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In the business world, making errors is a norm. In the stages between the conception of a business idea and owning a successful business, entrepreneurs are known to cycle through a process of making mistakes and trying again. However, as a founder, you want to learn from others and avoid making such errors yourself. This is particularly so where the mistakes have legal implications that can be expensive to resolve and damaging to your reputation. This article will explain four common mistakes startup founders make and how lawyers can help you avoid them.
1. Poor Record-Keeping
Good administrative procedures form the backbone of a legally sound business venture. Company law requires all companies to maintain several registers, such as a register of members and a register of directors. It is crucial to keep accurate and up-to-date statutory books. Failing to do so constitutes an offence under company law.
Accurate record-keeping from the start of your journey can also help when seeking investment. Investors will conduct their due diligence on your company. Their process includes checking that the books are in order. A lawyer can advise you on gathering the necessary information and updating your company’s books.
Proper documentation also includes ensuring you have board meeting minutes that are sufficiently detailed and document the board’s decisions. Practise good record-keeping from the early stages of your business.
2. Lack of Well-Drafted Contracts
As a business owner, you will share contracts with many different parties. These include:
- suppliers;
- employees; and
- customers.
As your startup grows, you will have a growing network of people and other businesses you depend on, including your suppliers. You will also have more customers and people who rely on your business. Your growing network will mean you need to create more agreements, and the documentation process can become more complex.
For example, failing to establish clear employment contracts can result in disputes with employees over the terms of their employment. Improper or unwritten supplier contracts can lead to late delivery of products or services. Accordingly, you must put all of your agreements in writing. Legal disputes can result from founders relying on verbal agreements or improper contracts. A lawyer can assist you by preparing and reviewing your agreements and additional legal documents.
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3. Equity Documentation and Ownership Dilution
Founders often issue shares to other parties, including their employees, investors, and advisors. When founders give others equity in their companies, they dilute their level of ownership. You should carefully consider any decision to give others equity and how you plan to do this.
It is also vital to properly document the agreement when you issue shares to avoid future legal disputes. Consider the implications on a co-founder’s or employee’s shares in the event of underperformance or their departure from the company.
4. Not Protecting Intellectual Property
Not adequately protecting intellectual property (IP) assets, such as trademarks, patents, and copyrights, can leave a startup vulnerable to infringement claims, loss of valuable IP, and reputational damage.
Registering IP gives your company ownership rights and protects its competitive position. Before registering, you should conduct extensive searches to ensure you do not infringe someone else’s rights. Founders should also ensure that the company owns its IP. Legal issues can arise where another individual, for example, a co-founder or employee, owns an IP asset.
A lawyer can help by registering your business’s trademarks and other assets. IP ownership also puts your company in a good position to obtain finance from investors.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
Key Takeaways
The path of startup founders is well-trodden and contains several possible pitfalls. Having an awareness of potential issues forms a foundation for a successful startup. Common legal issues faced by startup founders include:
- poor record-keeping;
- the lack of well-drafted contracts;
- ownership dilution and the unwritten issuing of shares; and
- not protecting intellectual property.
Thorough record-keeping and bookkeeping ensure your business complies with company law. This can also ease the process of securing investment by preparing your business for potential investors to conduct due diligence. Additionally, registering your business’s IP helps to secure your business’s assets and protect its brand identity.
Mitigating risk and investing in professional legal advice at an early stage can prove highly beneficial for the longevity of your business. Your investment can help to protect your company from costly legal problems in the future.
If you require legal assistance with your startup, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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