5 Legal Mistakes every Start-up should avoid!

13 Apr 2018

 

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

 

– Winston Churchill, British Prime Minister

 

According to the Global EntrepreneurshipIndex[1], out of 137 countries, the UK is ranked fourth in the world for the startup ecosystem and third out of the top ten countries for female entrepreneurs[2].

 

The Global Entrepreneurship Index collects data such as entrepreneurial attitudes, abilities and aspirations of the local population and then weighs them against the social and economic infrastructures. The Index highlights the ecosystem in the United Kingdom is good to innovate and develop due to its supportive financial culture for entrepreneurs to flourish.

 

According to the index, the UK scores extremely high in terms of its attractiveness to the availability of venture capital and private equity together with a stable economy the UK is an optimal jurisdiction for investors.

 

UK legal policy assists with encouraging entrepreneurs by providing legislation and economic freedoms afforded by its open approach to capitalism. The United Kingdom is one of the most open and nurturing environments for entrepreneurs to build their own business.

 

As a lawyer working with Startups for over a decade, I have seen many legal mistakes made by entrepreneurs and start-up companies over the years.

 

The following are some of the more common and problematic legal mistakes a Start-up should avoid when going into business.

 

1. Lack of Clarity With Co-Founders

 

 

 

The second most important step after deciding to start-up your entrepreneurial venture should be to establish how the relationship with your co-founders will develop as the business develops and expands.

 

Often entrepreneurs overlook the importance of an agreement with co-founders when starting a new venture. In particular, when a dispute or deadlock situation arises, lack of clarity of not having an agreement between the founders can expose the business to some major legal ramifications in the future.

 

If you are serious about your Start-up, then the agreement will not only provide clarity and certainty with the roles and responsibilities of the co-founders, but also how the business equity and ownership is divided.

 

TIP 1.

 

Discuss the following areas with your co-founder when establishing a legal agreement: -

 

  • Equity and ownership of the business

  • Intellectual property rights,

  • Salaries of the founders,

  • How key decisions and day-to-day decisions of the business are to be made?

  • Assets and cash introduced into the business by each founder?

  • Overall clarity of the goals and vision for the business

  • An agreed procedure for disputes where a deadlock arises

  • A process in the event of death, retirement or exit by any other foreseeable event from the business

 

This is not an exhaustive list, each legal agreement between founders is bespoke to the individual needs of the type of business. An experienced lawyer should be able to advise you of the key areas that should be considered.

 

2. Starting business without a Business Structure

 

 

 

Another key area to consider when starting a business is the legal form upon which the business will operate. Quite often business start-ups start to trade without consulting a lawyer, and often can result in being liable for higher taxes or being subject to significant liabilities, had there been consideration on the structure of the business earlier on.

 

There is a lot of choice for start-up ventures to compare where to incorporate within Europe.

 

It is not uncommon for tech start-ups to expand quickly and trade in other countries within the first 5 years of business.

 

When considering which business structure to use, consider the business set-up costs, tax and legal competence of that particular jurisdiction as you trade on a national and international level.

 

In the UK there are 4 main types of legal entity: -

 

  • Sole Trader

  • Partnership

  • Limited Liability Partnership

  • Limited Company

 

TIP 2:

 

Each business structure has its benefits, considerations should be given to any investment or holding of investment real estate at an early stage. Choosing the right structure will not only give you greater legal protection, but also limit your personal liabilities.

 

An experienced lawyer should be able to guide you in selecting the right type of business structure for you.

 

3. Not having the right Legal Documents

 

 

 

It is very important to ensure your legal agreements such as terms of business, privacy policy for your website or use of intellectual property rights and employment agreements are suitable for your industry and business needs.

 

Terms of business will provide the process and procedure when dealing with customers and clients, for example, your terms of payment and what service will be delivered when and how.

 

An experienced business lawyer will be able to draft agreements with agreed industry terms and be able to advise you on aspects that should be considered to limit your liability if the service or product does not meet expectations.

 

TIP 3:

 

Discuss with your experienced lawyer what your business service/product is about and what your business plans are in the future, this will assist your lawyer in ensuring the legal agreements are fit for purpose in the present and future.

 

4. Don’t rely on standard agreements found online

 

 

 

Often Start-ups cut costs at the early stages of business and cut and paste documents found online or through previous engagements working within the same industry.

 

The internet is a great resource for information and research however, I would not advise proceeding down this route without caution. 

 

Using the terms of business or other legal agreement of another business in the same industry may seem like a good idea to reduce start-up costs. However, terms and conditions of other businesses are generally tailored to their specific service or goods that they provide.

 

Just replacing a name and address can lead to problems where language or terms can be adopted that may be inapplicable to your business, or something could be missed entirely that is critical to your own business.

 

TIP 4:

 

Don’t copy another businesses terms of business or legal agreements. Invest in a good lawyer who will be able to advise you to get your business started in the right way.

 

5. Cutting corners can end up being costly

 

 

 

In an effort to save on expenses start-ups sometimes seek advice from friends and relatives which can end up either increasing their costs when things go wrong or exposing them to legal liabilities that can hinder the business development.

 

Engage an experienced competent lawyer who will have the experience and knowledge to get your business on the right track.

 

Quite often by cutting corners, start-ups deny themselves the advice of an experienced lawyer who can not only provide advice and guidance on legal structures and documentation, but can also provide you the opportunity to tap into their experience gained over the years in advising different businesses in limiting business risks and provide insight into potential areas that a start-up may not have considered before.

 

TIP 5:

 

Use an experienced lawyer and review their profile to determine whether they have the expertise in some, if not all the areas you require.

 

An experienced lawyer is able to not only draft bespoke terms of business and legal agreements for your type of business, but also be able to ensure the terms fit your business start-up, as there is no “one size fits all” solution.

 

Furthermore, an experienced lawyer will be able to advise and guide you through the early stages of business to limit business and personal liabilities.

 

 

 

[1] (GEDI, 2018)

 

[2] (GEDI, 2015)

 

 

Bibliography

 

GEDI. (2015). Retrieved from http://thegedi.org/wp-content/uploads/dlm_uploads/2015/06/Gender-infographic-June-11-2015.png

GEDI. (2018). (G. E. Index, Producer) Retrieved 2018, from http://thegedi.org/global-entreprenuership-and-development-index/

 

If you enjoyed this article, you can subscribe to my blog. I will be writing further articles on legal updates.

 

Avinder Laroya is a Partner at Serenity Law LLP, she is an expert in International Dispute Resolution. If you enjoyed this article you can subscribe to my blog here

 

Serenity Law LLP is a boutique London commercial law firm providing commercial legal services such as company commercial, real estate, litigation and employment services to UK and international clients. 

 

 

 

 

 

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