Most Common Legal Mistakes Made by Start-Ups

Starting up a company is a challenging task in and of itself. There are hurdles to jump over at every step and you need to come up with a genuinely great idea to even have a hope of creating a profit. What you do not need on top of all of that pressure is an added layer of issues that come from legal mistakes.

The list we are presenting you here does not consist of every single mistake you can make, but it does include the most common ones. And all of these can really cause a lot of trouble in the future of every company.

Not beginning as an LLC or a corporation

To operate a business you need to decide on the legal form of it. And, believe it or not, you should consult a lawyer immediately. If you are not a corporation or a limited liability company, you will have to pay higher taxes and even be personally liable for issues. This is not something that you would want.

Most people simply go with Sole Proprietorship as it requires no fees, no documentation, and no local business permits. However, it has many flaws. With only one owner acquiring capital from other investors requires starting a partnership or another entity form since there is no form for investors in sole proprietorships, and you are not protected against creditors. So, if your company owns the money, you could be used to pay off the debt yourself. While an LLC would limit the obligation to the property of the company.

True, you can convert your sole proprietorship into a partnership and later on even into a corporation or an LLC, but that would incur significant costs.

Not using a “prenuptial” agreement with co-founders

When starting a company with friends or other types of co-founders it is imperative that you are absolutely on the same page. You need to agree on the deal as early as possible and it needs to be crystal clear. You need to look no further than Facebook to see the proof of this as Zuckerberg had to essentially fork up 150 million dollars (20 million dollars and Facebook shares which continue to grow, at the time it was 45 million, however, the shares of Facebook went up) to Winklevoss brothers.

Here is what a written founder agreement has to define:

– Dividing the company in percentages.

– Vesting rules.

– Responsibilities and roles of its founders.

– Purchasing shares of a founder that chooses to leave.

– Time commitments.

– Salaries. How much for each founder and are they subject to change?

– Decision making. (CEO based, unanimous votes, majority of votes etc)

– What does each founder contribute or invest?

– What happens if the deal is broken?

– What is the future for the business?

As you can imagine, failing to cover any of these can lead to a lot of troubles down the road.

Not having a standard form contract that favors your company

If you plan on doing any business with customers and clients, you will need a standard form contract. However, that is not something you can find online, it needs to be tailored for your company and you need to find it favorable for you. Of course, the other side can always negotiate the changes for your contract, but simply coming up with a form is already making you appear more serious, capable and it is making you more prepared for the future.

Do not forget – hire an experienced business lawyer to draft it since he will have both starting forms and the experience needed to perfectly customize them. Spending some money on a lawyer at the beginning saves money in the future.

You should be careful with your intellectual property

You need to be covered and protect everything that you can. And if you are trying to place a new product, service or a technology on the market it goes double for you. Not only is it extremely important to protect your own intellectual property, but also avoiding to infringe on the intellectual property rights of others. So, what measures do you need to take?

– Patents: For any new product that you want to launch you will need protection via patents. It gives you the right to stop others from making, using, or selling the inventions you are responsible for and which are described in your patent’s claim.

– Trademarks: Any symbolic value of a word, symbol, or a device that you are using to distinguish yourself from others needs to be trademarked. Technically, you do not need to register the trademark as you obtain the rights by simply using it but registration offers advantages, like protecting you from others who try to register it before you use it enough to be associated with you.

– Confidentiality agreements: Every person in your company who holds any type of confidential information needs to sign a Non-Disclosure Agreement so that you can protect the inner workings of your company.