The whirlwind of excitement and activity surrounding the launch of a startup can feel overwhelming. You’re so focused on managing the day-to-day logistics of getting your business up and running, you often don’t have time to focus on the bigger picture.
Because of this, it can be easy to overlook some perilous legal pitfalls that can turn your entrepreneurial dreams into a nightmare. Indeed, not having the proper legal protections in place is one of the biggest reasons startups fail. But with sound legal advice and planning, it’s fairly easy to safely sidestep these potential dangers.
Here are four of the most common legal landmines to watch out for:
1) Choosing the wrong business entity: Choosing the right legal structure for your business is crucial, not only for protecting your personal assets from liability, but also for boosting your income and saving on taxes. Whether it’s a sole proprietorship, limited liability company (LLC), or S-Corporation, each entity comes with unique advantages and disadvantages, all of which must be carefully considered before launching.
Consult with us for help choosing and setting up the business entity structure that’s best suited for your particular operation.
2) Not having a clear founders’ agreement: In a startup’s early days, it can be tempting to skip clearly documenting each co-founder’s responsibilities, rights, decision-making power, and equity. You’re all in this together, right? But if you don’t have a thorough founders’ agreement in place from the start, you risk major legal and financial conflicts down the road.
Such agreements should be in writing and created with the guidance of lawyer who specializes in business law. And they should be in place before you begin earning revenue. Once a business starts making money, you’ll often find your co-founders’ goals aren’t as closely aligned with yours as you first thought.
3) Not having the proper employment agreements: As with a founders’ agreement, you should also have comprehensive employment contracts in place for every person who works for you—both full-time employees and independent contractors. 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 employment.
Require your workers to sign these contracts to provide evidence that both parties are aware of the employment relationship, especially when it comes to 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.
4) Not protecting your intellectual property: Protecting your intellectual property (IP) from outsiders and competitors by securing patents, trademarks, and copyrights is essential. But don’t forget to protect your IP from insiders as well.
Make sure that all intellectual property (IP) brought into your business by its founders before startup, along with any IP created by owners, employees, and/or contractors after its launch, is owned by the company, not the individual.
The transfer of ownership rights from the individual to the company can be done using 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 actually own all of the work you’re paying others to create.