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8 Legal Errors Entrepreneurs Must Avoid

By PANKAJ SHARMA
Last updated on: April 18, 2022 14:55 IST
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These mistakes can turn out very expensive and not just in terms of your finances, but also in the time it will take to resort to the conflict at hand.
Having a legal hand can save you from any unforeseen troubles, alerts Pankaj Sharma, president, Lexicon Group.

Kindly note the image has been posted only for representational purposes. Photograph: Kind courtesy Andrea Piacquadio/Pexels.com

As fascinating as the idea of having a start-up sounds, there are a ton of liabilities that you as a founder are bound to adhere to.

The process can be gruesome and in many ways and not so hunky-dory as you might want it to be.

Streamlining the pre-requisites and cross-checking essential to-dos can save you from back-breaking operational errors.

The easiest way to be on track is by consulting a lawyer. Having a lawyer while setting up a company can make the navigation easy and that is a no-brainer.

However, setting up agreements, compliance, and other wings through a lawyer is not spoken very highly off but can be a real-time-saver for a start-up.

But if you are not in a position to find one anytime soon, here is a quick list of things you must keep in mind while kick-starting your start-up without any expensive mistakes:

1. Not signing a partnership agreement or founders agreement

A company is started either by partners or co-founders, and it is important to agree on the commercial details at an early stage of the business relationship.

Such commercials can raise unexpected obstacles, and to avoid that, a solid agreement between the partners/co-founders should exist.

The partnership or co-founders agreement can be thought of as planning for a good divorce and therefore, it should contain the founder’s rights and duties, distribution of assets and dispute resolving mechanism.

A solid agreement binding the partners to their roles and decision making can build a strong business relationship while keeping off legal issues ahead.

2. Poor Intellectual Property protection

Start-ups and entrepreneurs fail to realise the importance of their intellectual rights over their domain names and products.

Lack of enough protections often ends up facing trademark and copyright infringement issues. Hence, it is essential to formulate a strategy for the protection of its IP including, patents, trademarks, copyrights, and trade.

A start-up based on innovation should seek the protection of its patent at the earliest stage. Other start-ups should focus more on their domain name and other copyright issues.

3. Non-compliance with security law

A common legal mistake that entrepreneurs/ start-ups make is raising capital from friends, families and angel investors without realising the security law implications.

They fail to understand that issuing stocks without compliance with the law may not only attract heavy financial penalties.

4. Ignorance of tax implications

Another mistake that start-ups and entrepreneurs make is not focusing on taxes.

A variety of taxes is required to be paid for the smooth functioning of a business. These include factors such as choice stock options, tax incentives, etc., depending upon the nature of business.

Start-ups or entrepreneurs must seek professional help to avoid the liability of fines and penalties.

5. Failure to seek experienced advisors in responding to financing term sheets.

Investors use several approaches to protect liquidation rights and preferences in financing structure.

An entrepreneur may enter into agreements without realising the significance of legal implications. Hence, to understand the ramifications, one must engage appropriate counsel from professionals.

These professionals will also guide the criteria that can be pushed back against and that can’t.

6. Sloppy Employee related agreements

Most start-ups fail to take steps to avoid employee-related legal issues.

The first step towards avoiding uninvited trouble is drafting an organised employment agreement for its employees.

The agreement should contain the job role, responsibilities, benefits and salary details.

The second step should be a non-disclosure agreement (NDA).

An NDA abides the employee from disclosing internal business information to any third person for 2-3 years from the date of resignation.

Third, a start-up should always give in writing the process of resigning, dispute regarding resignation may raise sensitive and potentially explosive issues.

In order to limit future risk, a start-up or an entrepreneur should either start working on the agreements or seek professional legal help.

7. Web site privacy policy or terms-of-use

With the growing data concerns, the vigilance among the users has increased to.

Having privacy policies that go along with the interest of the users is of paramount importance. Therefore, transparent privacy policies and terms of use will not only limit the start-up's liability but also attract more users.

As a start-up one should also assess the demographic the website is catering to and adhere to the jurisdictional requirement of such a country.

8. Not getting legal counsel

Start-ups often avoid hiring a legal team or a counsel to save on investment.

This is a common mistake that start-ups do -- they fail to realise the implications of the legal issues that may affect their future.

Getting legal advice at the initial stage of a start-up is necessary for its foundations. One can build a business with harmonious relationships with its business partners, employees, investor and client.

Without that, entrepreneurs will end up in legal hooks.

Regardless of how unimportant or minuscule this documentation may seem, having them planned beforehand is the best way to avoid any hiccups in the operations of a start-up.

There could come a time when these mistakes can turn out very expensive and not just in terms of your finances, but also in the time it will take to resort to the conflict at hand.

Having a legal hand can aid the process and save you from any unforeseen troubles.

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PANKAJ SHARMA