Founders have a tendency to avoid seeking legal advice in the early stages. That is completely understandable considering the limited resources they have. However, this could lead to compliance issues down the road.
From the outset, the cost of legal advice can seem really intimidating, but it is always more expensive to fix what has not been done right.
Fixing legal mistakes can be significantly more expensive than being compliant.
Common Mistakes Startup Founders Make
- Relying on trust between founders instead of legal documents
In a typical startup, the relationship between founders must be documented in the company’s bylaws, stock purchase agreements, and any confidential information and invention assignment agreements.
All these documents should be formalized early in the relationship. Templates do not consider the unique circumstances of your relationship with the other founder; so it’s best to consult a lawyer to help draft these documents.
- Failing to choose the right corporate structure
Failing to select the right structure can result in increased tax obligations and limited access to external investment opportunities. Talk to a lawyer and a tax advisor to figure out what the right entity is.
- Not respecting trade secrets and intellectual property
The misuse of any trade secrets or intellectual property can be completely catastrophic. The two common early-stage IP mistakes that we often see are:
(1) founders misusing a previous employer’s trade secrets and IP, and
(2) founders don’t assign their IP to the startup.
To avoid these common mistakes:
- Do not use any of your former employer’s technology, tools, time, or any of their trade secrets to develop your idea.
- Have everyone in the company sign a nondisclosure agreement or NDA and a confidential or proprietary information and inventions assignment agreement.
- Work out how you can talk about your idea without going into significant technical details about the execution.
- Not paying your employees properly
Use caution when determining how to engage an individual to provide services to the company. Whether they’re a contractor or an employee, they must be correctly classified and paid in line with their classification and their wage claims and risks that exist in every stage.
- Privacy is not built into your startup from the beginning
If you have any concerns about compliance, it is best to reach out to an attorney who can help you navigate this because there can be catastrophic consequences for non-compliance.
Building a relationship with an attorney who’s experienced in these issues can help you avoid the mistakes that most startups make because there are consequences, and they come with a hefty price. Ultimately, a good lawyer can help you strategize, mitigate risks, and help you make the most informed business decisions.
If you want to learn more about steps to compliance success, check out https://cgl-llp.com/podcasts/cgl037.
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