startup legal mistakes

11 Lawyers Take On The Worst Startup Legal Mistakes

Alexandra Isenegger Company Law, Founder's Post, Startup Advice & Tips

Since Linkilaw’s business model is based upon allowing you to choose from multiple solicitor proposals, I thought it would be an interesting exercise to pose one important question to a number of lawyers here in London. The response was brilliant and we are pleased to share the results with our readers!

Q: What do you see as the worst startup legal mistakes, and how do you deal with them?

 

Rebecca Howlett on startup legal mistakesRebecca Howlett – Partner at Mackrell Turner Garrett, London

Choosing a name or logo without doing your research.

One of the biggest pitfalls I’ve found that start-ups make is choosing a brand name or logo that is already in useClick To Tweet (a failure by entrepreneurs to carry out checks on their brand before investing in it). They are so keen to start their business, and love the name they have chosen. It often doesn’t occur to them that someone else may already be using it, or that it may not meet the grounds for registration. Would you invest in a brand if you knew from the outset that you could not protect it?

Not protecting your intellectual property.

When talking about worst startup legal mistakes, we also see problems occur when a company does not actually own its intellectual property. Intellectual property is often created by a consultant. Frequently there is no formal assignment from the consultant to the company, and the company doesn’t realise this could be an issue. We have been involved in situations where the sale of a company has stalled because the company didn’t own the intellectual property it was selling. Unfortunately, they didn’t appreciate this until the sale was in progress.

Further advice: When looking to create a brand, it is imperative that the business carries out full due diligence checks. Checking the name you intend to use with Google, Companies House and the availability of the domain name are a good start. However, you do need to make further investigations (such as trade mark availability searches) and legal advice should be taken in relation to this. Businesses should also instruct their legal advisers to watch for third party applications to register marks, which may infringe their rights, and take action against anyone violating those rights quickly.

Loredana Cacciotti talking about startup legal mistakesLoredana Cacciotti – Business Affairs Consultant at DIT Legal, London

Not assessing the importance of contracts!

In my experience, one of the biggest legal startup mistakes is not establishing a comprehensive legal framework from the beginning.Click To Tweet They often think that a handshake is enough to regulate their relationship and they often forget that pretty much any commercial decision should be supported by a contract.

Recently I came across an independent record label run by three friends. Once things started to take off, and money started to flow, problems arose between them and they asked for my advice. One of them was the owner of their limited company and sole shareholder, another had rights over their registered trademark and the third one was the owner of their Internet domain.

No one (including the company) had rights over any of their scheduled releases as no contracts were signed with the artists. This created a legal mess (potentially very expensive if taken to court) that could have been avoided had they regulated their position at the early stages of their collaboration.

Matthew Howat

Matthew Howat – Partner at Howat Avraam, London

Niki Avraam

Niki Avraam – Partner at Howat Avraam, London

 

Matthew Howat -Partner at Howat Avraam, London

Niki Avraam – Partner at Howat Avraam, London

Assuming a template contract is enough!

In our experience, most startups focus too much on their bottom line and overlook the necessary legal documentationClick To Tweet needed to regulate and protect the individuals involved. Believing the contract to be a mere formality (rather than a valuable aid for the business) they download generic documentation from the Internet that bears no resemblance to their specific circumstances; and so, offers no protection in the event of a dispute down the line.

Whether the need is for Employment Contracts or Shareholders’ Agreements for internal use (or robust T&Cs or Supply Agreements with external third parties), well-drafted documentation should be thoughtfully prepared to genuinely protect the legal exposure of a business. Without it, the business exposes itself to greater risk and increased costs as a result of the lack of contractual framework within which to resolve disputes.

Consider the analogy: There’s little point buying an expensive house if you’re going to then leave the door open!

Need help with legal contracts?

Rahul Batra about startup legal mistakesRahul Batra – Managing Partner at Hudson McKenzie, London

Trying to cut costs at the onset by omitting legal advice!

When dealing with new businesses we see the same startup legal mistakes being made time and time again – which would have been very simple to avoid. Businesses continually try to cut costs, then come to us with poorly drafted contracts and rushed agreements which result in shareholder disputes (or employment tribunals) after taking incorrect advice or, in some cases, none at all.

We would urge all new startups to do their research, take recommendations and spend the money for some good quality legal adviceClick To Tweet from an experienced lawyer. It will help in the long run, we promise.

