The Top 5 Legal Mistakes Startups & Founders Make

So much goes into launching a startup including determining your Ideal Customer Profile, finding Product Market Fit, Building your MVP, Acquiring Customers, the list goes on and on. While it’s an exhilarating journey filled with passion and innovation,  amidst the excitement, entrepreneurs often overlook the critical aspect of legal compliance. 

Failing to address legal matters properly can have severe consequences, potentially derailing even the most promising ventures. In this blog post, we'll explore the top five legal mistakes startups commonly make and discuss how to avoid them. The last thing you’ll want is 1-2 years down the road finding out you made a mistake early in your startup’s journey that will impact the long-term health of the company. We spoke to dozens of entrepreneurs who shared similar legal issues they encountered through their journey so note that this isn't legal advice, rather tips you should consider before and during launch.

Neglecting Proper Entity Formation:

One of the first crucial decisions for a startup is choosing the right business structure. Some entrepreneurs make the mistake of rushing through this process without fully understanding the implications. Whether it's a sole proprietorship, partnership, limited liability company (LLC), or corporation, each structure comes with its own set of legal, financial, and operational considerations.

Opting for a structure without careful consideration of factors like liability protection, tax implications, and governance can lead to serious consequences down the road. Consulting with a legal professional or business advisor during this early stage can help startups make informed decisions that align with their long-term goals.

At this early stage you might not have a ton of capital to invest in lawyers or consultants, but it’s extremely important to understand the difference between determining your starting structure. While partnerships and sole proprietorships can be converted into a C or S corporation down the line, note that this might incur significant legal costs and take some time.

Neglecting Intellectual Property Protection:

Intellectual property (IP) is often a startup's most valuable asset. From innovative products and unique brand names to proprietary technologies, safeguarding these assets is critical for long-term success. Unfortunately, some startups neglect to prioritize IP protection, leaving them vulnerable to infringement claims and loss of competitive advantage.

Common mistakes in this area include failing to conduct comprehensive patent searches, neglecting trademark registration, or inadequately safeguarding trade secrets. Developing a robust IP strategy and working closely with legal professionals can help startups secure their intellectual property rights and avoid costly legal battles in the future.

The TESS (Trademark Electronic Search System) is a great place to start so you can ensure that you’re not infringing on existing IP and that you can also safeguard what you’re building. This goes for the name of your company and products as well.

Inadequate Employment Contracts and Employee Equity:

Startups are built on the passion and dedication of their teams, making employment agreements essential. Many startups, however, make the mistake of using generic or outdated employment contracts, or worse, operating without written agreements altogether. This oversight can lead to misunderstandings, disputes, and potential legal issues.

Ensuring that employment contracts are comprehensive, legally compliant, and tailored to the startup's specific needs is crucial. This includes addressing issues such as confidentiality, non-compete clauses, intellectual property ownership, and termination terms. Regularly updating contracts to comply with changing labor laws and seeking legal advice when necessary can help mitigate risks in the employment arena. At your launch stage you might not initially be worrying about your first employees but having something in place always helps.

Additionally with employee or investor equity it’s important to comply with securities laws, especially when issuing stock to angels or others outside of your company. Not only do you want to avoid massive financial penalties, but you’ll want to set the structure for how you’ll compensate employees as your company grows since you might not be able to pay them as much during the early stages.

Forcing Everyone to Sign a Non-Disclosure Agreement:

Don’t get us wrong, NDA’s have their place in the startup ecosystem but one of the biggest mistakes we see founders make when actively fundraising is requiring every single investor or person they speak with to sign an NDA before even looking at a pitch deck.

There are likely dozens of individuals with the same product or idea out there, but most startup leaders and investors will tell you that it’s not the idea rather the execution that makes a successful startup.

If your product is truly unique or has some proprietary technology (think Biotech, Healthcare, Government) then an NDA might have its place. But refusing to meet with VC’s or investors because they won’t sign an NDA is an early trouble sign.

Not Including a good Terms of Use Agreement and Privacy Policy:

Whatever your product or service is - it’s extremely important to make sure you have a terms of use agreement that sets forth the conditions for visitors to your website. Additionally your privacy policy is the legal statement on your website publicly stating what you will do with the personal data collected from users and customers of the site or app.

These should be tailored specifically to your business and how you plan on leveraging the data. With the rise of AI tools it’s easy to build a standard template but the more specific you are early on the less headaches you’ll have down the road.

There are countless other legal issues to look out for when launching your startup and it’s easy to get excited and wrapped up about the initial launch. Make sure you carve out time for yourself (or your team) to make sure that you get everything addressed early on so you can focus on your product and customers when business starts to ramp. Nothing kills growth at a startup quicker than legal troubles or headaches so it’s best to avoid them altogether with ironclad agreements from the beginning. 

At Gildre we support founders navigating the startup ecosystem with helpful resources and tips by connecting them with leaders who have done it before.

To learn more visit us at Gildre.com and let’s build together!