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Mar 13, 2013

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Top Legal Mistakes Entrepreneurs Make

Startups often left legal issues in a second plane, however, these are a great source of risk for the company. This post describes some of the most common legal mistakes entrepreneurs make and how-to solve them.

Top Legal Mistakes Entrepreneurs make and how-to solve them
 When starting a business is very common that the founders concentrate all their energy on the development of products / services, and on starting the commercial activity of their startup. Legal issues often remain in a second plane. However, this is a great source of risk for the company. This post describes some of the most common mistakes.

Make Verbal Agreements, And Not Leave Them In Writing.

 Successful business relationships are those in which expectations of each of the participants are clear. Nevertheless, verbal agreements can generate confusion, can be forgotten and generate misunderstandings among the parties involved. Use contracts, as they set the expectations of the parties in writing, or at least compose a sheet with the agreement and send it by email to all concerned. This will also help you to build your corporate documentation.

Signing Agreements Without Fully Understanding The Consequences Of Key Clauses.

 Written agreements are intended to establish clear expectations among those who participate in it. Therefore, before signing an agreement, as a representative of your company, you must fully understand what the company is getting and giving up. You should determine which circumstances and clauses could generate a financial impact on the company. For example, what happens in case of an early termination of the relationship between the parties. You need to comprehend what fines, extra costs, or situations may limit what the company gets of the contract. Finally, completely understand who owns what as the relationship persists, especially in the case of intellectual property (IP).

No Vesting Restrictions.

 Companies which issue stock to co-founders without imposing vesting restrictions, run the risk of a founder leaving early on the company while he or she does not only keep all of his or her equity, but also benefits of the other founders' hard work. When each founder is given ownership in the company, make sure to include a vesting clause this will entitle the company the right to repurchase part or all of a founder’s ownership if a founder chooses to leave prior to a certain date. Make sure you and your co-founder(s) execute a restricted stock purchase agreement with a reasonable vesting schedule (typically four years) upon the issuance of the company’s stock. This encourages each founder to stay with the company during the crucial first years.

Not Protecting IP Ownership.

 Intellectual property affects the company since its founding. Some entrepreneurs make the mistake of creating IP for their new venture while they are still employed by another company. Given that employees usually are asked to assign all intellectual property rights to the employer over her or his works during the employment term. The employer may in the future claim intellectual property rights over work that the entrepreneur created using the company’s facilities or on company time. Reason why, the company should review previous agreements signed between former employers and its founders and future employees. Furthermore, take into account that employee confidential information and invention agreements generally also contain some form of noncompetition, and non-solicitation provisions. The first one, prohibits employees from working for competitors of the company, and the second one prohibits former employees from hiring away other employees or contractors.

 The founders must also prevent leakage of intellectual property of the company, which can occur by the departure from the company of any founder, employee or given the disclosure of inventions before a patent application is filed. You can easily accomplish this by having each founder sign an Intellectual Property Assignment Agreement with the company that lists all the intellectual property the founder will transfer to the company. Ask your employees to assign all intellectual property rights to the company, and to sign a nondisclosure agreement to avoid inventions walking out the door of your company. Sometimes patents won't be available, and the only protection is to maintain them as a trade secret, in order, to keep it secret from competitors.

Infringing Another’s Trademarks

 A trademark identifies and distinguishes the source of a product or service from other sources. A trademark can be a word, name, logo, or design. Developing a trademark takes time and money, so before your company starts to create value to one, make sure you have the right to use it, that you register it, along with its web domains. It is common in many countries that a person benefits from trademark protection simply by using it in the market, even when he or she has not registered his or her trademark.

Not having a formal scheme for decision-making

 It will not be always possible to ensure that all partners who have different points of views, reach an agreement on an important decision. However, even when it is impossible to reach an agreement, someone has to make the decision. The company should establish from the beginning, what mechanisms should be used in order to resolve this problem.


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Deimar Gutierrez
Businessman and Blogger passionate about life, Entrepreneurship, Finance and Social media. My goal is to provide you with a resource of business tips and strategies, in which you can rely on and guide your personal and professional development.