Starting a new business is no less than a marriage. Initially, everything is rosy and smooth, but as soon as the honeymoon period fades away, the real hustle begins. This is the reason startups need to have a clear legal agreement in place.
A startup business can face significant legal challenges due to plenty of mistakes made by its founders. These mistakes are generally made at the initial formation of the business, at the early stages of growth, and when dealing with staff. You can also hire the best business coach to get the right guidance.
If you are an entrepreneur and planning to start your dream venture, here is a list of common and legal mistakes you must avoid at all costs:
Mistake #1: Not Making an Agreement with Co-Founders
If you are starting your business with a co-founder, then you should have all the agreements in place at the initial stage of your business relationship. Not doing it can lead to various legal challenges down the road. A founder`s agreement is just like a “prenuptial agreement.” Here are the key legal terms your founder agreement must involve:
- What are the roles and responsibilities of the founders?
- How will the equity be split among the founders?
- What is the overall goal and vision for the business?
- What salaries are the founders entitled to? Factors that will lead to change salaries?
- Is each founder’s percentage ownership in the company subject to vesting?
- If one founder leaves, does the company or the remaining founders have the right to buy back the departing founder’s shares? If so, at what price?
- How will a sale of the business be decided?
- What time commitment to the business is expected of each founder? What constraints will be imposed on outside commitments?
- How will key decisions and day-to-day decisions of the business be made? (by majority vote, a unanimous vote, or are certain decisions solely in the hands of the CEO?)
- Under what circumstances can a founder be removed as an employee of the business?
- What assets or cash does each founder contribute or invest into the business?
- What happens if one founder isn’t living up to expectations under the founder agreement?
Mistake #2- Not Deciding the Structure of the Company
Because founders often start businesses without consulting lawyers, they do not decide the structure of their businesses. One of the very first decisions that any entrepreneur should make is in what legal form to operate the business. Due to the incorrect structure of the company, startups often incur higher taxes and become subject to significant liabilities that could be avoided by structuring their startup business as a corporation or a Limited Liability Company (LLC). You can also take help from the best business coach who can help you navigate with legal formalities.
Mistake #3- Choosing a Disputed Business Name
It is very important to do research when picking a company name as it helps to avoid trademark infringement or domain name problems. It also ensures that the name you select is available to use. Here are some steps that you can do to avoid naming issues:
- Conduct a Google search on the name to check if it is already in use.
- Before picking a domain name, search GoDaddy.com or other domain name registrars to see if the domain name you want is available.
- Ensure the name is distinctive and memorable.
- You can shortlist 5 names and test market them with prospective employees, investors, partners, and customers.
- Avoid unusual spellings of the name as it can cause confusion and problems down the road.
Mistake #4- Not Adhering with Securities Laws When Issuing Stocks
If founders form a corporation, LLC, Limited Partnerships, or any other structure the sale of stocks, limited partnership interests, or LLC interests to the investors will be subject to state securities laws. Most laws require that such sales comply with certain disclosure, filing, and various other form requirements unless the sales are exempt. If any business fails to comply with these laws, it can result in significant financial penalties for the entrepreneurs and the company.
Founding a company is not much different from getting married. Everything looks promising in the beginning, but as the business evolves, complexity and stress become a part of everyday operations. So, with all of the things that go into launching a startup, one must get the Founders agreement, right!
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