Success and Your Startup: Avoiding Key Legal Mistakes

Many startup companies fail for business reasons, while others fail because they neglect key legal issues. This post identifies some of the most common mistakes (legally speaking) made by startup companies that our attorneys routinely see at SK&S Law Group.

1.    Selecting the Appropriate Type of Legal Entity. From the outset, founders need to be diligent about selecting the appropriate entity type, planning for growth and raising capital. Having to make unnecessary changes to an entity type – while typically possible – is both costly and time consuming. Founders need to choose an entity that supports the company’s goals from a legal, tax and investment perspective. For example, popular limited liability companies and limited partnerships may be problematic for a business needing to issue equity compensation or desiring venture capital funding.

2.    Brand Clearance and Protection. Failing to clear a company’s business name, logos, and domain names can be a costly mistake. Founders need to be diligent about choosing marks to protect the company from others’ use with similar products or services, while also choosing a mark that does not implicate liability for infringement.

3.    Agree and Document Roles and Responsibilities. Startups should formalize relationships between company’s founders and set out each founders’ role and responsibilities in writing. Ownership and rights to make key decisions should be clearly documented, and founders should consider agreeing to a mechanism for dispute resolution.

4.    Understand and Comply with Securities Laws When Raising Funds. Founders need to understand both state and federal securities laws and regulations applicable to offerings and sales of securities, including those to friends and family (no, there is no “friends and family exemption”). All securities need to be issued with a valid exemption or registration.

5.    Comply with Labor and Employment Laws. Labor and employment laws can present a field of landmines for founders. Beginning on day one, founders must comply with state and federal wage and hour laws, classify independent contractor and employees correctly, and adhere to anti-discrimination laws, to name a few. Founders must understand both federal and state employment and labor laws applicable to their industry and to their company.

6.    Properly Documenting Customer, Supplier and Employee Relationships. Founders often rely on oral arrangements for customers, suppliers, and employees, which can be a costly mistake. Startups should work with counsel to create a toolbox of key agreements for core business activities, and those agreements should updated and reviewed regularly.

Need assistance with any of these areas? Our attorneys are well versed in business, contracts and intellectual property, and are happy to help.