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These 3 Legal Mistakes Could Ruin Your Startup

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Being the founder of a startup is one of the most exciting career adventures you could embark on. When you have an innovative idea, the drive to put it into practice, and a team who shares your ideals, starting a business feels less like a chore and more like something rewarding. When you can’t wait to bring your idea to life, not even overtime doesn’t seem that bad, and obstacles feel more like exciting challenges. There’s something quite euphoric about the startups, and, in general, we as a society tend to idealize startup culture as fun, thrilling, and different.

But as exciting as they might be, startups are still subject to legislation. Everyone must respect corporate regulations, not just “boring” corporations, and failing to pay attention to them can cut short your startup adventure.

Unfortunately, many startup founders put legal duties somewhere in the background and choose to focus only on the product, which has led to a growing number of startup lawsuits. Needless to say, when you’re just starting out, and money is scarce, a lawsuit can be devastating and may even put you out of business. If a corporation has the budget to hire world-class lawyers to avoid legal penalties or at least land on their feet after a lost lawsuit, most startups don’t.

The reasons invoked for not paying attention to legal stuff vary, but none of them holds up as a valid excuse in court:

  • I didn’t know I had to do this (not knowing you had to do something is not an excuse, especially now, in the age of information where you can look up all legal requirements online).
  • I was so busy overseeing other processes that I forgot about the legal stuff (as hectic as a founder’s life may be, legal duties are among the top priorities).
  • Everyone in this startup is my friend; I thought there was no need for legal stuff (once you register as a company, legal requirements apply for everyone, even if they’re friends and family).
  • We just didn’t have money to take care of this (understandable, but the fine is more expensive).

So, when you’re launching your startup, make sure you don’t make these costly legal mistakes:

1. Not establishing in writing who owns what in the company.

Many entrepreneurs start a business with their friends. For every Jobs, there’s a Wozniak; for every Page, there’s a Brin. It can all be really fun in the beginning, but, as history has shown many times, co-founder relationships can degrade in time, not necessarily because someone wants more money, but because you will both grow and change your ideas and personality over the years. When and if that happens, it’s good to have a written agreement to refer to. Otherwise, it’s a game of he said/she said that will have tensions running high within the company, split the business into two sides, and even lead to the dissolving of the company.

To avoid messy Zuckerberg/Winklevoss-type co-founder breakups, lay out the terms of your relationship from the very beginning: each co-founder’s percentage of ownership, rights & responsibilities, what happens with the company if one of the founders leaves, who makes key decisions, and so on. It might feel odd, putting your friendship into legal perspective, but it will save you a lot of trouble down the line.

2. Not respecting your duty of care towards employees.

As an employer, you have a duty of care towards everyone who works for you. That means you have to do everything to ensure that everyone is safe at work, that they are properly trained to handle specialized equipment, and that they don’t hurt themselves. Many startup founders neglect this duty of care and pay a high cost for this. Of course, no one intends for workers to get hurt, but they are not aware of what they have to do, and that leads to expensive accidents.

According to the experts at How To Sue, modern employees are aware of their rights and don’t hesitate to take legal action if they sustain an accident at work. This might not be immediately obvious, but if an employee slips and falls because the floor was dirty, or hurts their hand on a piece of heavy machinery that shouldn’t have been there, the employer is legally responsible. Other examples include employees who hurt themselves using equipment that should have been replaced, overexertion, or being assaulted by another employee. Even though health and safety might sound like a tedious formality, they are essential, and no employee should feel that their health is at risk while they’re at work.

3. Forgetting to check intellectual property matters.

Coming up with a great product, logo, or company name after wrecking your brain for months can feel very liberating, but just because you thought of it yourself doesn’t mean that the idea is original. Unfortunately, many entrepreneurs go into business with big plans, only to discover, years later, that their business name was already taken or that their unique product idea was already patented. Intellectual property lawsuits are extremely expensive, and, more often than not, the party that registered their name/idea/product first wins, while the other has to pay heavy fines or even cease all activity. So, before you invest a lot of time and money into your business, run a patent search and check to see if your business name and website name are unique.

While you’re at it, you might also want to check different spellings of your domain name. For example, the exact spelling you have in mind may not be taken, but a similar one is, and that could lead to legal problems, not to mention branding complications. Unfortunately, many corporations sue small startups because their names are too similar to theirs, even if they’re not direct competitors. Needless to say, if you’ve invented a new product or a new technology, make sure you patent it. It’s a long legal process, but it will prevent other people from stealing your idea in the future.