The 8 Biggest Legal Mistakes A Startup Will Make

When starting a business, there are a host of basic legal mistakes to avoid. By identifying, recognising and avoiding these mistakes, you can avoid the common stumbling blocks that so many young businesses fall over.  

In this article, we'll attempt to list some of them. Note that, when thinking about your startup, it's a (really) great idea to chat with a lawyer to go over your strategy. At Heavy Chef, we're longstanding partners with Whipping The Cat, a disruptive and entrepreneur-friendly legal firm (with a seriously cool name). Do yourselves a favour and drop them a line if you feel like you need professional help. 

1. Not having written agreements  

This is probably the most common mistake. You want to get cracking, so drawing up a contract seems like a proper mission. Founders get caught up in the heat of the moment, too excited about the new journey they're on to bother with the legal agreements. Drawing up an agreement at this stage can be tedious, disruptive, and interruptive to the process. 

So here's the thing. It's a small thing compared to the gigantic pain you'll feel when problems come up. The quarrels that inevitably happen when your business runs into challenges are easily quelled when you have clear agreements in place. If there are no agreements, it becomes murky, emotionally charged and time-consuming. 

2. Not Creating A Founders' Agreement

Founders generally are driven by the passion of starting their business, and there's no bigger passion killer than having to write a Founder's Agreement. However,  having a founders agreement ensure that your co-founders respect your equity in the startup and abide by agreements that are most beneficial to the business.

Most disputes that might arise between founders as to the progression of the startup or the profits of the business can be settled through reference to a comprehensive founders agreement.

3. Not Selecting The Correct Legal Entity When Establishing Your Company

One of the biggest startup legal mistakes to avoid is choosing the wrong business structure.

It’s important to establish your startup in the most appropriate legal form for tax purposes and to incorporate your business into the correct market.

The list outlines the different types of establishments so you can identify what best suits your business and avoid the problems that can arise should you fail to do so.

4. Not Having Employee Contracts

Employee contracts are essential to minimise disputes and make sure that you have committed and hardworking employees to help grow and support your startup.

This would specify terms such as working hours, salary, role and leaving requirements and would be legally binding between the employer and the employees, giving both parties security and can be referred to in instances of dispute.

5. Not Creating Clear Contracts For Your Developers

One of the most exciting things about the startup world is the use of the newest technology and the development of new forms of technology. 

However, in creating your app, website, or applying a new software you might need to use third-party contractors. Not having clear contractual agreements, outlining the ownership, licensing and copyright of your product will be devastating down the line, particularly when you start to gain traction in the marketplace. There are few things worse than seeing a replica of your product suddenly appear in the horizon, easily deploying all your best features. Clear documentation and communication at the start will avoid this. 

6. Not Having A Comprehensive Privacy Policy

A privacy policy is essential especially in web-based startups to outline to the user what information will be retained by the website directors and what information will never be accessed.

Without correctly outlining the nature of your privacy policy, there will be a lack of trust between the user and the startup, opening up your business to time consuming and expensive litigation.

7. Not Protecting Your IP

There are many ways to protect intellectual property (IP), including Patents, Copyrights, Trademarks, Service Marks, Trade Secrets, and Confidentiality Agreements. Covering all your bases using the correct legal method will ensure that no one will steal the ideas that make your startup unique.

As a young business, your most valuable property is your intellectual property. You’re building something innovative and your IP is your competitive advantage. If you don’t take all the measures to protect it all at once, at least be sure to do your research and speak to a lawyer so you make a fully informed decision.

8. Not Having A Lawyer

There are alternatives to traditional law firms if you would like to reduce your legal costs. For example, Whipping The Cat aims to build and support startups by offering legal advice and documentation at competitive prices to cover essential contracts. Heavy Chef and our sister companies have been working with Whipping The Cat for 

Enlisting the help of an experienced lawyer is far better than a Do-It-Yourself approach because it’s one of the biggest startup legal mistakes to avoid.