Grave Legal Mistakes will kill a Growing Start-up
Akhileswar Sivaratri / January 25, 2019

A start-up to survive shouldn’t be luck dependent, it should be legally dependent. Here are the top 10 legal mistakes that affect the growth and survival of start-ups.

 

Startup Legal Mistakes

 

10. Intellectual Property:

Anything that is open information is fair game for the public to use. If a patent is not yet obtained, it is best not to disclose information about your invention and keep your intellectual property as a trade secret. Employees and co-founders will be under a non-disclosure agreement if you don’t have proper trademarks or patents in place within your company.
            The most unique and simple way of protecting intellectual properties is not to file patents. Filing and publishing patents give a recipe of how a product or service can be created. It is not impossible to create a similar product with workarounds not to violate the intellectual property rights.

 

9. Trademark Disputes:

Trademarks help consumers identify the source of a given product or service. Trademarking all the marks may lead to confusion and conflict between competitors and the consumers they serve. Trademarks include names, logos, words and products. These marks are used by businesses to distinguish their products and services in the market place.
            Registered trademarks give you all the rights that are granted by the federal law. Those trademarks that are unregistered afford you some of the same rights along with other common law rights. Understanding business torts give you the resources you need to protect your company from costly damage.
If you can, one of the best intellectual property securement methods for trademarks (that you actually own) is an exact-match domain name. While a costlier objective in the short run, the windfall of benefits in the long run, is unrivalled.

 

8. Choose the right legal counsel:

Start-ups deliberately neglect the formulation of evaluation criteria, choosing the legal counsel. Hiring the right legal Counsel consumes cost and time. Founders often hire lawyers who are friends, family members or relatives. The following are some of the legal areas in which the expertise of a lawyer has to be considered. They are Corporation, commercial and security law, Contract law, Employment law, Intellectual property laws, Real estate laws and tax laws.

It is easy for founders to fall in the trap of not having a legal counsel because of lack of obligatory Knowledge or the unwillingness to spend money that it takes. State bar referral services, business acquaintances and online legal websites are some of the sources for a founder to locate a competent legal counsel.

 

7. Founders Agreement:

            A Founders Agreement is a legal document drawn at the time of the incorporation of the business to avoid ambiguity regarding roles, responsibilities and payments/ remunerations of each of the co-founders. It sets up the goals and projections of the co-founders. Before entering into a Founders Agreement, the co-founders must undertake a sincere dialogue to create an understanding of issues like ownership, management, remunerations, compensation, investments, the board of directors, etc.

            It is essential for the founders to have clarity which shall then be reflected in the Founders Agreement. The components of the Founders Agreement should be discussed thoroughly to be able to arrive at a detailed and conclusive result. A well-drafted Founders Agreement helps to avoid situations which may possibly hinder the development and cause uncertainty in the management of the business. Also, a wise investor ensures that during the due diligence, the Founders Agreement is scrutinized.

 

6. Security Laws:

            Small businesses need capital to start-up, operate and grow. Seeking capital from outside investors and obtaining a loan from an outside institution are two ways of seeking funds. If a business entity offers or sells securities it must comply with and meet the procedural requirements of the ‘33Act. Especially, Section 5 of the ’33 Act prohibits persons from using any method of interstate commerce to buy, sell or deliver any security, except in accordance with the provisions stated therein.

            Violating section 5 carries potential civil and criminal penalties. Most notably among the securities laws is the requirement to register with the SEC any sale of securities.

 

5. Procrastinating Legal Problems:

By far the biggest mistake of all is becoming an "emergency entrepreneur" — someone who puts off all legal issues until she is being sued. The time to engage with a legal professional is not when threatened with a lawsuit. Healthy people see the doctor or dentist for preventative care; healthy businesses should take the same approach, and establish a relationship with a good lawyer early on in a business s lifecycle. A good lawyer will want to get to know the intricacies of a company, including how the employee’s tick and their tolerance for risk, long before alarm bells go off. Many attorneys even often offer free or low-cost initial consultations, in order to build a long-term relationship. Another thing new businesses can consider is legal plan options. For less than the price many lawyers charge for an hour, many businesses can get a year of coverage and a lawyer to call in the event of a problem or legal query.

 

4. Time for Incorporation:

Forming a legal entity, like a limited liability company or corporation, is extremely important. These business entities shield entrepreneurs from personal responsibility for certain business obligations. But with the privilege of having the legal entity comes responsibility and cost. An entrepreneur should be sure that his or her business is more than just an idea, and that he or she is ready and willing to invest time and money to maintain the business as a separate, legal entity.

Would-be entrepreneurs might find themselves with a lot of legal and tax fees on top of government-imposed fees just for having a legal entity, so they should carefully consider the timing for incorporation. When the benefits of limited liability and having a real company outweigh the likely administrative costs, it may be the time to take action.

 

3. Lack of employment documentation:

Business start-ups often encounter problems when they do not maintain adequate employment documentation. Consequently, start-ups should have prepared a core group of employment documents to be signed by most, if not all, employees. A starting list of employment documents for a new company would typically include the following:

1.       Stock Option documents (if a corporation has been formed), including a Stock Incentive Plan, Notice of Stock Option Grant, and Option Agreement

2.       “At-Will” employment offer letters (signed by the company and the employee, acknowledging that the employee or employer could terminate employment “at-will”)

3.       Confidential Information and Inventions Assignment Agreement (discussed below)

4.       Employee Handbook (setting forth company policies on vacation, conflicts of interest, internet usage, etc.)

5.       USCIS Form I-9 (to document verification of the identity and employment authorization of each new employee)

6.       IRS Form W-4 (the employee’s withholding allowance certificate)

7.       Benefit forms, for benefits available to employees and family members (e.g., health insurance, dental insurance, 401(k), etc.)

 

2. Using Unregistered Brokers:

Be wary of someone who claims to be a broker who can sell or buy shares on behalf of your company but who isn’t registered. If you use an unregistered broker for these transactions, then you’re breaking the law.

Use the Financial Services Register to find broker-dealers and firms registered with the FCA and PRA.

 

1. Registration and structure:

            Business Registration is the first important legal document that sets a secure foundation for your company. The structure in which it is registered determines the company’s capabilities 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 easier.

 

References:

https://www.allbusiness.com/10-big-legal-mistakes-made-by-start-ups-9941-1.html

https://linkilaw.com/blog/the-12-biggest-legal-mistakes-that-start-ups-make

www.edenfieldlaw.com

https://enterslice.com/founders-agreement

https://www.forbes.com/sites/forbestechcouncil/2018/07/23/10-effective-ways-to-protect-your-intellectual-property/#199ecf9c32e1

https://thebusinessprofessor.com/knowledge-base/startups-securities-laws/


COMMENTS
Rohan Lotliker
July 12, 2018 - 05:15 AM
Testing Blog Comments
Rohan Lotliker
November 28, 2018 - 12:37 PM
testing
Dhuno
March 15, 2019 - 11:21 AM
What a complete rip off! This article is copy paste mismash of several articles on the web. The article is advising Indian startups, and yet talking about US documents (401k, I-9)...did ahyone proof read this?
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