If You Get Put In A Corner Then You Fight Back, It’s The Same With Your Startup. Find Out The Startup Legal Mistakes To Avoid At All Costs.
When founding a startup, there are a few business and startup legal mistakes to avoid. By avoiding these legal mistakes, you can ensure that you don’t fall into the same traps that early-stage startup founders are prone to falling into.
Some common startup legal mistakes to avoid include:
- Failing to protect your intellectual property (IP)
- Not setting agreements in writing
- Not creating a founders agreement
- Not choosing the correct legal form when establishing the company
- Not having employee contracts
- Unclear contracts for web developers
- Establishing a 50:50 partnership
- No exit strategy
- Not working with a lawyer
After reading this blog post, you’ll understand and know the key startup legal mistakes to avoid if you want to succeed.
You’ve been warned.
1. Intellectual Property (IP)
When you first found your startup, you’ll want to create an identifiable image and name to establish your company in the market and drive publicity for the brand. However, all these efforts can be lost if you fail to protect your IP or accidentally infringe on another brand’s intellectual property.
If you don’t protect your IP or violate another company’s then you could kill your startup as shown in this article by Startup-Booster. This is a very common startup legal mistakes to avoid.
2. Not Setting Agreements In Writing
In the haste of trying to get a startup off the ground and gain recognition, too many founders will agree to handshake agreements rather than create legally binding contracts. These agreements can extend from equity agreements to contracts with third parties.
If you have done this then you’ve just made one of the biggest startup legal mistakes to avoid so pay attention.
Whatever the agreement is concerning, a verbal contract is not binding; contracts must be signed by both parties and constitute an intention to agree, which may not be present or evidenced in a verbal contract.
It is therefore essential that all agreements are made in writing in accordance with contract law to ensure that agreements are adhered to by all parties involved. Verbal agreements are one of the key startup legal mistakes to avoid according to Camillieri & Clark Associates.
3. Not Creating A Founders Agreement
A founders agreement is exactly what it sounds like – an agreement between the founders of a business. Within this agreement, there will be clauses outlining:
· Who gets what percentage of the company?
· Is the percentage ownership subject to vesting based on continued participation in the business?
· What are the roles and responsibilities of the founders?
· If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price?
· How much time commitment to the business is expected of each founder?
· What salaries (if any), are the founders entitled to? How can that be changed?
· How are key decisions and day-to-day decisions of the business to be made? (majority vote, unanimous vote, or certain decisions solely in the hands of the CEO?)
· Under what circumstances can a founder be removed as an employee of the business? (usually, this would be a Board decision)
· What assets or cash into the business does each founder contribute or invest?
· How will a sale of the business be decided?
· What happens if one founder isn’t living up to expectations under the founder agreement? How is it resolved?
· What is the overall goal and vision for the business?
By having a founders agreement, you can ensure that your co-founders respect your equity in the startup and abide by agreements that are most beneficial to the business.
Most disputes that might arise between founders as to the progression of the startup or the profits of the business can be settled through reference to a comprehensive founders agreement.
Ensuring that this is in place before creating your startup can head off easy-avoidable disputes, creating a clear path to success. Out of all the startup legal mistakes to avoid, this is arguably the most common.
4. Not Choosing The Correct Legal Form When Establishing The Company
One of the biggest startup legal mistakes to avoid is choosing the wrong business structure.
It’s important to establish your startup in the most appropriate legal form for tax purposes and to incorporate your business into the correct market. The list below outlines the different types of establishments so you can identify what best suits your business and avoid the problems that can arise should you fail to do so.
The main types of business are a sole trader, a limited company, or a business partnerships. You can also form an unincorporated association if you are setting up an organisation with no intention to make profit.
If you start working for yourself, even if you haven’t told HMRC, you’ll be legally regarded as a self-employed sole trader. Because you’re running the business as an individual, you can keep all your business’s profits after you’ve paid taxes on them. Even though you’re the the sole founder, there is no requirement that you have to work alone.
However, as the sole trader you are personally responsible for any losses your business makes.
This is an organisation that you can set up to run the business. The limited company will be held responsible for its actions and its finances would be separate to your personal finances, which would not be the case as a sole trader. Profit made by the limited company is owned by the company after it has paid Corporation Tax.
In this case, company directors aren’t personally responsible for debts the business can’t pay if something goes wrong, as long as nothing illegal has been done.
A PRIVATE COMPANY LIMITED BY GUARANTEE means that directors or shareholders financially back the organisation up to a specific amount if things go wrong.
