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In this weeks "Ask a Business Lawyer", we cover the most common legal mistakes that small businesses and entrepreneurs make.
The chances are limitless: for growing riches, for getting a fresh lifestyle, for shifting the world--and for making errors that can make you wish you had been more informed in the beginning when you started a company. Here are five of the very most typical legal mistakes startups should avoid.
Error #1: Not inquiring, "What's in a name?"
Picking a name is among the primary choices you will make as a company owner, but before you begin on this, there are a few legal issues you will want think through. Your task at this point would be to seek out a name that's yours to brand, which means doing an extensive investigation for just about any names you contemplate, in addition to any names that are similar. Use google, check the U.S. Patent and Trademark Office, and consult with an Intellectual Property lawyer.
Error #2: Failure to safeguard your property
By not doing so, the apparent danger you encounter is that, if unguarded, your creations are fair game for rivals to steal.
There is another caveat here that might appear less clear: In addition to worrying about the competition, you also have to safeguard against intellectual larceny by workers and your collaborators. It's essential you require third parties to sign NDAs better known as Non-Disclosure Agreements. That way, third parties can reward you with their labor and expertise, allowing you to rest assured your creations will not evaporate out the door with them when they leave.
Error #3: Incorrect Format
It is among the greatest questions facing any business owner: What legal structure will your startup model? The principal point to take is that, even though it's not impossible to alter formats in the future, that is an extremely undesirable state of affairs. Even putting aside all the lamentable events that may ask one to switch business strutures--unforeseen responsibilities, tax dilemmas, possession disputes--the exorbitant fees and stacked paperwork required in changing make it worth your while to think about the issue carefully beforehand, so you don't have change strutures later on.
Error #4: Not having an ironclad cofounder deal
Everything seems rosy when you are starting a business: You find only success and your business associates are jolly and cheerful. Obviously, this might not necessarily be true. As disagreeable as it might appear, you certainly must possess a written agreement by means of your cofounders that covers every adverse consequence that is expected. You are going to have to concur on what the results are when a partner leaves, how responsibilities will likely be shared, just how much of a position each associate has, the best way to oust a cofounder, ans a multitude of other scenarios. It is considerably easier to figure it all out in the start, when everyone is on favorable terms.
Error #5: Not requiring cofounder equity to vest
The ownership structure of your firm should order that equity will vest over a period of years. In a way, this is insurance against specific individual failings, like treachery, freeloading, and petty arguing. By requiring cofounders to remain active and productive for some period of time, it is possible to prevent being left to do more than your share of the job for less than your share of damages.
Bonus error: Believing you may do it all without an attorney! It is virtually sure that, somewhere down the line, your company will fall upon situation you never might have expected by yourself. Plus, in case your enterprise is successful as you understand it's going to be, someday there is likely to be plenty of cash at stake.
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VIDEO TRANSCRIPT
There are a few different things that I find people to typically make mistakes around—one of the most common ones is people not properly setting up a partnership agreement if they are working with someone else.
So, if it’s you and your friends starting a company, it’s a lot of fun, but you also need to figure out, is it 50/50? Has one done more work? So you’re going to take the majority of the equity, the other person is going take a smaller stake—that’s a big one.
It’s also important to make sure you have contracts put in place for new clients, partners or any kind of contractors. A lot of people do it with a handshake, which seems like an OK idea at the time, but there are a lot of issues around that obviously. So, I’d say those are the two biggest mistakes I see.
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