When you’re knee-deep in pitch decks, investor meetings, and trying to scale your startup in L.A.’s wild tech and media jungle, the last thing you want is to sabotage your own fundraising process with common and avoidable startup funding mistakes. But here’s the kicker: most founders do it without even realizing. In this LATML breakdown, we’re diving into the top 3 mistakes entrepreneurs make when seeking funding—with a focus on how they trip up legally and financially. Trust us, VCs, angels, and lawyers see these red flags all the time. The good news? They’re totally avoidable.
Mistake #1: Raising Too Much Money, Too Early
Sounds weird, right? You’d think more money = more runway = more growth. But here’s the twist: raising too much money too early can actually hurt your startup—and your control over it.
Why it’s a problem:
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Dilution disaster – When you raise more than you need, you give away a bigger chunk of your company. Founders often lose significant equity in early rounds, which becomes painful when future rounds roll in.
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Investor pressure – Big checks come with big expectations. Overfunding can bring in aggressive investors pushing unrealistic growth timelines.
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Burn rate blowout – Easy money often leads to sloppy spending—fancy office, bloated team, over-hyped marketing. Suddenly your lean startup’s burning $200k a month.
The smart play:
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Raise what you actually need for your next 12–18 months, with a clear roadmap tied to milestones.
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Show investors you know how to budget and scale responsibly. That’s sexier than flashy fundraising headlines.
Want proof? Look at early-stage success stories like Basecamp or Mailchimp—both bootstrapped carefully and avoided massive early rounds.
Mistake #2: Having the Wrong Valuation
Here’s where things get spicy. Valuation is a hot topic in every pitch meeting—but too many founders walk in either grossly overvalued (hello, ego) or tragically undervalued (hello, desperation).
Why it matters:
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Overvaluing your startup can instantly turn off experienced investors. They’ll assume you’re unrealistic, inexperienced, or both.
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Undervaluing your startup means you’ll give away too much equity for too little cash. That’s money left on the table and less leverage in future rounds.
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Future round conflicts – Early mispricing can create cap table chaos later on, especially when you try to raise Series A or B.
Common signs your valuation is off:
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You used a competitor’s valuation as your baseline (big no-no).
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You haven’t generated revenue or traction but expect a $10M pre-money.
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You’re negotiating based on “what you need” instead of “what you’re worth.”
What to do instead:
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Use industry benchmarks: tools like PitchBook, Carta, or AngelList can help you set a realistic range.
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Get advice from a startup attorney or financial advisor with fundraising experience.
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Build your valuation based on traction: revenue, user growth, partnerships, intellectual property, and market opportunity.
Pro Tip: Early-stage investors often expect SAFE notes or convertible notes to delay formal valuation—this can buy you time until a priced round.
Mistake #3: Not Having Your Legal Paperwork in Order
Mistake #3: Not Having Your Legal Paperwork in OrderHonestly, this one’s the most frustrating because it’s totally preventable—and it’s one of the biggest deal-breakers for investors. You can have a killer pitch, a brilliant product, and strong metrics… but if your legal house is a mess, the funding round stalls or dies.
Red flags that scream “Not Ready to Invest”:
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No formal incorporation or wrong entity type (hint: Delaware C-Corp is the standard for startups)
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Missing or vague founder agreements
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Poorly managed cap table (inaccurate or unclear ownership)
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Unassigned IP (who actually owns the code or product?)
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Outstanding employment or contractor issues
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Unissued stock or no stock option plan
Why investors walk away:
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Legal risk = financial risk. If your paperwork isn’t clean, you’re a liability, not an opportunity.
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They don’t want to spend time or money cleaning up your mess.
How to get it together:
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Work with a startup lawyer to run a legal audit BEFORE you pitch.
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Make sure founders have IP assignment agreements in place, and that you’re clear on equity splits, vesting schedules, and board structure.
Founder Tip: Keep a clean data room ready with key docs—investors love being able to review everything quickly.
So, What Does a Clean Startup Fundraising Process Actually Look Like?
Here’s a quick checklist:
- Reasonable funding ask with clear use of funds
- Valuation tied to traction and market comps
- Delaware C-Corp status with all IP assigned
- Cap table structured and transparent
- Founder agreements, advisor agreements, and equity docs signed
- Pitch deck backed by legal and financial clarity
Remember: fundraising is part storytelling, part paperwork, and part due diligence. Nail all three, and you stand out from 90% of early-stage startups.
FAQs
Q: Should I work with a tech startup lawyer even if I’m just raising a friends-and-family round?
A: Yes, 100%. Even small rounds should be documented properly. Informal deals today can cause big headaches down the road.
Q: Is it ever okay to raise more than I need?
A: Only if you’re confident in your scaling strategy and you’ve stress-tested your burn rate. Otherwise, stick to milestone-based fundraising.
Q: What’s the best way to set a valuation if I don’t have revenue yet?
A: Use market comparables and highlight traction like user growth, engagement, or pre-signups. And consider using SAFE notes until you’re more established.
Los Angeles Startup Funding Lawyer
Raising capital isn’t just about the check—it’s about setting up your company for sustainable growth and long-term success. Avoiding these three common mistakes—overfunding, incorrect valuation, and legal sloppiness—can mean the difference between a deal that propels your startup and one that drags it down.
Whether you’re a founder building a new AI tool in Venice or a media startup navigating L.A.’s creator economy, the rules are the same: get your financials, valuation, and legal ducks in a row before you ever say the words “we’re raising.”
Startup Attorney David Nima Sharifi, Esq. has been consulting tech startups on the legal and business affairs of innovation since 2007. Whether you’re developing AI chatbots, automating sales processes, or navigating the future of technology, our team at L.A. Tech and Media Law Firm can provide the legal expertise you need. Contact our Los Angeles office today to schedule a confidential consultation to discuss your startup funding strategy.
