Executing a startup idea or strategy is not easy. No matter how well planned your idea might sound in your head, executing it as per the market standard as well as meeting your expectations is challenging. Many newbies face several challenges. While they take care of major business challenges, they somehow commit certain mistakes. These mistakes become one of the decisive factors of the startup. And thus, if not corrected, they can lead to the downfall of the startup.
One of the most common sets of mistakes that the newbies commit is legal. It becomes easy to avoid legal mistakes if you know about it. Since most of the young entrepreneurs have now or very little knowledge about the law and legal field, they do not pay attention to these details. However, these details can sometimes lead to huge difficulties for the newbies.
Common legal mistakes:
1. Not determining the nature and form of the startup
The first mistake that newbies commit is not paying attention to the nature of their startup. Determining the nature and type of startup is very crucial. It not only protects the entrepreneur from personal liabilities but also provides certain benefits. There are various forms of business such as sole proprietorship, partnership, corporation, limited liability company, limited liability partnership, etc. Each type has its liabilities as well as benefits. The founder should be clear about the nature of the startup from the very beginning to avoid unnecessary liabilities.
2. Not determining the nature of the relationship between the founders and co-founders
The young entrepreneurs need to make sure that they predetermine their relationship with the co-founders through a written agreement.No matter how trustworthy the co-founders may seem, they must divide their liabilities as well as the benefits from the very beginning to avoid legal complications inin the future. It should be taken into consideration that all the terms of the contract should be in writing and oral agreements should be avoided. Moreover, certain important terms and clauses should be included in the agreement such as termination clause, equity share clause, vested and contingent interests, salary or other benefits, long term goals etc. Including all these points in the agreement makes the execution very smooth.
3. Ignoring specific laws
Certain specific laws should not be ignored in any case. Ignoring these laws or figuring them out on their own will put the founder as well as the startup at risk.
(a) Security laws
If a startup raises capital, it will attract the State and Federal security laws at some point. Not complying with these laws may attract financial penalties and other legal disputes. Since the security laws are a bit complex and technical, it is always better to consult an experienced legal professional.
(b) Intellectual Property Laws
If the startup deals with a unique or original product or service, it is necessary to take into consideration all the intellectual property issues such as Patents, Trademarks, Copyright, Design, Service marks, etc.
Apart from that, Intellectual Property Laws must also be considered while adopting certain things in a startup such as ideas, names of the startup, logo, design, and graphics on the website, etc.
(c) Tax Laws
Newbies need to pay attention to certain important tax considerations such as Tax ID, Tax incentives, stock options, sales tax, income and deductible expenses, etc.
Moreover, it is crucial to maintain and update all the appropriate documentation from time to time.
5. Not having fixed and certain terms and conditions of the employment
As mentioned before, oral agreements may lead to conflict and complications at the later stage. Thus, all the important aspects must be mentioned in a written document or agreement. While appointing prospective employees, offer an appointment letter must be well drafted. They should specify the job description, roles and responsibilities, tenure, termination clause, dispute resolution clause, salary, and other benefits (if any), confidentiality clause, and other such necessary details. The employees should know all the terms and conditions of employment. Moreover, written consent should be taken from the employee that he or she has read and understood all the terms before joining. All this would avoid legal conflicts and disputes in the future.
6. Ignoring confidentiality agreement
Since the employees would be working for the entrepreneur, they will have all the day-to-day as well as important details of the startup. Thus, it is necessary to have a confidentiality agreement with the employees. The agreement of confidentiality must contain certain key points such as prohibition from disclosing confidential information as well as ideas of the startup, competitionclause, representation clause, etc. Moreover, it should also mention the consequences of the breach of such an agreement.
It is also essential to have such an agreement with the consultants and investors (if any).
7. Taking documentation, permits, and licenses lightly
Certain permits, licenses, documents, registrations, etc are required depending upon the nature of the startup. E.g., alcohol permit, aviation permit, sales tax license, health department permits etc. All these are nature specific permits and licenses. Not all startups will need them. However, some certain startups or projects are entirely dependent on such permits. And thus, taking them lightly will lead to legal complications and penalties. In extreme cases, not having appropriate permits may lead to the closure of such businesses.
8. Not determining the dispute resolution clause in the contract
One of the important clauses that any contract must have is the dispute resolution clause. The entrepreneur must invest his or her time and attention to this clause. This clause must be predetermined in the agreement with all the parties, be it co-founders or investors or consultants or employees or any third party. The predetermination of the dispute resolution clause will reduce difficulties while facing a legal dispute.
9. Hiring inexperienced legal professionals
One of the most common mistakes that newbies commit is hiring inexperienced legal professionals or individuals. Generally, they find it convenient to take advice from their relatives or friends who are from the legal field. However, these people might not be that experienced to give crucial business-related advice.Not having experienced legal professionals by their side, will make things complicated. The legal individuals can’t know all the Laws. However, before hiring them the entrepreneur should ensure that they have the necessary knowledge and experience in the laws related to the startup. There are certain areas of law, which are related to the business and corporate field, that the legal professional must know, e.g., Contract Law, Securities Law, Employment Law, IP Law, Tax Law, Real estate Laws etc.
10. Not paying attention to the terms and conditions on the website
In these days of virtual platforms, having a website of startup or business has become very common. While it is very common and easy to create and design a website of own, it is crucial to pay attention to the content uploaded on the website. The entrepreneur should be careful while uploading the privacy policies, disclaimers, cookies, copyrights, liabilities of the site owner, etc. Moreover, it should be exclusively mentioned that what the site owner or entrepreneur will do with the data collected from the users of the website as well as the third parties.
11. Postponing legal dealings
Apart from the above mentioned legal issues, if the founder feels that there are certainly other issues or facts about the startup that need to reviewed from the legal perspective, he or she should consult an experienced legal profession without any delay. Not giving immediate attention to certain matters might increase the risks and losses.
Founders that take care of these legal challenges from the very beginning have a higher rate of success than those who avoid them. Avoiding these challenges will only lead to the downfall or failure of the startup at some point. Hence, it is crucial to be aware of and avoid such legal mistakes.
1. Lee Drizin, The 6 Most Common Mistakes Made By Newbie Entrepreneurs, https://www.business.com/articles/common-legal-mistakes-newbie-entrepreneurs/, August 15, 2018
2. Richard Harroch and Richard N. Frasch, 10 Big Legal Mistakes Made By Startups,Oct 3, 2013
3. Alejandro Touriño,Seven common legal mistakes made by entrepreneurs who forego business legal advice, https://lawahead.ie.edu/seven-common-legal-mistakes-made-by-entrepreneurs/