In a PUBLIC LIMITED COMPANY, the company’s shares would be traded publicly on a market like the London Stock Exchange
‘Ordinary’ business partnership
In this partnership, you and your partners share responsibility for the business. You can share all the business’s profits between the partners and each partner pays tax on their share of the profits. As a partner, you’d also be personally responsible for your share of any losses your business makes and bills for things you buy for your business, like stock or equipment.
Limited partnership and limited liability partnership
Your liability for business debt differs depending on whether you’re a limited partnership or limited liability partnership. In both cases you can share all the business’s profits between the partners and each partner pays tax on their share of the profits
Liability for debts that can’t be paid in this partnership would be split among partners. There are ‘general’ partners who are personally liable for all the partnership’s debts and are also responsible for managing the business. ‘Limited’ partners are only liable up to the amount they initially invest in the business.
LIMITED LIABILITY PARTNERSHIPS LLPs
In this case, partners wouldn’t be personally liable for debts the business can’t pay, the liability would be limited to the amount they have invested in the business. In the LLP agreement, partners’ responsibilities and share of the profits would be outlined. ‘Designated members’ have extra responsibilities.
Setting up the correct legal entity will allow you and your partners, or you yourself, understand your obligations regarding tax and liability should debts arise. Making this one of many startup legal mistakes to avoid at all costs.
5. Not Having Employee Contracts
Employee contracts are essential to minimise disputes and make sure that you have committed and hardworking employees to help grow and support your startup.
This would specify terms such as working hours, salary and leaving requirements and would be legally binding between the employer and the employees, giving both parties security and can be referred to in instances of dispute.
Not having an employee contract can mean that employees do not abide by the director’s expectations because there is no legal requirement to do so without a legally binding contract.
The creation of an employee contracting outlining requirements and relevant processes significantly reduces the likelihood of disputes. It can settle disputes should they arise between employer and employee.
This is one of the most common startup legal mistakes to avoid so get your contracts sorted!
6. Unclear Contracts For Web Developers
One of the most exciting things about the startup world is the use of the newest technology and the development of new forms of technology. After all, Facebook, Instagram and Snapchat were all startups insistent on creating new social media platforms.
However, in creating your app, website, or applying a new software you might need to utilise third-party contractors.
It’s essential to create legally binding contracts with these developers to ensure that they comply with your requirements. This will ensure that you can get your startup up and running with no delay. Without such contracts in play, you’re committing one of the cardinal startup legal mistakes to avoid.
Therefore, this is one of many critical startup legal mistakes to avoid.
– What information the site collects
– How the site uses the information collected
– How the information may be shared or sold to third parties
– How the site deals with children under the age of 13
– How the site may allow the user access through third-party services such as Facebook and Twitter
– The steps taken by the site owner to protect confidentiality and security of the information collected; and
8. Establishing A 50:50 Partnership
Talk about startup legal mistakes to avoid and this mistake is a killer for startups globally.
This might sound like the best idea when you have a partner who has contributed equally to the establishment and financing of a startup, but in reality a 50/50 partnership gives rise to dispute. And there are many things that should be considered in advance, as shown in this article by Vanessa Emilio.
It would be best to establish even a 51/49 split with one partner holding the power to make important decisions to make the startup go from strength to strength.
9. No Exit Strategy
When you start out the business, it’s good to be practical as well as optimistic. That’s where planning your exit strategy comes in. But things can go wrong and you might want to move on without causing dispute or facing legal action. Unless you do this you’ll be on the wrong end of one of the key startup legal mistakes to avoid.
Knowing how and when owners can share their stake in the business, how much shares can be sold for and who they can be sold to is vital. Creating a buy-sell agreement when founding the startup ensures smooth future transitions.
Do this and you’ll avoid problems and ensure you bypass this as one of the major startup legal mistakes to avoid.
10. Not Working With A Lawyer
For startup legal mistakes to avoid, this one is a killer because what a lot of startups tend to do is employ a form of ‘legal Do-It-Yourself’ to set out their agreements and obligations. This approach will inevitably lead to problems between founders.
It will also create problems between employees and employers, and with third parties and clients.
This is far better than a Do-It-Yourself approach because it’s one of the biggest startup legal mistakes to avoid.
Startup Legal Mistakes To Avoid: What Next?
In this blog post, we have outlined some of the most common startup legal mistakes to avoid. If you’d like to give your startup a strong legal foundation for the future then act now.
You can begin with a free Startup Legal Session. Find out how to deal with the most common startup legal mistakes to avoid by speaking with one of our startup legal experts.
Click the image below to book your session.