The 12 Biggest Legal Mistakes That Startups Make

Tosin Business Finance, Entrepreneurship, Legal Advice, Legal Documents, Terms and Conditions

 

  1. They neglect the basics 

 

It is important that any startup has the necessary legal documents in place from as early on in the company as possible. This means having shareholders agreements, co-founders agreements and other necessary agreements needed in order to launch the company.

Being legally secure will prevent further implications in the future.

It is easy for startups, especially, to fall into the traps of not having a legal system in place because they may be unaware that is is obligatory or because they’re not willing to spend the money that it takes. However, since there are a lot of regulations when it comes to business it is important to comply with them.

Not complying can have a series of consequences such as fines and even jail time sometimes.

 

  1. They don’t make sure that they compliant with data regulations

If you collect any kind of data in your company you need to make sure that you are compliant with the General Data Protection Regulation.

This also means making sure that you have the right terms and conditions, as well as any other privacy policy agreements, such as cookie policies in place.

 

  1. They don’t register the right business structure

Another key legal document that sets the foundation of your company is how your business is registered and under which structure it is registered under, this sets out how your business is going to operate in the future.

If you want to incorporate your business it is important you do it as early on in the company as possible.

You should know if your company operates as a sole trader, a limited liability company or joint venture etc. and registering it as such would make doing business easier.

 

  1. They do not protect their intellectual property

Protecting intellectual property is probably one of the first things that startups think of.

However, if a patent isn’t obtained it is best not to disclose information about your invention and it is best to keep your intellectual property as a trade secret. Anything that is open information is fair game for the public to use.

Hopefully, your employees and your co-founders will be under a non-disclosure agreement if you don’t have proper trademarks or patents in place within your company.

 

  1. They do not limit their liability

Not having the right mechanisms in place for what happens if something was to go wrong can open up a can of worms between the startup company and their employees and also their clients. You want to make sure that you have the right terms and conditions in place to limit your company’s liability.

Having the right terms and conditions can protect your company from certain injuries that your company may be accused of, depending on what kind of service or good your startup provides.

 

  1. They do not have the right employment agreements in place

It usually takes a while before startups start to hire employees. However, once they do it is important that they have the right type of employee agreements in place in order to protect themselves and their employees.

 

  1. They do not hire the right legal counsel

A lot of startups, unfortunately, hire lawyers who may not have the necessary experience when it comes to dealing with entrepreneurs and startups. Also, startups will often try to save money in the legal department.

However, not investing in the right legal counsel will lead to inadequately drafted documents, mistakes or not having a full understanding of what is needed for the company.

Another thing that is often seen in this area is that startups will try to take on a do-it-yourself approach. However, unless the founders are educated in the legal sector and have the necessary experience to draft and deal with important documents, it is foreseeable why this is not advisable.

 

  1. They do not always put their agreements into writing

Although oral agreements are and electronic agreements are legally binding, if an agreement was in writing this would prevent a lot of hassle and prevent a lot of he said she said.

In the long run, it would be cheaper for all the parties involved to put their agreements into writing.

It would mean almost no litigation or court visits. It would be clear if there was a breach in the contract and it would also be clear what the repercussions are for breaching that agreement.

 

  1. They have inadequate document and filing systems

There needs to be a clear record of the startup’s activities from the beginning. Hiding documents is a huge risk and it can be seen in the business if something is missing.

Having your legal documents in order also makes it easier to track things within your company.

 

  1. They issue founder shares without vesting

As a startup, you need to make sure that your co-founders are committed to the company. This may be seen over time.

However, it is important that you don’t issue out founder shares until you know that your partners have invested their time and money into the business

 

  1. They fail to comply with business tax laws

Startups need to make sure they know what kinds of taxes their company may be subject to. This is a vital legal issue. It is important that as a company you are fully informed on any VAT policies and other tax policies.

Also, you need to know how and when to pay your taxes as a company. Not having the right tax mechanisms in place can lead to more legal issues down the line.

Therefore, it is recommended that you hire a good business accountant and lawyer to help you keep track of all of your taxes.

 

  1.  They think that legal problems can be solved at a legal date

Thinking that legal problems can be solved at a later date is quite dangerous. It is dangerous for many reasons. Leaving legal problems will only make them bigger and a lot of the legal problems that startups may face have time limits and deadlines.

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