Max Lesser, topic: startup legal mistakesMax Lesser – Head of Company & Commercial at Colman Coyle, London

Not delineating responsibility in a contract!

The biggest and most often recurring startup legal mistake that can come back to haunt a startup is the failure of its participants to properly agree and set out the terms upon which they will run the business.Click To Tweet

In owner-managed businesses, disputes at the shareholder/director/partner levels arise from a wide number of causes. These typically involve disagreements regarding overarching strategy, day-to-day management, exclusion from decision making, putting personal interest before the business and the terms of exit. While there is some statutory protection, it is limited and disputes only serve to distract the business away from its purpose of making profits.

It may be another “inconvenient truth,” but the best way to avoid a dispute from occurring is for owners to reach agreement on how the business is to be organised and their respective roles, rights and obligations in that business and to each other. This should always be done before commencing trade, but unfortunately this step is not typically considered a priority.

The failure to agree to a shareholders’ or partnership agreement at the outset is a mistake, and often proves to be a false economy. As the business subsequently grows, a dispute arises and there is no agreement governing the relationship between the owners. Nevertheless it is never too late to put in place an agreement once a dispute has arisen and the parties cannot reconcile it without resorting to highly disruptive and costly litigation, or dissolving what may well be a highly profitable business.

While it is not possible for a shareholders’ or partnership agreement to cover every possible scenario (and thereby obviate the need to resort to litigation), the more areas that can be predetermined by agreement the less chance there is of a dispute occurring.

Alexander PappinAlexander Pappin – Partner/Managing Director at Jamieson Alexander Legal, London

Waiting too long to go see a lawyer!

In summary?

The legal mistake is not seeking professional help early enough and, in doing so, the person is not planning for the future.Click To Tweet

What’s the problem? So many startup owners have a fantastic idea, and they want to plough everything they have into making it a success. They throw their hearts, souls and very often every waking hour they have into making their idea a reality. Then they meet or take on someone else and think that this person can help out in exactly the same way, with the same passion that they are putting into bringing the business to life.

This new person could be an employee, but very often in the early stages they’re brought on as a director or shareholder. What’s worse is that usually due to the excitement and growth of the business, they’re now under too much time pressure to have anything drawn up to properly regulate their agreement.

Inevitably (often 2-8 years on) there is a mismatch of expectations or an inequality of effort. The parties find that they are no longer seeing eye-to-eye and one of them wants out, possibly in the worst-case scenario; expecting to take part of the business with them. Only at this point do the distressed parties seek legal advice, when we are then forced to go through hours of evidence (and forced to put them through the trauma).

Sorting through roughly scribbled notes and e-mails, we try to find out what was actually agreed between them so that their relationship can be ended as amicably as possible. Often we succeed in extricating them from the situation cleanly, but all too often it isn’t until after both parties have spent a considerable sum on legal (and sometimes Court) fees, a lot of stress has been had and of course through which time the business itself has suffered.

Apart from it being easier to have a good Shareholder’s Agreement, Director Service Agreements and Employment Contracts drawn up at the outset (when everyone is in agreement), going through the process early can tease out some of the issues that really need to be discussed before jumping (in the business sense) straight into bed together. I can understand many parties going into a marriage together and not wanting to enter into a prenuptial agreement (*where’s the romance in that?!*), but this is business not love.

Clear rules and agreements set out on paper, so that all parties understand them, can actually help the smooth running of the business, and not stifle it. Can you imagine trying to play Monopoly without having had sight of the rules, when you can’t quite agree how much you’re supposed to get from the bank when you’re forced to mortgage Park Lane with a hotel on it? You may never need them, but it’s nice to know they’re available.

How do you avoid this? See a lawyer early on, and for that matter, an accountant too. Agree on a fixed fee for an initial meeting so that you actually have a focused adviser. Get some clear advice on the way forwards – both at the outset and especially before any significant changes like taking someone else on. If you’re happy with your choice, agree on a fixed fee or a price cap for the work required and stick to that.

Even if you don’t use that particular adviser going forward, you now have a plan for what you need to do to remain compliant, are aware of the documents that it’s best to have in place, and have a way to stay ahead of obvious pitfalls! The old saying ‘a stitch in time saves nine’ is so true here if you analogise the ‘stitch’ with your cost of getting help. The difference is substantial between the costs of preventative professional help at an early stage, compared to the costs of resolving the matter later on.

