When legal issues rear their ugly head, many entrepreneurs put them off and hope that they'll be resolved somewhere down the road. Entrepreneurs have enough things to worry about, from developing a proof of concept to hiring the first employees; the life of a startup is incredibly busy. Moreover, with all of these demands on an entrepreneur's time, legal matters can slip through the cracks.
However, newbie entrepreneurs shouldn't ignore certain issues. If you do, you do so at your own peril. From protecting your IP to avoiding disputes over equity arrangements, legal mistakes can be costly. We've detailed six of the most common mistakes that newbie entrepreneurs make.
A lot of would-be entrepreneurs find themselves caught in the incorporation conundrum. Forming a corporation is an essential step on the road to entrepreneurial success. It can shield a business from legal liabilities as well as provide specific tax benefits. Ultimately, it becomes a question of when, and not if. That is what new entrepreneurs need to consider.
Forming a legal entity provides a lot of privilege, but with it comes a certain degree of responsibility and cost. Therefore, an entrepreneur should ask themselves if they are ready to shoulder the burden. Their business should have moved on beyond the idea stage and have actual skin in the game before the owner decides to incorporate and create a separate legal entity. When the benefits of incorporation outweigh the legal and administrative costs, that’s the right time to take action.
2. Equity arrangements
No one knows what the future holds. Many newbie entrepreneurs seem to have blind faith that things will always work out. While that belief is needed for success, too much naivete can come at a cost.
When things go south, and they always do, the people you started out with might be tempted to jump ship. When that happens, how much of the company will they walk away with? This is why it's important to formalize equity arrangements early on. When founders get into a high-stakes disagreement, it can be tempered by a well-defined equity arrangement.
3. Protecting your IP
Every wannabe entrepreneur in the world is proud of their idea. While there's nothing wrong with that, newbie entrepreneurs need to ask themselves the question, "Who owns that idea?" The answer is no one. At least not while it's dancing about in your head.
It's essential to create a business around that idea and create an entity around it. Gather your founders together and create an assignment of invention. This can not only protect your intellectual property from theft, but it gives you some legal weight to propel your business forward.
4. Complying with securities laws
If the above terms sound foreign to you, then you are a newbie entrepreneur. Any startup that raises any amount of money must comply with state and federal securities laws. Even investments from friends and family (and not taking the appropriate steps about those investments) can get you into trouble.
The securities landscape is complex and can be overwhelming. Ignoring securities law or trying to figure it out on your own is a bad idea. This is why you should have an experienced legal counsel in mind and contact them before raising money or issuing securities to investors.
5. Vesting schedule
When you gather your co-founders, you should have a vesting schedule in mind. This schedule provides a guideline for how each member will earn their shares over time.
Moving forward without a vesting schedule means that a co-founder can jump ship and take valuable stock with them. A vesting schedule is specifically designed to protect the company.
6. Procrastinating on legal problems
The life of an entrepreneur is a hectic one. Trying to create something from nothing is an all-consuming task. However, many newbie entrepreneurs focus all of their time and energy on getting their business up and running. They tend to believe that once their funding comes, once the prototype is ready, then they'll have time to think about lawyers.
This is the extreme of short-sightedness. The previous mistakes that we've outlined here should be proof of how foolhardy this thinking can be. They're not things that can be patched up later. Some mistakes can be so devastating as to bring down an entire company. Now, does this mean that an entrepreneur should devote their entire time to legal matters? We don't believe so.
Excellent legal talent can be retained for low fees at the early stages of any venture. Consider the following: It costs less to get it right at the start of your new venture than it is to correct course later on.
Taking an idea and turning into a company is an admirable feat. It takes a lot of sleepless nights and caffeine-fueled days. From developing a proof of concept to hiring your first employees, it’s a time filled with excitement and opportunity.
This is why we’ve outlined some of the most common legal mistakes that newbie entrepreneurs make. Avoid these potential pitfalls, and you’ll be well on your way to the success you dreamed of in the beginning.
This information is for educational purposes only. It should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. This information is based on general principles of Nevada law at the time it was created, and laws frequently change. Moreover, the laws affecting you may differ depending on the circumstances. You should consult with a qualified attorney in your own state or jurisdiction concerning your particular situation. Review of this information does not create an attorney-client relationship.