Legal Pitfalls
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Top 5 Legal Pitfalls To Avoid

The day of hand shake agreements is over (especially when it comes to partnerships)! Having solid legal counsel is a key component to managing a successful business. Although you may get a little frustrated when lawyers spend time (and your money) wordsmithing an opaque clause in a 100-page legal document, you’ll appreciate the value of having good legal documents when unexpected things happen (especially negative events). See below the top five legal pitfalls you should avoid as a small business owner:

Waiting Too Long to Get a Lawyer

As the Spanish saying goes: “lo barato cuesta” (“being cheap can cost you”). At early stages of running a company, most business owners are reluctant to pay any fees and take on a “do it yourself” mentality. Although there are merits to bootstrapping your business, you should consider hiring a lawyer early on to ensure you don’t miss anything that can cost you in the long-run. For instance, a lawyer can help you on “value-add” tasks such as recommending the most appropriate incorporation for your business instead doing legal administrative tasks such as preparing standard legal documents. Not only can a lawyer help you manage legal risks, but they can also give you insights on what terms in a business agreement are fair according to what they see in other deals.

Choosing the Wrong Corporate Entity

There are multiple ways to form a company including: sole proprietorships, limited partnerships, corporations and limited liability companies. So why should you care? The corporate entity will determine your liability as a partner or investor, the company’s ability to raise debt and equity capital, tax treatment and other factors that directly impact the operations of your business and its stakeholders. Changing structures in later years can be an administrative burden and expensive. For more info on different corp. structure, click on the following article.

Failing to Protect Intellectual Property

Logically, some entrepreneurs are careful about sharing their trade secrets. In some cases, they are willing to file a patent to keep competitors from copying their products. The non-obvious protections are for products that are in development and not patented. Make sure all your employees (especially engineers) assign ownership of the intellectual property they create while working for your company. This will keep them from leaving your company and creating the same technology for a competitor. For a free IP agreement template, check out PandaDoc.

Not Having Founders’ Agreements

A good partnership is based on good documentation. There are a lot of unexpected things that can occur when partnering to run a business. For instance, a founding partner who owns 50% of a company decides to pursue another venture after a year. If there isn’t a vesting clause in the founders’ agreement, the departing partner would keep 50% ownership even if the other founder runs the business on her own. A clear, robust and fair founders’ agreement will ensure all major owners remain motivated in creating value for the company.

Failing to Have Adequate Employee Agreements

Many start-ups begin with verbal agreements and handshakes yet this puts the business at risk if the employee leaves for a competitor or wants to sue the company. This can easily be avoided with standard employment agreements (see PandaDoc to access free documents) which include clauses on salary, benefits, conditions for employment, confidentiality, and intellectual property assignment. If you think an employee can leave and take some of your business to a competitor, you should have them sign a non-compete agreement.

One last quote for you is “anything that can go wrong…will go wrong.” This is true for almost every business so it’s best you limit your downside by consulting a lawyer.

Sources and related articles:

  1. http://www.entrepreneur.com/article/38822
  2. http://www.forbes.com/sites/aileron/2014/07/02/top-10-legal-mistakes-small-businesses-make/
  3. http://www.nerdwallet.com/blog/small-business/3-common-legal-hurdles-challenges-small-business-owners/
  4. http://smallbusiness.foxbusiness.com/legal-hr/2011/07/12/ten-legal-pitfalls-startups-should-avoid/