’re always being evaluated by your future acquirer. Give them a clean, confident picture—no tattoos required.