The startup life can be exciting and for many the learning curve is huge.
In the midst of growth and opportunity, many entrepreneurs make costly legal mistakes which can be easily avoided with the proper preparation. Here are some of the most common legal missteps made by businesses in the startup phase:
Not Drafting a Clear Founder Agreement
A crystal-clear agreement between co-founders before you start making a profit (or losses, as the case may be) will prevent financial misunderstandings about who gets what and when. Decide early on how profits will be distributed and losses made up to avoid much bigger conflict down the road. Use the "Agreement Process" (part of our LIFT Foundation System™) to determine how you handle the hard issues, right up front, before you make big investments.
Starting as a Sole Proprietorship
Sole proprietorships are easy to set up, but expose you to personal risk and potentially higher taxes. Consider an LLC or S-Corporation to protect your personal assets and possibly even reduce your tax burden.
Ignoring Securities Laws When Issuing Stock
They say it takes a village to raise a child. The same adage applies to startups. If you want to issue stock to those who've helped you along the way, heed all state and federal securities laws. Contact us before you issue any stock, so we can get you set up right.
Not Having Enough Employment Documentation
Every startup should have a set of comprehensive employment (or independent contractor) agreements in its arsenal. Avoid the high cost of resolving employee conflicts in court by making sure you policies and agreements are absolutely clear, and that you've properly categorized team members as either employees, or independent contractors. If you aren't sure, contact us.
Neglecting IP Protections
Your intellectual property is an asset, and should be protected from day one. That means trademarks registered, and copyrights filed. If you aren't sure what needs protecting, contact us to get an audit scheduled.
Failing to Develop a Tax Strategy
If you're not making a lot of money, why worry about taxes, right? Think again. Work with a tax advisor to develop a tax strategy, and don't wait until tax season to do so! We meet with our clients' and their tax advisor at least annually in the Fall to begin identifying the tax opportunities that must be planned for well before year end.
Before you register your name or your domain, make sure there aren't any trademarks or similarly named companies already using your name.
Not Having Clear User Agreements
Perhaps the biggest legal mistake a startup can make is not having good legal counsel. Don't wait until it's too late to hire an attorney to help you avoid sticky situations. Having a trustworthy and experienced attorney in your ring from day one will help you start-up with the solid foundation you need for success.
Startups can be risky ventures, but with sound planning, you can beat the odds. If you want to avoid costly legal mistakes many startups make, begin by sitting down with a Family Business Lawyer™. As your Family Business Lawyer™, we can establish a sound legal, insurance, financial, and tax system for your business so you can focus on running your growing startup.
This article is a service of Sky Unlimited Legal Advisory, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business 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 at (650) 761-0992 to schedule.