Most Common Legal Mistakes a Startup Can Make

September 18, 2020

Tips for lawyers
Legal knowledge
A cartoon man sitting at his desk looking at documents, a coffee on his desk, money floating around, a warning sign, calculators and ledgers. The image symbolizes a busy person starting a company but they should be cautious of legal issues.

1. Not choosing the right legal entity.  

Sole Proprietorship?  Usually not the best recommended entity if you want to shield your personal property.  

LLC?  Quick, easy and tax pass through, but has its limitations.  

S Corp can be a great choice if you have a limited number of shareholders and they are not foreigners.  

C Corp is the "golden" form if you want to raise capital and plan to grow a great deal, but be ready to pay for the tax bills. Think it through and better even, consult with a company formation lawyer.  

2. Not seeking the right copyright and trademark.  

The worst you can do is to create a brand, spend money on marketing and website, only to discover that you cannot own that brand.  There are many nuanced rules about seeking a trademark, such as you have a conduct a search of what's currently being used, that your mark can't be too descriptive, etc.  You'll be shocked what kind of trademarks are considered to be "descriptive".  Your best shot, before even forming your entity and getting your domain, is to consult a trademark lawyer and conduct a proper search. Same thing with your copyright (writings, code).  A small step to protect yourself can go a long way. 

3Not protecting your idea.  

Before you send your pitch deck to anyone, make sure you get an NDA in place.  Although not all ideas are patentable, many methodology/unique ways to do things are.  When filing for the patent, make sure your co-inventors assign the patent to the company, vs. being individual owners of the patent, this will avoid dispute down the road. Consult a patent lawyer to file a provisional patent.

4. Not having the right agreement in place with people you work with.  

Got co-founders? Make sure you put a co-founder agreement in place, allocate the equity and vesting schedule appropriately, so that there is no confusion down the line.  

Hiring independent contractors? Make sure you sign the right agreements with them, to clarify that they are independent contractors, not employees.  When you do have actual employees, having the employment agreements in place is also critical. Please consult a commercial and employment lawyer to ensure you dot all the I's and cross all the Ts. 

5. Not having the right buy and sell agreements in place.  

Whether you are an internet company, or you sell actual merchandize, ultimately you must buy and sell things.  Not having the right terms in place can cost you a lot of headaches and even money down the line.  

What are the warranty terms?  

What happens if anything goes wrong? 

What if someone takes legal action?  

You want to make sure you have the right agreements in place, be it a SaaS licensing agreement, general terms and conditions, or the right purchase agreement/sale agreements.  Consult a commercial lawyer to get it right. 

*The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.