At the risk of sounding bleak, thousands of startups are tried every year and the majority of them fail. While a lot of those failures have to do with offering goods or services people don't necessarily want or need, it also has a lot to do with entrepreneurial processes. As many legal counsels will tell you, many startups make the same mistakes as other business ventures, resulting in costly and time consuming issues that can significantly hinder the success of a company in its earliest stages. The following legalities are important aspects that businesses and startups of all kinds tend to neglect during the excitement of their company's early stages of development. Pass it along for the next business venture and help them avoid these common legal blunders many entrepreneurs make.
1. Not protecting intellectual property.
Only within the last few years did the United States switch to a first-to-file (FTF) patent system. As opposed to a first-to-invent system, it's much easier to protect your ideas and much harder for someone to snake your concept out from underneath you and invent it first. With the FTF system being so new, many entrepreneurs fail to make use of it as well as they could, resulting in creative and intellectual property disputes (watch The Social Network for a cinematic illustration of this).
To avoid this error, get used to filing patents early and often, and cover all your bases by citing appropriate information with non-disclosure agreements and signatures of confidentiality for matters involving external parties. You should also familiarize yourself with the FTF system as well as the different type of patents available.
2. Choosing the wrong business structure.
Navigating the waters of business structures can be a tricky thing for novice entrepreneurs, because a business can be classified or organized in a handful of ways. You're likely familiar with terms like Limited Liability Company (LLC), C Corporations, and so on. But not having a working knowledge of the differences in such business structure can be costly down the line. While it may not necessarily be a big enough blunder to tank your business altogether, it can certainly be enough of an issue to cause a major financial set back.
Understanding where your business falls in terms of structure is essential to selecting a pathway for long-term success. These different structures will determine tax advantages, liability issues, and whether or not your investors are willing to back your business venture. Before moving forward, take the time to get a firm grasp on these different business entities and understand how your business should be categorized.
3. Not clarifying roles of individual team players.
A disagreement among team players in a business venture can be deeply problematic for a fledgling entrepreneurial endeavor (again, watch The Social Network). The importance of clarifying the roles, titles, responsibilities, and ownership of each and every member of your business venture cannot be understated.
Early on in business development, a detailed and written documents should be composed that specify who does what and who owns what for every person involved. Moreover, it should include strict definitions and policies outlining proper protocol in the event of unforeseen circumstances (death, incapacity, divorce, etc.). Clarifying these roles and policies will keep everyone involved on the same page and minimize conflict.
4. Handling business legalities yourself.
DIY definitely has its place in the world. Home improvement, building a garden, making a work of art out of wooden pallets, etc. But if there's one area in which DIY should really be ruled out, it's handling the legal components of the business you're starting. Sure, there are plenty of websites out there boasting an easier, more affordable way of handling entrepreneurial legalities. But do they really cover all the details you need to know? And if they skip over a detail, would it cost you more in the long-term than you're saving in the short-term?
The nice thing about having professional legal counsel is that they'll think of all the things that could go wrong for you. They'll be familiar with patent laws and procedures, drafting policies and contracts, selecting appropriate business structures, and everything else there is to consider when starting a business. Most of these common legal blunders are avoidable with extra research, but if you're looking for more of a guaranteed safety net that protects your business, go with a professional legal consultant.