4 Legal Mistakes That Can Doom Your Startup
During the startup phase, it’s easy to get overwhelmed by the massive amount of work it takes to get your operation up and running. You’re so focused on the daily tasks needed to keep your doors open, it can be easy to put off administrative duties that aren’t aimed at bringing in revenue or attracting customers. In light of this, many entrepreneurs make costly legal mistakes that have the potential to doom their business. Indeed, failing to put the proper legal protections in place is one of the most common reasons new businesses fail. This is unfortunate, as most of these mistakes can be easily avoided with proper legal planning and advice.
Though you should consult with us early and often during the startup phase, here are four common legal missteps to watch for:
1. Not creating a founders’ agreement When your business is just getting started, it might not seem like a big deal if you don’t have a formal agreement documenting each co-founder’s rights, responsibilities, decision-making power, and equity. You figure you can take care of that once the dust settles and you start making money. Besides, you’re all in this together, right? However, if you don’t have a properly drafted founder’s agreement in place from the start, you’re setting yourself up for serious legal and financial conflicts down the road.
And since these agreements lay the foundation for how your operation will be governed and run, you should never attempt to create them yourself with generic legal documents you find online.
Founder agreements should always be created with the guidance and support of trusted lawyers like us who specialize in business law. What’s more, they should be put in place before you start earning revenue. Once your company starts making money, you’ll often discover that your co-founders’ goals and interests aren’t as closely aligned with yours as your first thought.
2. Selecting the wrong business entity Selecting the right legal structure for your business is critical, not only for protecting your personal assets from liability, but also for maximizing your income and tax savings.
Some of the most popular entity structures for small businesses include sole proprietorships, partnerships, limited liability companies (LLCs), and S-Corporations.
Each entity comes with its own unique advantages and disadvantages, so you should carefully consider which one is best suited for your company and put the structure in place before opening your doors. We can help you select, set up, and maintain the entity structure that makes the most sense for your particular situation.
3. Not using proper employment agreements Unless you plan on running the company all by yourself, you should require every individual who works for you—employees and independent contractors—to sign a comprehensive employment agreement as a condition of employment. It doesn’t matter how long you’ve known the person, you should have an agreement in writing clearly laying out the terms and conditions of their position.
These agreements are vital in order to clearly define the employment relationship when it comes to properly classifying employees versus independent contractors. These documents should also include any non-disclosure agreements and/or non-compete agreements you need to ensure your trade secrets and clients don’t fall into the hands of your competitors. As with your founders’ agreements—and every legal document you use—employment contracts should always be created with the guidance of trusted legal counsel, never on your own.
4) Not protecting your intellectual property Given that intellectual property (IP) typically makes up some 80% of a company’s total value, it’s vital that you protect these intangible assets from your competitors by securing the necessary patents, trademarks, and copyrights. However, you should also protect your IP from those inside your company. Before you launch, you should ensure that all IP brought into the business by its founders is owned by the company, not the individuals. And once your business is up and running, the same needs to be done for any IP created by your employees and/or contractors.
The transfer of ownership rights from individuals to the company can be done with IP assignment agreements and work-for-hire clauses. We can help you draft these agreements as well as put in place other legal protections to ensure you own all of the work you’re paying others to create.
A solid legal foundation
Don’t put your startup at risk by neglecting to put the proper legal protections in place. As your Creative Business Lawyer®, we specialize in helping entrepreneurs protect their business interests and limit their liability with a wide array of legal documents and systems. Even if you’ve worked with another lawyer, meet with us today to ensure your company’s legal foundation has been properly created and maintained, so it can withstand all potential threats.
This article is a service of Hanson Legal Creative Business Lawyer®. We offer a wide array of business legal services and can help you make the wisest business choices throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.