The Many Ways Startups Can Get Into Legal Trouble, And What To Do About It

startup legal trouble

What’s the difference between a great idea and a great product? Execution. The startups that fail are the ones that only discuss ideas: the startups that succeed are the ones that make them a reality.

But in between product development and finding a market are a bunch of legal concerns, which at any moment could derail your enterprise. That’s why, according to experts, it’s a good idea to spend a bit of time thinking about legal issues and developing law case management tools before you hit the big time. Suppose, for instance, your business is operating in a heavily regulated environment, like healthcare, crowdfunding or alcohol, there’s every chance that you’ll bump up against a legal issue at some point. Therefore, conquering legal issues is just as much a part of your business’s success as a great marketing campaign or getting your costs down as low as possible.

Here are some of the common legal issues you’re likely to face, and how to avoid them.

Failing To Be Transparent With Co-Founders

Most people, including entrepreneurs, can often find it hard to talk about money. Money, unfortunately, is an awkward topic – and one that most people want to avoid having with their co-founders. It’s just not a pleasant conversation to have, figuring out how much each individual is worth to the company and working out how much of the reward they should get. But there’s a problem with this, however. Avoiding discussing difficult topics can end up leading to legal issues when founders find out they’re not in line for as much money as they thought they were.

There’s an easy way around this problem: it’s called a founder’s agreement. Founders agreements help to clarify things like responsibilities, decision-making roles, and equity in the company.

Failing To Include A Vesting Schedule When Giving Out Shares To Co-founders

It’s important that when you split equity in your company by handing out shares that you install a proper vesting schedule. The idea behind a vesting schedule is to deliver shares to co-founders over a set period of time, usually around four years. Vesting structures are important because they mean that a founder can’t just walk off after 12 months with a huge tranche of the company. Once a founder leaves, their share payments are cut off and paid out to the remaining founders.

Hence, vesting helps to protect entrepreneurs and startup businesses in the event that one of their key people suddenly decides to bail and do something else. Vesting structures can be complex, so it’s worth talking to an attorney about the best way to proceed.

Failing To Protect Intellectual Property

The biggest startup killer is the failure to protect intellectual property. Many startups don’t realize just how easy it is to mess this process up, lose the very thing that makes them valuable, and then have all their investor finance withdrawn. Protecting intellectual property isn’t easy, but companies need to ensure that they are the legal owner of the IP. If they’re not, they could be up the creek without a paddle – so to speak.

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