Entrepreneurs are usually great at getting down to business and putting the peddle to the medal. Often that comes at the cost of glazing over some important legal aspects. It's not worth putting yourself or your company in harm's way to avoid doing a bit of basic legal research. If you mess up the legal side, it could seriously hurt you or your business.
I recently sat down with Aaron Kelly, an infamous online lawyer from Kelly Warner Law to find out what entrepreneurs commonly miss when it comes to the legal game.
Here's the advice he gave me about the legal side of entrepreneurship.
1. Don't co-mingle personal assets.
It's tempting, especially when you are bootstrapping your company not to want to separate your personal and business assets. But the problem on top of creating an accounting nightmare, is as soon as you mix your personal and business finances you also may lose the legal protections that come along with incorporating your business.
In fact, even as much as signing a contact in your personal name without clarifying in writing that it's on behalf of your company can cost you your corporate protections.
Although it can be hard to do when starting out, if you pay for any of your businesses goods or services from a personal bank account, you may lose your companies legal protections altogether.
Piercing the veil, which is the technical term for losing your companies legal protections, means that someone could sue you and convince a court to collect a debt from you personally if your company owed them. Whereas, if you had your veil intact, it would be much harder to collect from a Founder/CEO.
"I see people that start all the time commingling because they bootstrap. It can be hard to control, especially when you're a startup. It really comes down to priorities," said Kelly.
2. Always get it in writing.
Speaking of priorities, you always want to have an agreement between yourself and the other party that you are doing business with.
"A majority of the lawsuits I deal with, or threats, are usually because they didn't have an agreement. That then leads to unrealistic expectations," said Kelly.
The problem with not having things in writing is that often business deals involve a lot of negotiation and conversation. Some of what was discussed may not be included in the actual deal. And, unless you have the final terms of the deal, specifically in black and white, it can be really confusing for both sides and lead to conflict. Ultimately this is the very point of a contract, to make sure that the deal is spelled out clearly and there can be no confusion as to what was agreed upon.
Personally, I make it a point to have every deal no matter how big or how small in writing. I don't do the deal otherwise. It's never worth the confusion and legal headaches that are caused without an agreement. I learned this from Mark Cuban who is also a big advocate of getting every single deal in writing, no matter how big or small it is. Then there is always a black and white verifiable paper trail with everything you do, and no potential for confusion.
3. Don't be in a hurry to sign agreements.
Entrepreneurship by its very nature can reward founders for being quick to act. But when it comes to the legal game, it's rarely a good idea to sign without thinking or even worse, without reading.
"It's surprising to me the number of people that sign things without reading it. People could be signing their life away and have no idea. You really have to read and understand everything you are signing," said Kelly.
This is one of those cases where it's better to be safe than sorry. In my early days as an entrepreneur, I signed a few deals that I didn't fully understand and it was one of the worst business decisions I've ever made. I then had to call a lawyer and spend a whole lot of money on fixing the situation. I ended up spending much more than I would have spent if I just had a lawyer review it in the first place.
4. You need to vet employees and contractors.
"The biggest thing I think people take for granted is, over-trusting or under-trusting. There's a level of responsibility they need to have but also you have to watch them and have proper contracts in place," said Kelly.
And he's totally right. I can't even keep track of the number of startups I've personally advised that have no agreements between their Co-founders or employees; it's shocking. I think that makes it a big gamble. You are putting a lot of trust into those people without an agreement. And if things go sour, it could be disastrous.
But as long as you follow this advice, you will be way ahead of 90% of entrepreneurs and startups and have your legal game on point.