Business start-ups: top five legal pitfalls and how to avoid them!October 16, 2016
After months, maybe years, of planning and research you are finally ready to take the plunge and go it alone. Starting your own business can afford you the lifestyle you’d always hoped for, as well as the confidence and satisfaction that comes with running your own show – the early days in particular can be exhilarating.
But given that there is significant risk attached to starting up on your own, how an entrepreneur manages these early days is crucial because, importantly, it is at this point that you have scope to minimise those risks; improving the chances of your overall business success.
In her latest blog, Roz Goldstein, Founder of Goldstein Legal runs through the top five legal mistakes that start-ups often make when setting out, and more importantly, how to avoid them!
Shareholders’ agreements – Failing to agree and document terms with your co-owners
Just like a marriage, in your early honeymoon period with your co-founders, it is difficult to imagine that you may ever fall-out, let each other down, or drift apart. But eventually, come what may, disagreements will eventually arise. Those business owners who put a suitable shareholders’ agreement or joint venture agreement in place at the outset will have an agreed framework to fall back on. Those who don’t, will not. Unfortunately, at least 80% of new business start-ups fall into the latter category. When co-founders no longer share the same vision for the business, a lack of agreed exit means that many profitable and potentially valuable businesses end up insolvent or worthless.
A good shareholders’ agreement will give the owners an agreed exit strategy, so that the value of their equity in the business can be protected for the future. It also formalizes and clarifies which owner is contributing what to the business (in terms of cash, resources or time), sets out an agreed structure for board meetings, and specifies what actions can only be carried out by unanimous agreement,
To avoid facebook style Zuckerberg vs Winklevoss litigation, be sure to discuss and clarify the equity structure of your new business and have it documented in a formal and professional manner.
Failing to protect your I.P!
You may not realise it, but your Intellectual Property (“I.P”) may be your business’s most valuable asset. So it pays for you to protect it right from the start.
Intellectual Property extends to your trade marks, logos, domain names, copyright material, and a number of other forms of rights.
Trade mark ownership is particularly significant. It gives you the right to trade under your brand name, and crucially it enables you to stop anyone else using your brand name. Many new business owners make the assumption that this right comes when buying the domain name(s). This is not the case. It is trade mark rights that count, and broadly speaking these will take precedence over domain names.
Your trade mark really does need to be protected from day one. You do not want to find, months or years after you have built up reputation and goodwill in a brand name, and spent money marketing and promoting it, that you are on the receiving end of a trade mark infringement claim. Having to re-brand after your business is established can be hugely damaging, as are the crippling legal costs that come with this sort of litigation. It therefore pays to consult a trade marks expert as soon as you have settled on a name for your new business.
Failing to document your key contracts
When under pressure to conclude your first customer contracts, or to engage key suppliers, it is all too easy to focus on getting a “handshake” on each deal, rather than on the detail of who is committing to do what, and when, and on what terms. Sadly, it is the lack of documented contractual terms that is more often than not the cause of downfall when disputes later arise.
The law does not view commercial (or “B2B”) contracts in the same way that it views consumer (or “B2C”) agreements. In a consumer contract, the law will imply a host of provisions relating to reasonableness. The consumer who buys something that does not live up to expectations, or is not what was promised, will very likely have the law on their side, and remedies including a right to their money back. Not so with a B2B contract. The courts are generally reluctant to imply terms into a commercial contracts, and consumer law does not help you. If you didn’t document it in writing, you are likely to come unstuck when things don’t work out.
And when it comes to key customers or key suppliers, it is worth ensuring that you have proper contracts in place.
Not choosing the right business structure
Sole trader, partnership, limited company or LLP? There will be a vehicle to suit your company, but it pays to do your research so that you get it right first time.
There are advantages and disadvantages to every structure; a limited company, for example, may bring with it credibility, but can be less tax efficient. A partnership, on the other hand, is low cost and easy to set up, but can be complicated to wind up.
Get good, impartial advice before you decide on the vehicle for your new business – choosing the wrong structure can affect its future growth and profits.
Leaving legal advice until it is too late
Before your business is well established and highly profitable, it is so tempting to cut corners on legal support. This is particularly so where you become involved in a dispute. Trying to sort it out yourself first seems like the sensible (and cheaper) thing to do. Indeed, there is some merit to this. But it is a double-edged sword, and in any given situation you need to make sure you take the right steps.
For a lawyer, there is nothing more frustrating than finding that a client, who was perfectly in the right and had a strong case, has irretrievably compromised their case by accidentally putting their proverbial foot in it while corresponding with the other side.
You should be able to discuss your dispute with your lawyer at an early stage. If you have a good relationship with them, they will give you a framework to help you to resolve a dispute yourself before it becomes legal. They may also be able to suggest other cost-effective alternatives to litigation. But don’t leave it to the last minute before you speak to him or her.
Goldstein Legal can help you create a sound legal framework for your business. We service a range of businesses of all sizes and whatever the matter, we’ll always think one step ahead, so that you avoid loopholes later on.