Starting a business can be an exciting – but scary – time. Focusing on securing venture capital, building your team, and creating your company’s identity is easy. But as many founders have learned the hard way, overlooking small details can create huge legal problems. Securing an attorney or firm that can help you in the early stages can be one of the best things you do for your business to ensure its future success.
Startup law is also referred to as enterprise law. It is the convergence of many branches of law required to help startups avoid or deal with common mistakes made during the early evolution of a business.
Examples of legal services that may be provided to startups include:
- Helping with Venture Financing Documents: Seed financing and funding rounds are critical in securing startup working capital since these new companies often will not qualify for traditional financing options. Legal services can help you mitigate risk by creating written policies related to conflicts of interest in venture capital financing arrangements. Venture capital financing is a great option to reduce liability if the company fails. However, it is also closely monitored by the Securities and Exchange Commission.
- Liability Protection: When starting a company, there are several ways to structure it. Certain business entities reduce personal liability for owners and investors. But these entities may be governed by different laws, which can vary from state to state. Consulting with an attorney can help you identify the best structure for your unique business in a way that protects the owners and investors.
- Entity Formation: Determining the right business entity can have broad ramifications for your business. It can impact your tax liability, the amount of paperwork required, additional regulations, personal liability, and options for securing startup capital. Legal experts with experience in startup law can help you identify the best entity and structure by considering multiple factors.
- Mergers and Acquisitions: Successful mergers and acquisitions often rely on good negotiations and diligence. Depending upon the type of transaction, the merger or acquisition may require regulatory notice and compliance. A failure to comply could result in a failed transaction and/or penalties or fines. Startup legal services can aid you by considering all the details and diligence required throughout the merger or acquisition process.
These examples are just a few ways that legal services for startups can be beneficial. But the reality is that there are many ways in which a startup could get in trouble without sound legal guidance. And any of these could land you in costly and complex business litigation, jeopardizing any startup’s future.
For example, some of the most common and problematic legal mistakes made by startups include the following:
- Not making the deal clear with co-founders. Agreeing early on about the details of a business relationship is a great way to avoid substantial legal problems in the future. Legal services can help you draft agreements that address how equity will be split, ownership percentages, roles and responsibilities, buyback of shares if a founder leaves, salaries, time commitment expectations, and decision-making processes, among others.
- Not selecting the right business structure. Because many founders often start a company without legal counsel, they incur higher taxes and greater liability because they didn’t opt for the right business structure.
- Choosing a company name with trademark issues, domain name problems, or other issues. Many owners put a lot of thought into their business’s name. Unfortunately, doing a lot of research before making a final decision is also important. Without this action, you risk infringing on another company’s trademark, which can be a huge legal problem. A startup lawyer can check and verify there are no foreseeable legal issues with your chosen name.
- Not complying with securities laws when issuing stock to angels, families, or friends. Failure to comply with state and federal securities laws can lead to substantial financial penalties. A knowledgeable attorney can help you navigate these complexities to protect your business’s assets.
- Not taking into consideration tax implications. Startups must pay attention to key tax issues to avoid excess taxes, fines, and penalties.
- Not maintaining sufficient documentation. Startups are often characterized as intense environments with high levels of activity. And often, the founders are so focused on realizing their goals that they may overlook key documentation activities, including ones that protect the company, its founders, and investors.
- Not protecting intellectual property sufficiently. Protecting your intellectual property often requires obtaining patents, copyrights, trademarks, and protecting trade secrets. A corporate attorney can easily handle these complex processes.
As you can see, there are many ways in which a startup could benefit from legal services. For more information about startup law, contact Grellas Shah today.