Top Ten Legal Mistakes Startups Should Avoid

Over the years, Suresh Law has served hundreds of technology startups and entrepreneurs with their corporate law needs. There are many common legal mistakes that startups make which require our assistance.

We wanted to share these common mistakes entrepreneurs make with you to help avoid similar pitfalls and seek legal consultations early on if you have any concerns.

1. Plan for the future

We often see businesses struggling to balance the business and legal priorities during their early days, which may have a long-term impact on the startup. Entrepreneurs should consider future business needs, including raising capital and growing the team.

2. Legal compliance

Startups often forget to update corporate records, file key changes and annual filings. At times, issues may arise around privacy and data compliance due to these potential decisions.

3. Incorporation and corporate structure

Entrepreneurs who rush to incorporate without following the checklist may find surprises down the road. Share classes have to be properly created. Registers for directors, officers and shares should be properly maintained. The operating jurisdiction may dictate potential changes to the corporate structure as well.

4. Protecting intellectual property

From the early stages, it would be a good idea to protect all the company’s intellectual property, which may include patents, trademarks and copyright. Hiring third-party developers can also raise potential concerns over who may own rights over the code even though they may have been compensated for the work.

5. Employment matters

It is important to have property-written employment contracts regardless of the type of hiring that is taking place. These should address key issues such as termination and confidentiality. If stock options are part of the employment package, this should be carefully drafted with legal consultation.

6. Legal counsel

It would be wise to have legal counsel to help plan all the startup stages to avoid potential pitfalls. Lawyers can assist with reviewing contacts that may contain gaps and assist in business planning.

7. Shareholder agreements

Many startups fail in the early stages since shareholders do not take the time to create a unanimous shareholder agreement. This helps to establish the ground rules, expectations and, most importantly, any remedies for breaches that take place.

8. Disputes with clients

Poorly drafted service agreements may lead to issues with clients.

9. Confidentiality

Carefully executed non-disclosure agreements are essential to securing the secrets of your business. Ensuring that contacts with clients and partners also cover this will help maintain a competitive advantage.

10. Personal liability

The corporate structure and any personal guarantees that may be signed may expose founders to personal liabilities. This also extends to tax and employment obligations directors may have.