In the world of business law, it is always best to proceed with caution. Entrepreneurs are typically moving quickly in their dynamic and fast-paced industry. It is important for them to seek legal advice so their options are funneled towards realistic goals that will keep their company out of legal trouble. Occasionally, startup companies fail due to avoidable tax, structural, intellectual property, or other business issues. A lot of startups avoid hiring lawyers due to high fees when their product is not proven yet; however, there are firms that offer fee-alignment plans.
Entrepreneurship is on the rise, and more and more young entrepreneurs are starting to build their own businesses. This raises the demand for business legal advice. Lawyers representing companies in the budding tech industry say that the startup companies that experience a legal downfall often come in the early stages. Intellectual property and structural lawsuits are difficult to come back from.
Below are 5 legal mines that entrepreneurs will want to stay away from according to this article from Forbes.
1) Founders agreement – It is critical to outline how the company’s ownership is allocated. It is also important to determine what will happen if the owner leaves the company. Absent vesting provisions can leave a founder completely running the company while still owning only half. This is poison to future investors.
2) Equity grants – Equity needs to be established as soon as the company is formed because equity is a critical driving factor.
3) Early tax elections – If founder shares are subject to vesting and an 83(b) election is not made, the company will be taxed at regular income rates rather than at capital gains. If this is the case early on, the company might not have enough cash to pay these taxes.
4) Employment laws – Startup entrepreneurs can’t abuse employment laws. There are specific laws for employee hours and wage, and it is also important to understand the different wage laws for employees and consultants.
5) Intellectual property – The entrepreneur needs to own what they are selling. IP legal issues should be a priority early on for a business.