8 big legal mistakes start-ups make

It doesn't have to be.

When you start a business the inevitable excitement does not usually extend to the legal points that need to be sorted out. 

New businesses however can not avoid the law and not dealing with key legal points at the outset can quickly add to the difficulties companies face when getting going. Crucially also, legal problems sap the energy of those involved and in those early stages energy is a precious commodity.

To help steer clear of the main pitfalls we have put together a list of 8 of the biggest legal mistakes start-ups can make.

1. Choosing the wrong business structure

If you are starting up a business in the UK, it’s important you choose the right legal structure.

What ‘business vehicle’ you decide on is guided by:

  • The type of business you are starting
  • Whether you’re starting the business on your own or with others and
  • Most importantly your approach to how much financial risk you want to take.

The most common business structure people choose - a limited company - will keep your business and personal finances separate and ‘limit’ your financial liability. Setting up as a sole trader by comparison will mean that financial liability for the debts of the business rest with the individual.

Choosing the right business structure is an important early legal decision and one you need to make sure you get right.

2. Choosing a company name without doing your research

Choosing a name for your company is a hugely exciting milestone. It is also trickier than you think and is worth spending time on and doing your research.

A clever name will attract business to your company and will grab your target audience’s attention, instantly establishing a connection with them so that it sticks in their minds. But it may also already be being used by someone else. So while you’re running through your list of alternative names make sure you also think about trade marks at the same time.

A registered trade mark is legal protection for a company's branding. So if someone already has protected the name you are thinking of using you can’t use it. Similarly if you choose a name and don’t consider a trademark your company name remains an ‘unprotected asset’ unless there are exceptional circumstances.

3. Thinking Intellectual Property (IP) does not apply your business

In the beginning a lot of new businesses do not think about IP and think it is something which applies to other companies. But IP exists in every business, whether it’s a name, logo, flavour, model, machine or information – and it belongs to you. But only if it is protected. So be aware of what is yours and think about whether it needs protection.

Protecting your company’s Intellectual Property via a patent, copyright, trademark or registered design will cost money and you may not consider the costs of protection to be worth it in the early stages. But at the very least make sure you do not simply ignore it. After all just ask yourself this – would you invest in a company if you knew from the outset they could not protect their IP?

Protecting your IP (and staying clear of others IP!) could be an important part of your business’ future success.

4. Not making an agreement with your co-founders

It has been estimated 65% of all start-ups fail due to co-founder conflict arising from having no agreement in place.

A start-up business will frequently involve friends and colleagues and so they will more often than not opt for a handshake, or a verbal agreement about how the business will be run. While such agreements can be legally binding, they are inherently ambiguous as memories fade and the rapid pace of events overtakes clear thinking.

Consequently it is crucially important you have a shareholders agreement (also called a founders agreement) when you have two or more people involved in a business. This will help make it clear where everyone stands by getting you to consider key items including:

  • What happens if someone who owns part of the company (i.e. owns equity) wants to leave?
  • How do you exclude people if things don’t work out?
  • What happens if someone gets ill?

These are not always the easiest conversations to have but writing down in a shareholders agreement what’s agreed will make sure everyone is on the same page. It may also help to save those friendships further down the line.

5. Not putting together your Terms and Conditions (T&Cs)

Often overlooked and underestimated by new businesses you need to make sure you have the right ‘terms and conditions’ (T&Cs) in place. T&Cs will govern the sale of your product or the supply of your service either direct to your customer or online via your website.

They will protect both your business and your customer and help establish your reputation as a reliable and trustworthy trader.

Make sure they cover issues such as supply, pricing, payment, customer responsibilities, data protection, guarantees, cancellations and of course liability. Displaying your T&Cs where your customer can find them will let them know where they stand and crucially help to avoid any unnecessary disputes.

6.  Overlooking the need for website policies

Getting the word out to your customers means more than sharing marketing information on your products and services. There are practical things your customers need to know too.  

Online sales customers must, for example, be able to access your ‘website privacy and cookie policy’ so they know how you are protecting their personal data and using cookies.

Selling online also means you have to comply with specific laws, including the e-commerce regulations. A website use policy will help you comply and should make clear the terms which govern the use of a website by visitors.

Depending on your business, if you store data of any kind you need also to be registered with the Information Commissioner’s Office or this could void any cyber liability insurance and put you in breach of the Data Protection Act.

7. A lack of employment documentation

You had the great idea. You started your limited company. You are passionate about making your idea succeed and your business is growing. Now, you have hired your first, second, third employee and you are on the path to success.

Except you are also now an employer and with that comes a critical need to ensure you have all the paperwork required to comply with employment laws in order to protect you, your business and your staff.

Start-ups often encounter problems when they do not maintain adequate employment documentation including employment contracts and staff handbooks which cover areas such as company policies on vacation, conflicts of interest, internet usage etc.

8. Not considering the benefits of a Non-Disclosure Agreement (NDA)

If you have a product idea or business model that is exceptionally innovative it can be sensible to limit the number of people you disclose it to. Remember ConnectU and Cameron and Tyler Winklevoss?  I thought not. They are the two Olympians who sued Mark Zuckerberg, the founder of Facebook, over the allegation that he stole their idea for a social networking site which allowed users to add people as friends, send them messages and update their personal profiles to notify friends about themselves.

They didn’t consider using a Non-Disclosure Agreement (NDA) – sometimes called a confidentiality agreement – when talking to Zuckerberg about their idea and now ConnectU only exists in the Internet archives whilst Facebook has over a few hundred million users.

The ideas and innovations that define your business can walk out the door if you don’t have the right legal documentation in place. So think about using a Non-Disclosure Agreement (NDA) to let you share information in confidence with third parties.

At the very least if your idea is especially cunning be cautious about which potential partners you make disclosures to. Just ask Cameron and Tyler Winklevoss what they would do now.

Final thought

It is human nature to want to avoid trouble rather than have to deal with it when it happens. And by simply taking some early preventative steps at the outset to avoid the most common legal pitfalls small, cost conscious, businesses can eliminate a lot of the early risks.

It also costs a lot less to get things right at the beginning than have to deal with disputes, often through the expensive engagement of lawyers, later on. 

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