Common Legal Mistakes Start-Ups Make

Mistakes are certainly a part of life and are ways of learning how to and not to do business. However, some mistakes in business could cause irreparable damage, thereby bringing one’s business to a premature end.

The few tips below will help you to avoid a few:

Failing to consider vesting requirements on founder stock

Does your start-up have more than one founder? If so, then the founders should consider imposing vesting requirements on the stock that they will receive.

Vesting is the process by which a founder accrues non-forfeitable rights in the stock over time. In practical terms, vesting protects founders from the risk that a co-founder will prematurely leave with his or her slice of the company. For example, assume that 3 co-founders each receive a 1/3 interest in a company with no vesting restrictions. In this example, a co-founder could leave after 1 month and keep his or her 1/3 interest.

Not Registering Your Name

Whether you intend to be a sole proprietor or a corporation, you should make sure that no one else is using the name you have selected for your company. If you register a limited liability company (LLC) or a corporation, a name check is required. So be certain that the name is available before you design a website, have a logo made, or print business cards and other business materials.

Failing to protect intellectual property

Intellectual property is one of the most valuable company assets, so founders and investors should protect theirs in whatever ways possible. A company’s products, services, technology, as well as its name and logo are intellectual properties. Below are the key protective measures start-ups should undertake to protect their intellectual properties.

  1. Patents – When a new product or innovative technology is invented, its author should apply for a patent, which will grant him exclusivity to make and use it. The patent also guarantees that others have no legal rights to make, use or sell the patented product or technology. Before applying for a patent, make sure that your invention is new or novel and has some useful purpose.
  2. Trademarks – A trademark is a sign that distinguishes the services or goods of one company from those of other companies. Entrepreneurs should trademark company name, slogans, logo, and product names to protect them by intellectual property right and prevent competitors from using them to identify their own products.
  3. Copyrights – Copyright protects original works of authorship, such as works of art, articles, books, software, etc. from unauthorized reproduction.
    Non-Disclosure Agreement – NDA, also referred to as Confidentiality Agreement, is a contract signed by the parties to ensure that a piece of confidential information (could be manufacturing process, a sales plan or a formula for a new drink) will stay secret or have legal recourse if it is disclosed or misused.
  4. Trade Secret – Trade secrets range from computer programs to formulas, which are not ascertainable by others. A trade secret rights make it legal for the owner to take legal actions against those who breach confidential relationship, steals secret information or use any improper means to make it public.

Failing to properly document employment relationships

Has your start-up hired employees? If so, then you should have standard employment documents that clearly define the employment relationship and protects the start-up.

The employment documents should include provisions regarding confidentiality, invention assignment, role, job description of the employee and renewal terms.

Work with a lawyer

Don’t overlook the importance of working with a lawyer. Working with a trusted lawyer can help you avoid all the mistakes above, plus countless others that you will likely make as you grow your start-up. A lawyer who also works as a creative, strategic advisor will guide you to not just avoid legal mistakes but set your business up with the right legal, insurance, financial and tax systems for a lifetime of business success.

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