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6 common legal mistakes made by startups

Building a new tech business is taking risks. And by taking risks, you can make big (legal) mistakes. Some of those mistakes are more common than others. Here’s how to avoid them.

1. The wrong legal form

Startup companies can grow very (very) fast. What began as comic trial (the Yo app), a school project (Snapchat) or as another business (Flickr) can quickly grow into a large company. In that case, you don’t want to be personally liable (or with your business partner) for the company. So: if your company is growing fast it is desirable to establish a vehicle with limited liability. Result? Tax advantages and no personal liability.

2. No specifications of relationships among founders

Most of the startups begin as an informal partnership. Frequently heard statements are: “We trust each other – our friendship goes way back”. Or: “We are working on the future. My partners and I do not want an exit.” Believe me: in a lot of cases these statements make no sense. Business is not (always) like friendship, and it is essential to put verbal agreements into written agreements. As early as possible. Discussing such agreements is not fun to do, but you have to make clear arrangements about share ownership for example.

3. Forgetting a NDA

If you forgot to bring a non-disclosure agreement to the table, and decide to do business anyway, you should stop right away.As a tech startup you have a lot of good ideas, and in most cases an unique business plan. In the early stage your company is very vulnerable, which means big companies can steal your idea by inviting their copycat to the meeting. A NDA can be used to protect any type of valuable information that needs to be kept secret.

4. No arrangements with designers

It’s your company, so you want to be the owner of logos, layouts and designs. But: you do not automatically get that ownership of these creative assets of your company. By operation of law, that ownership generally remains with the designers / developers / creative service providers. So: arrange in your contracts that all intellectual property will be transferred to you.

5. Needless patent

Groundbreaking inventions should apply for a patent. Price tag of this request? At least 10.000 euros. Now imagine: you have a patent and someone released a copy. In that case, challenging your rival in a patent infringement case costs you another 20.000 euros. Do you have the new cure against hangovers, colds and depressions in one drink? Go get them, tiger! Do you have an idea for just a cool app? Don’t go for patents.

6. The wrong legal partner for your company

This may not be so credible to hear from a lawyer, but as a growing company you need one. Make sure expertise, experience and personality is a match. Your legal partner should understand important terms, the market in which your business operates and the process the company is going through. For recurring and straightforward legal needs, seek out an innovative service provider. For once-in a lifetime high exposure legal transactions (i.e. you are selling your company or listing it on the NASDAQ), seek out the help of specialist lawyers.

Philip de Roos LegalPhilip de Roos has a lawfirm specialized in startups. He also has his own startup Legalloyd
Contracten
, which is using smart technology to better serve the legal needs of small businesses. Philip loves to share his experiences and knowledge. Questions? Send Philip an email at: philip@legalloyd.com.

 
Photo by Pieter van Marion (creative commons via Flickr)

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  1. Dave says:

    Great post Philip ! One point to disagree, the NDA. As most investors get a lot of sortlike ideas, they are simply not able to sign NDA’s. As to business deals, agree more but the same goes there sometimes. Key is to only get introduced by trusted parties and contacts.

    • Philip says:

      Thanks Dave – indeed amongst (tech) VCs an NDA is often not accepted in an early phase. However, Founders would be wise to still at least introduce the concept of confidentiality in that phase – if only to clarify that the information they are sharing is sensitive. Founders should also heed the form in which they share information: best to provide a hard copy print out of sensitive info at a face to face meeting, and to then take that information back home (until there is a confidentiality undertaking on the VC – after that, info can be shared more freely).

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