Of course, we’re happy to help in all instances– let’s just say it’s a significantly better value to come to us beforehand!

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David MiddleburghDavid Middleburgh – Partner at Gallant Maxwell Limited, London

Not having a clear, cut-in-stone, Shareholder’s Agreement!

In my experience of working as legal adviser to startups, I have found that what makes them potentially strong are the very factors which are mirrored in fundamental weaknesses. If these vulnerabilities are not recognised and dealt with, there can be existential consequences for the enterprise.

Startups usually involve young, highly motivated individuals with creative minds and exciting new products. This potent mix of strengths is mirrored by a temptation to ignore the importance of less exciting matters, such as legal structure and sound corporate governance.

Where there are various participants, the most basic building block is the Shareholder Agreement. When the inevitable honeymoon period is over, the individuals still have to work together. If the fundamentals of the relationship are not set down in legally binding form when all is rosy, a small difference of opinion can lead to an implosion at an early stage. I have seen otherwise sound businesses collapse because the stakeholders had no structure to resolve disputes that arose.

Not having a well-structured, definitive Business Plan!

The other fundamental is the business plan. I have seen many great new products not come to market because the creatives have not brought in someone to test and hone the business plan.

Without a great business plan, the startup will not attract the capital to take the product to market with the resources to succeed.Click To Tweet

Reena PopatReena Popat – Principal Solicitor at Carter Bond, London

Hesitating to add the staff and support you need!

Carter Bond Solicitors was born just over fourteen months ago and I am often asked questions such as: “Why did you set up on your own and not join an existing firm?” or “How did you choose the name?” or “What is the firm’s five year plan?” Recently, I was asked for the first time, “What is the one thing that you would do differently in your startup or business if you had the chance to do it over?”

I am not sure there is just one single thing that I would change or do differently. However, if I had the chance to turn back the clock,

I would have invested in good staff and support from the start. I would not have compromised or thought twice about it.Click To Tweet You simply cannot do it all (well) yourself. You need to have people you can trust, and who can take significant pieces of the execution and just get them done. Without that, even the best business plan or idea goes nowhere.

Those entrepreneurs starting their new ventures should understand that mistakes are good and failures will come. However, as long as you can learn from them and keep moving forward, you will eventually get to where you want to be.

Daniel OaklandDaniel Oakland – Principal Solicitor at Oakland & Co.

Not realising that it costs a lot less to get it right than to put it right!

I see a lot of people facing startup legal mistakes and fledgling businesses. Most have the ideas, relevant skills, the energy and the optimism associated with a new venture.

Unfortunately, some also have an apparent unwillingness to invest in sound advice and contractual documentation.Click To Tweet This may sound self-serving coming from a lawyer, but the fact is that problems and unforeseen circumstances will arise on a daily basis – and we lawyers have seen them more than most in relation to our own areas of expertise.

I am always amazed by the number of new business owners who have taken ideas, practices, information and clients from their old employers. They appear not to appreciate that, without taking preventative steps to protect their business, the same may happen to them in due course with their own employees.

Nice office premises with chrome and leather furniture, shiny coffee machines, 4k TV, Apple everything (etcetera) are common startup budget items – all meticulously researched and priced on the Internet. So, it is startling how many entrepreneurs think that sound bite, “Wiki-type” legal” advice cut and pasted for free off the Internet is sufficient, or even correct. It is not.

You might get lucky, but the truth is – you don’t know what you don’t know, and it’s usually the bits that you’ve missed out of a contract that will come back to bite you on the backside. Google is the curse that makes us believe that we know more than we do. If I decided to re-wire my house relying on YouTube tutorials I just might get it right, but chances are that at some point I would come home to a burnt-out shell and wish I had invested a few pounds on a qualified electrician.

Simon WalkerSimon Walker – partner at Taylor Wessing

The biggest startup legal mistake is not securing ownership of IP by their company.Click To Tweet They assume that, because a person owns shares or has been paid by the company, it owns the know-how. Not true, the IP must be transferred to the company using an IP assignment. Examples can be found on the TW Tech Focus microsite (http://united-kingdom.taylorwessing.com/twtechfocus/).

Legal issues are almost always overlooked by startups, and wrongfully so! The result of ignoring your legal obligations in the early stages of your growing company has the risk of potentially destroying your company in the future – when it is successful and profitable.

Our goal at Linkilaw is to help you avoid these pitfalls. That way, you can continue to focus your time on your business strategy, while being at ease.

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