10 MISTAKES THAT DERAIL STARTUPS

An aspiring entrepreneur can find the start-up process exciting and fulfilling. Yet, many of the mistakes that ultimately ruin companies occur in the initial stages. Even with a small number of employees and little funding or income, you can’t ignore the importance of your decisions and actions. A successful startup is not only about doing the right things, but avoiding mistakes as well. While every startup has a unique set of challenges, there is a common group of issues that could make it difficult for startups to succeed. 

1. Sign founder agreements

You should have agreements in place if you are working with other founders to clearly define how the partnership is to work and what will happen in the event that it dissolves. No matter how well the partnership is going, it can go wrong, especially if no agreement is in place. A smart business strategy is to make provisions for a divorce in the event of a departure and to draft rules for how equity and ownership will be handled.  

2. Choose the right legal entity

Though establishing a company seems simple, it can be tricky, especially if you are unfamiliar with the laws and regulations that govern corporations. It is for this reason that some choose to only operate as sole proprietorships. Consequently, you put yourself at risk for personal liability.  A lawyer can help you save time and money, avoiding problems resulting from choosing the wrong form of entity when setting up your new company.   

3. Intellectual Property is important

A business’s intellectual property (IP) is an essential component from day one. Unfortunately, far too many companies do not consider IP seriously, either putting it off until later or ignoring it completely. In addition to protecting your IP with patents, trademarks, and copyrights, you should also guard any trade secrets you possess.

As well as taking IP seriously, we need to avoid infringement on others’ IP. If you’d like assistance with your IP planning, contact a lawyer or use LEGID to get offers from several lawyers at once. A costly infringement suit can derail a new company quite quickly.

4. Have employee agreements

In the free and easy early days, it’s probably quicker and easier to bring on new team members with a handshake and a start date. But the employer-employee relationship can become problematic without the requisite paperwork outlining responsibilities and obligations. A good employment agreement covers not only job title, responsibilities, and salary but also expectations regarding privacy and security of sensitive information as well as ownership of IP created while at the company and non-compete clauses in event of departure. Without that, a former employee could take what they know and what they’ve created to a competitor, leaving you with little recourse. 

5. Get the right licenses or permits 

In addition to the business permit and seller license required for operation, your company may need additional, specific permits. You should always do your research prior to doing business to avoid risking fines and penalties, and depending upon where you are from, there may be other requirements you must meet. 

6. Have contracts in place 

You should have written contracts with clients, customers, and vendors if you run a professional business. Using a handshake for a business agreement is not enough; so are verbal agreements. Putting your agreement in an email is definitely better but the best way to protect yourself and your company is to have a formal written contract that addresses contingencies and potential disputes. Without a contract, an agreement is left open to dispute based upon the understanding of each party. This is where a lawyer can assist.

7. Contractors are not employees 

Even if the distinction seems arbitrary, it’s crucial to remember that employees must be categorised as employees and others as not employees. For more information about these classifications, consult a lawyer. Employees and contractors are subject to different tax implications. Also, make sure you follow the contract with regards to the work and hours you demand of contractors (as well as ensuring you own the work created by them).

8. Take taxes into account

There is nothing fun about taxes, particularly when dealing with the complexities involved with running a business. Sales and payroll taxes, as well as taxes on stock option grants, must be considered by businesses, and without proper planning and accounting, they could face an unexpected tax bill, or worse, penalties and fines. Find a bookkeeper who can help you keep everything straight, as well as an accountant or lawyer who can help you manage your taxes.  

9. Paperwork and documentation

The more lax your documentation standards are, the more likely you are to get into trouble. You need to keep business documents organized, even if your personal recordkeeping is not up-to-scratch. Tax authorities and reporting standards can be concerned about any discrepancies in transactions. It is very important to keep good accounting records even when the company is very small; all stock and equity transactions should be documented to prevent further headaches.   

10. Get legal support at the start

The biggest mistake can be not getting expert legal help at the beginning and can have serious consequences. Cutting costs is important for a startup, but a budget-conscious approach to legal matters will only lead to more problems in the future. By finding an experienced lawyer, you can avoid any mistakes that could destroy your startup before it has even begun.

Verified, expert lawyers at LEGID are there to help you avoid these mistakes from the beginning; having a lawyer assist you from the start may be the best business decision you’ll make.

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