Starting a business can be an exciting and fulfilling experience, but it can also be filled with legal pitfalls that can hinder your growth and success. As a startup founder, it’s important to be aware of common legal mistakes that can be made and how to avoid them. Here are the top four most common mistakes:
- Failing to incorporate properly:
One of the most common legal mistakes made by startups is not incorporating their business properly. Incorporating is the first step for a startup to become official in the eyes of the government and will serve as the base structure from which your business legally operates. Choosing the right entity structure (i.e., LLC, S-corp, C-corp) and ensuring that all necessary paperwork is filed correctly is essential for protecting your business and ensuring that it is set up for success. If you’re expecting to be in an “accelerator program” then be prepared to be required to form a Delaware C-Corporation, which is the preference of most venture capital firms and investors.
- Not protecting intellectual property:
Another common legal mistake made by startups is not protecting their intellectual property. Intellectual property can include trademarks, patents, copyrights, and trade secrets, and failing to protect it can lead to legal battles down the line that can be costly and detrimental to your business. Your intellectual property likely consists of your ideas, branding, and inventions, so it is vital to ensure these aspects of your company are fully protected.
- Not having clear contracts and agreements:
Another common legal mistake made by startups is not having clear and concise contracts and agreements with vendors, employees, and investors. Failing to do so can lead to misunderstandings and disputes in the future that can be difficult to resolve. Clear contracts allow both parties to know the rules of the road when working together and make business smoother, even in times of dispute. Additionally, contracts play an essential role in ensuring your intellectual property rights remain yours while conducting business with others.
- Not complying with securities laws:
Startups may also inadvertently violate securities laws when raising funds from investors. It’s likely that most founders will be looking for financial investment or loans to support their ideas in the early days. Those investments or loans are considered “securities” in the eyes of the state and federal governments. Thus, it is important to understand the rules and regulations surrounding fundraising and to comply with them to avoid legal issues that can harm your business.
In conclusion, it’s crucial for startups to be mindful of the legal pitfalls that can arise during the early stages of their business. Seeking legal advice early on can help you avoid these and other legal mistakes, set your business up for success, and allow you to focus on growing and scaling your company with confidence.