By: Raad Ahmed
When you start a business, the opportunities are limitless: for growing wealth, for gaining a new lifestyle, for changing the world—and for making mistakes that will make you wish you’d been more savvy at the beginning. Below are five of the most common legal errors that startups make.
Mistake #1: Not asking, “What’s in a name?”
Choosing a name is one of the first decisions you’ll make as a new business owner, but before you even get started on this, there are some legal matters you’ll need think through. Your job at this point is to find a name that is all yours to trademark, which means doing a thorough search for any names you consider, as well as any similar names. You don’t want to print a truckload of t-shirts with your logo on them, only to find out that there’s already a company in Iowa with the same name. Use the Internet, check the U.S. Patent and Trademark Office, and finally, run everything by an Intellectual Property lawyer to make sure you haven’t missed anything.
Mistake #2: Failure to protect your property
When you are establishing your startup, it’s vital that you obtain any relevant trademarks, patents, or copyrights before your intellectual property is out for public consumption. The obvious risk you run by not doing so is that, if unprotected, your creations are fair game for competitors to steal.
There’s another caveat here that might seem less obvious: In addition to worrying about your competitors, you must also guard against intellectual theft by your collaborators and employees. Get in the habit of requiring them all to sign confidentiality agreements, also known as Non-Disclosure Agreements (NDAs). That way, third parties and employees can give you the benefit of their expertise and labor, and you can rest assured that your creations won’t disappear out the door with them when they leave.
Mistake #3: Wrong Format
It’s one of the biggest questions facing any new business owner: What legal structure will your company have? Much has been written (on this very blog, in fact) about this subject. For the topic at hand, the main point to grasp is that, although it is possible to change formats later on, this is a highly undesirable state of affairs. Even putting aside all the lamentable occurrences that might prompt you to switch formats—unforeseen liabilities, tax issues, ownership disputes—the steep fees and mountain of paperwork involved in switching make it worth your while to consider the matter carefully up front, so you won’t need to change your structure later.
Mistake #4: Not having an ironclad co-founder agreement
When you’re starting a company, everything looks rosy: You see only success on the horizon, and you and your business partners will be happy together forever. Needless to say, this may not always be the case. As unpleasant as it may seem, you absolutely must have a written agreement with your co-founders that covers every foreseeable negative outcome. You will need to agree on what happens if a partner leaves, how duties will be shared, how much of a stake each partner has, how to oust a co-founder, and countless other scenarios. It’s much better to figure it all out at the beginning, when everyone is still on friendly terms.
Mistake #5: Not requiring co-founder equity to vest
The ownership structure of your company should dictate that equity will vest over a period of years. In a way, this is insurance against certain human failings, like betrayal, freeloading, and petty arguing. By requiring co-founders to stay active and productive for a certain period of time, you can avoid being left to do more than your share of the work for less than your share of compensation.
Bonus mistake: Thinking you can do it all without a lawyer! It’s almost certain that, somewhere down the line, your business will encounter circumstances you never would have anticipated on your own. Plus, if your venture is as successful as you know it will be, someday there’s going to be a lot of money at stake. An initial investment in good legal advice will repay itself many times over.