6 Costly Legal Mistakes Made by Startups

Launching a startup is undeniably an exciting time. Not only are you finally your own boss, but you also have a chance to become one of the most prolific companies in the world. Granted, that’s unlikely, but who knows, right?

Unfortunately, that excitement can be the cause of entrepreneurs failing to consider the legal implications of their actions. And a startup in legal trouble is unlikely to become solvent, let alone the most prolific company in the world.

The following is a list of six legal mistakes frequently made by startups.

Failing to Set up an LLC or Corporation

It is very rarely a good idea to start a business as a sole proprietorship or simple partnership. Doing so legally intertwines the founders’ and the business’ finances. That means that the personal property, savings accounts, and other assets of the founders can be attached if the company is the subject of any sort of legal action. People have lost their homes, vehicles, and money as a result.

By creating a corporation, entrepreneurs ensure that they and their company are separate entities. This ensures that they are not held personally liable in the event of a lawsuit.

Picking a Company or Domain Name Without Researching it

Never pick a domain name or company name without doing intensive research beforehand. This includes checking the domain name on a website such as GoDaddy.com, doing a Google search of the name, and possibly even hiring an attorney to do a patent and trademark search.

Doing these things will ensure that you’re not taking a name that is the same as, or reasonably close to an existing company name. Be wary of attempting to use slightly different variations or intentional misspellings. This can have negative consequences as well. If a business owner can prove that your name is confusing enough or is an attempt to attach your company to their brand, they may have grounds for legal action.

Not Protecting Source Code And Other Intellectual Property

It’s extraordinarily important to take steps to properly ensure that products created by your company are legally protected. This prevents others from taking your ideas and claiming them as their own. This is why it is important to get and retain copyrights, trademarks, patents, and other legal protections.

As technology advances, this has become a bit of a sticky area. One particular point of concern is with software and app development. Specifically source code. If you are licensing certain software from a 3rd party vendor, you might be wondering what will happen if they go out of business and stop supporting it? To avoid losing your product you may want to consider using a software escrow agent to store that licensed source code and have immediate access to it when the respective conditions apply.

Misunderstand the Law When Gifting Stocks

Once you form a corporation, the selling or gifting of stock options becomes a legal issue. You are bound by the laws and regulations that apply to you. It might be tempting to gift stocks to angel investors, friends, and family members who helped you launch your company. Be careful. There can be significant tax and other penalties involved if you do this incorrectly.

Having a Poorly Written Founders Agreement

When a company is first being launched, things tend to be very positive and upbeat between the founders. Unfortunately, things don’t always stay that way.

A founders agreement is a bit like a prenuptial agreement. It defines the roles that every founding member will play in the organization. It also makes clear the percentage of the company that each founder owns, and what will happen should somebody leave the company to avoid legal mistakes.

Hiring People Without Proper Paperwork

When you’ve achieved enough growth to begin hiring employees, legal mistakes become all too common. It is important to protect yourself from potential legal action by disgruntled employees by providing them with all of the documentation required before they begin working for you. This includes company policies, descriptions of duty, conditions and terms of employment, explanation of benefits, confidentiality and nondisclosure agreements, and other documents.

In order to ensure ongoing success and profitability, startups must take legal mistakes into consideration. In most cases that will mean consulting with legal experts to ensure that the proper measures have been taken to ensure that everyone involved is adequately protected.

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Written by:
Dianna is a former ESL teacher and World Teach volunteer, currently living in France. She's slightly addicted to apps and viral media trends and helps different companies with product localization and content strategies. You can tweet her at @dilabrien
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