It seems that everywhere you look, a new startup is trying to make it big with a game-changing idea. But, it’s only the ones that can turn that idea into reality that reach business success. Too many startups fail to make the transition from idea to execution or encounter major setbacks along the way. In the midst of developing your growing startup, don’t make the common mistake of disregarding tedious, but vital tasks such as making sure all your legal, insurance, financial and tax ducks are in a row.
Establishing a solid legal system can help you avoid costly mistakes and save time and stress down the road. Many entrepreneurs struggle with developing such systems because they don’t foresee the most common mistakes startups make. Avoiding these only takes a little self-awareness and planning, so read on to learn how to sidestep the five biggest legal mistakes a startup can make.
1. Be strategic when creating your entity. Think about your long-term goals, and choose an entity that matches up. Have your eye on major growth and raising capital? Consider a Delaware C-Corporation, which could set you up for venture capital. Looking for tax advantages? Look into the advantages of an S-Corporation structure that will allow you to minimize your payroll taxes by splitting your personal pay between salary and distributions.
And, while you can always convert your entity later on, doing it right the first time will save you time and money. When you talk with a lawyer about the best form of entity, make sure your lawyer doesn’t just suggest a one-size-fits-all solution, but actually understands the details of your business now and where you want to grow to in the future.
2. Be clear with co-founders. Don’t wait until your business begins to make a profit to begin discussing what each founder is worth. Confront the elephant in the room (i.e. money and position) and be clear on rights, decision-making authority and equity from the get-go. A well-drafted operating agreement or shareholder agreement is key here. The agreement process itself can surface potential conflicts in advance, and confirm whether you and your co-founders are truly in alignment before big investments of time and money are made.
3. Protect your intellectual property. It’s essential to establish ironclad protections for the intellectual property that impacts your business’ future value. Think beyond just patents and trademarks; consider having founders, employees and third-party developers sign intellectual property rights agreements so you retain the value they may create while working for you.
4. Develop a robust set of contract templates. You will thank yourself later for establishing clear guidelines and minimizing your liabilities in writing. Online legal document drafting services are one size fits all; your business will be best served by developing a set of templates that meets your business’ unique needs.
5. 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 you will likely make as you grow your startup. A lawyer who also works as a creative, strategic advisor, as we do, 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.
After more than a decade of fighting out business disputes in court, the more attention you put toward avoiding these mistakes, the better off your business will be. Indeed, you can expect the cost of solving the above problems in court to cost around 30 times as much as it would to do the planning in the first place. Also, courts are not known for moving quickly, so you can also expect to need about 30 months to work through the system.
Just because you’re a startup doesn’t mean you have to be naive. If you are serious about developing a solid legal foundation for your startup, begin by sitting down with us. As your Creative Business Lawyer®, we can help you identify your liabilities, mitigate any legal risks and get you on the right track for success. This will allow you the freedom and energy to focus on growing your business.
This article is a service of A. J. Yolofsky, Creative Business Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.