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5 Legal Mistakes every Start-up should avoid!

“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.