Top Legal Mistakes Entrepreneurs Make

 

Verbal agreements: A handshake isn't a contract.

Successful business relationships thrive on clear expectations. Verbal agreements, though, breed confusion. They're easily forgotten, leading to misunderstandings that can unravel partnerships or client deals.

Don’t rely on memory. Use contracts. They put expectations in writing. At minimum, draft a simple agreement, then email it to everyone involved. This builds your corporate paper trail and protects your team.

Signing agreements you don't fully understand.

Every written agreement sets the terms for those involved. As a company representative, you must grasp what your business gains and what it gives up *before* you sign.

Map out the financial impact. What happens if you terminate early? What fines, extra costs, or limitations could emerge? Understand who owns what as the relationship evolves, especially with intellectual property (IP). Don’t let a signature bind you to a hidden cost.

No vesting restrictions for founders.

Imagine a co-founder walks away early, yet keeps all their equity. They benefit from your hard work without putting in the time. This happens when companies issue stock without vesting restrictions.

Protect your company. When you grant ownership, include a vesting clause. This gives the company the right to repurchase a founder’s shares if they leave before a set date. You and your co-founder(s) should execute a restricted stock purchase agreement with a reasonable vesting schedule—typically four years. This keeps everyone committed during those critical early years.

Failing to protect IP ownership.

Intellectual property shapes your company from day one. Some entrepreneurs create IP for their new venture while still employed elsewhere. This is a trap. Employees often assign all IP rights to their current employer for work done during their term. That former employer might later claim rights over your startup's creations, especially if you used their facilities or time.

Review past agreements. Check what your founders and future employees signed with previous employers. These often include non-competition and non-solicitation clauses. A non-compete stops employees from working for rivals. A non-solicit prevents former employees from poaching your team.

Founders must also prevent IP leakage from the company. A departing founder or employee, or the public disclosure of an invention before filing a patent, can all expose your core assets.

Have each founder sign an Intellectual Property Assignment Agreement. This lists all IP they transfer to the company. Ask employees to assign all IP rights and sign a nondisclosure agreement. This keeps inventions inside your company walls. Sometimes patents aren’t an option; then, maintaining trade secret status is your only defense.

Infringing another company’s trademarks.

A trademark identifies your product or service's source. It can be a word, name, logo, or design. Building a trademark takes time and money. Before you invest in one, ensure you have the right to use it. Register it, along with its web domains.

In many countries, simply using a trademark in the market grants some protection, even without formal registration. But don’t rely on that. A registered trademark offers stronger legal ground.

No formal scheme for decision-making.

Partners often hold different views on critical decisions. You won't always reach a unanimous agreement. But even when consensus fails, someone must make the call.

From the start, establish clear mechanisms for resolving deadlocks. Define who decides, or what process you follow when opinions diverge. Without it, indecision stalls your company.