CALIFORNIA FOUNDERS, BEWARE:
7+ CRITICAL STARTUP MISTAKES
Starting a business requires careful attention to legal matters, as overlooking important legal and other considerations can have serious consequences. Unfortunately, startup founders who do not seek or follow legal, accounting, tax and other professional advice often make (otherwise avoidable) legal mistakes that can create frustrating or expensive problem or otherwise hinder their success. In this post, we will discuss the seven legal mistakes startups make and provide guidance on how to avoid them. Plus, a short discussion of an additional "bonus" mistake, which may be the most important of all of them.
I have been advising business clients on entity formation and related matters for over 20 years, guiding and counseling clients through the process, proactively ensuring all forms, documentation, and other necessary legal information and strategies are in place for a successful venture. If you are looking to launch a startup venture in New York or in Los Angeles or Ventura County, California, I can help you identify the most advantageous business structure for you, and help you perfect, qualify, organize, protect, and fund your new business.
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Failing to Incorporate
One of the most critical legal mistakes founders make is not incorporating their business or creating an LLC (or not doing it at the right time). The decision whether to choose an LLC or a corporation (and, if choosing a corporation, whether to choose a so-called S-Corporation or a C-Corporation). Operating as a sole proprietorship or partnership exposes the owners to personal liability for business debts and legal issues. By incorporating as a limited liability company (LLC) or corporation, entrepreneurs can protect their personal assets and limit their liability. This decision should be made on consultation with not only legal counsel, but experienced business accountants (who, in this experienced practitioner's opinion) are the startup founder's best friend.
Not Having Proper Founders' Agreements
Startups all too often neglect to establish clear agreements among founders regarding ownership, equity distribution, management and decision-making, assignment of intellectual property, and dispute resolution. Any of these omissions could lead to internal conflicts, frustration, confusion, loss of opportunity and profit, and legal disputes. Startups should and must have comprehensive, legally enforceable founders' agreements and other similar documents that outline rights, responsibilities, and potential scenarios to address potential conflicts.
Disregarding Employment Laws
This one is very important. Startups often fail to comply with employment laws, such as misclassifying personnel as consultants when they are really employees (the biggest mistake); minimum wage requirements; overtime regulations; and improperly structuring deferred compensation. Ignoring these laws can result in extremely costly (even draconian) fines and lawsuits. It is essential to consult with an attorney specializing in employment law to ensure compliance and create proper employment agreements.
Forgetting Intellectual Property Protection
Intellectual property (IP) is a valuable asset for startups, yet many neglect to protect it adequately. This includes patents, trademarks, service marks, copyrights, trade secrets, and industrial designs. Failing to safeguard these assets can leave the startup vulnerable to infringement and loss of competitive advantage, as well as lawsuits from disgruntled former founders, employees, and consultants. Consult an attorney to identify and protect your IP.
Ignoring Contracts
If good fences make for good neighbors, then good contracts make for good business relationships. Startup founders often make the mistake of neglecting written contracts and agreements, especially (especially!) with family and friends. Verbal agreements or handshake deals are not only insufficient to protect the business's interests, they can open a Pandora's Box of frustration, expense, confusion, and litigation. It is crucial to have thorough and properly drafted, written contracts for founders, investors (especially in the so-called "family and friends" round), content creators, strategic partnerships, client engagements, employee agreements, and vendor relationships. Well prepared, legally enforceable, written contracts that satisfy the provisions of applicable law will provide greater clarity and legal protection in the event that a dispute arises.
Disregarding Privacy and Data Protection
With increasing concerns about data privacy, startups must comply with applicable privacy laws and protect customer data. Failure to do so can result in significant legal and reputational damage. Understand the privacy regulations that apply to your business and implement proper data protection measures.
Failing to Comply with Regulatory Requirements
Startups must navigate a range of federal, state and local regulations. Whether it's licensing, permits, health and safety regulations, securities laws in fund raising or other financial compliance, overlooking these legal obligations can lead to severe (even if arguably unfair) consequences. Understand the regulatory landscape for your industry and consult with experts to ensure compliance.
"Bonus" Mistake: Failing to Engage an Experienced CPA
Do not rely on online tax filing, payroll, or bookkeeping services to help you understand and navigate the labyrinth that is the American tax regime. In this business lawyer's opinion, the experienced, small-business accountant is the startup founders' best friend. Click here to learn more about why startup founders should have a good CPA.
CONCLUSION
In conclusion, startups must prioritize legal and other professional matters to ensure long-term success. By avoiding these common legal mistakes—failing to incorporate, neglecting employment laws, overlooking IP protection, ignoring contracts, disregarding privacy and data protection, failing to comply with regulations, and lacking founders' agreements, and failing to engage experience CPA's—entrepreneurs can significantly reduce legal risks and build a solid foundation for their business. Seek guidance from qualified legal professionals who specialize in startup law to ensure compliance and protect your business's interests from the start.
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A.I.
I have become very impressed with the efficiency possibilities of AI. So, I gave ChatGPT a try. I generated this text in part with GPT-3, OpenAI's large-scale language-generation model. After it generated its own draft language, I reviewed, edited, revised, and expanded on it to my own liking and to ensure accuracy in all material respects. WLF takes ultimate responsibility for the content of this article.
Disclaimer
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