The 12 Biggest Legal Mistakes That Startups Make

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

In startups, co-founders often overlook the need for legal security in their company. Startups are especially vulnerable to legal matters relating to many different areas such as protecting their intellectual property, getting the right terms and conditions, and various forms of employment contracts. Often co-founders only feel the need to get their legal agreements later, once legal issues have already arisen. However, unfortunately, by the time this happens not only may it be too late but also it is almost guaranteed that it would cost the startup more money to mitigate the legal issues than it would have been had they had the right legal agreements in the first place. Thus, here at Linkilaw, we have summarised the most common legal mistakes that startups make, in order to give you an idea of the legal challenges you are likely to face as a founder of a startup.

 

  1. They neglect the basics 

It is important for any startup to have the necessary legal documents in place from as early on in the company as possible. This means having shareholders agreements, co-founders agreements and any 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 to fall into the trap of not having a legal system in place, either because they are unaware that it is obligatory, or because they are not willing to spend the money that is required. However, since there are many regulations when it comes to business, compliance with them is very important. 

Failing to comply with these regulations can have a series of consequences including fines and sometimes even jail time. 

 

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

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

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

 

 

Hence, Holger Schulze is correct in stating that many co-founders do not have the expertise to deal with privacy regulations. This is most prevalent in their marketing strategies and the storage of customer data.

 

  1. They don’t register the right business structure 

A key legal document that sets the foundation of your company involves how and under which structure your business is registered, specifically the Memorandum of Association, thereby setting 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 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 will make doing business significantly 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 has not yet been obtained, it is best not to disclose information about your invention and hence 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 bound by a non-disclosure agreement should you not have proper trademarks or patents in place within your company.

 

  1. They do not limit their liability

Not having the right mechanisms in place if something were to go wrong can open up a can of worms between the startup company and its employees and the clients. You want to ensure 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 business from certain injuries or transgressions that it may be accused of, depending on what kind of good or service 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 correct type of employee agreements in place in order to protect both themselves and their employees.

  1. They do not hire the right legal counsel

Many startups, unfortunately, tend to hire lawyers who do not have the necessary experience or expertise when it comes to dealing with entrepreneurs and new businesses. In addition, startups will often try to save money in the legal department.

Not investing in the right legal counsel will lead to inadequately drafted documents, mistakes, and an unsatisfactory and incomplete understanding of what is needed for the company to operate safely within the bounds of the law. 

Another option that startups often go for is attempting to go for 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 conceivable why this is not particularly advisable.

 

  1. They do not always put their agreements into writing

Although oral and electronic agreements are legally binding, if an agreement were to be in writing, this would prevent a lot of hassle and avoid  ‘he said she said’ scenarios therefore only relying on word of mouth.

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

This would mean almost no litigation or court visits. If one of the involved parties were to breach the contract, the repercussions and consequences would be clear and undisputed.

 

  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 puts your company at great risk and it can always be seen in the business if something is missing.

Having your legal documents in order also makes it significantly 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 can be seen over time.

However, it is important that you do not 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 kind of taxes their company may be subject to. This is an important legal issue legal issue, as it is vital for you as a company to be fully informed on any VAT policies and other tax policies.

Furthermore, 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 countless unnecessary 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.These graphs should give you an idea of how much the industry in which you want to operate has to pay in tax in the UK. Financial and insurance companies often have to pay more in tax than other industries. 

 

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

Thinking that legal problems can be solved at a later date is quite dangerous. This is dangerous for many reasons, such as the simple fact that not immediately addressing the issues will only make them bigger, and many of the legal problems that startups may face have time limits and deadlines.

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