5 Common Legal Mistakes Made by Startups You Should Avoid

When launching a new startup, many entrepreneurs make major legal mistakes that can cost huge and when can bring them down the road.  

Startups that make these mistakes can find their companies embroiled in lawsuits and, in some cases, will be unable to raise money from venture capital firms to get the capital they need to grow their business.

Startups generally make these mistakes repeated at early-stage startups over and over again. Unfortunately, in some cases, these mistakes can be fatal for a startup and prevent entrepreneurs from raising the capital required to build their businesses.

We are going to highlight the most common legal mistakes made by Startups. Kindly read till the end, because it will be going to save millions of dollars. If you’re an entrepreneur or want to become an entrepreneur then you must avoid these five crucial startup mistakes. 

The following are some of the more common and problematic legal mistakes that startups make. These issues typically arise at either the initial formation of the business, in the early stage of the company’s growth, or when dealing with employees.

Mistake 1# Missing Out Formal Written Agreement With Co-Founders.

A startup is a dynamic structure where things can change unpredictably. Likewise, startup founders work in a progressive environment where changes occur unexpectedly.  It is commonly said, “In the startup ecosystem, the only constant thing is change”.  Hence it is essential to have a  properly drafted agreement in place. This will help avoid unnecessary chaos later. The agreement should specify the actual roles and responsibilities of co-founders, the right to make decisions, intellectual property rights, equity breakdown, remuneration, and exit terms and clauses. 

Mistake 2# Not Starting the Business as a C Corporation.

One of the important decisions you make as a business entrepreneur is what entity to use for your startup. Because founders often start businesses without seeking guidance first on legal and financial issues, they incur higher taxes and can become subject to significant liabilities which could have been avoided altogether if they had structured the business as a C Corporation.

Most investors do not invest in a sole proprietorship, or limited liability company (LLC) because there is a higher chance of risk. Converting over to a C Corp later (after the company has already started doing business) can present thorny tax problems and be quite costly. Startups that are not registered as C Corps from day one are not eligible for Qualified Small Business Stock (QSBS) exemption, which allows investors, founders, and early employees to be able to potentially write off 100% of the proceeds of their investments into startups from their taxes.

Mistake 3# Ignoring Trademark, Copyright, or Patent.

Registering a trademark is an important step in any business venture – one that should not be overlooked. By protecting the name of your business, products, or services, you ensure that others cannot use trademarked words or designs.

If you fail to secure your ideas, anyone can start using your ideas, and in some cases, they may demand that you stop using what they now claim is their trademark. Or anyone can patent your idea on their name.

When you have secured the rights to your trademark, it is an asset that increases in value and can be sold or licensed to others. Therefore, registering a federal trademark is an essential component of any business and wealth-building strategist. Copyright and patent protection may also be relevant to you depending on your business and product.

Mistake 4# Lack of Intellectual Property Protection. 

The protection of the company’s IP, including its patents, trademarks, copyrights, trade secrets, and more, must be done in the early stages of the startup. You need to formulate a clear strategy for IP protection, which includes registering in the countries where you plan to do business, documenting agreements, and drafting solid NDAs with employees, suppliers, customers, and anyone who may be exposed to the venture.

Mistake 5# Over-promising to Investors.

Entrepreneurs are optimists – creative, highly motivated, passionate, and willing to believe what seems impossible. The smart entrepreneur is careful, though, to avoid making statements, projections, or promises that are unreasonable and/or untrue. Optimistic views, aspirations, and stretch goals should be explicitly characterized as such. Such statements may otherwise violate the anti-fraud provisions of state and federal securities laws and can result in the loss of credibility with prospective investors. A smart entrepreneur should not assume that because an investor is seasoned that they understand which statements being made by the entrepreneur are aspirational and which are factual. Having a well-vetted business plan with solid projections and being honest about the risks your business faces is the best way to stay on track to success – and avoid legal problems.

Wrapping Up

Starting a startup is not a cakewalk, when you step into the business you have to take care of everything from business structure to confirming a patent-free name to legal advice. As per the latest data around 70percent of startups shuts their operations in the first three years. Also, most MSMEs businesses make common mistakes and we should not take them lightly because millions of dollars are invested in startups, and the percentage of startup failure can be minimized if we minimize these mistakes (mentioned above).