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Startup Companies Mistakes to Avoid and Tips to Keep In Mind

Jun 1, 2018 | Corporate & Business

It’s hard to believe that companies such as Uber, Amazon, and Netflix began their incredibly successful journeys as startups. Many other services Americans use on a frequent basis probably began as startups, too—Postmates, Dropbox, and Slack, to name a few. These companies are examples of strategic funding and marketing decisions made with the advice of great corporate lawyers that eventually led to the creation of large corporations.

Startup companies obviously have the potential to grow into largely profitable publicly held companies. However, many startups fail to appreciate the legal issues that can make or break them. If you are thinking about getting into the startup industry or are currently involved in one, be sure to consult with an experienced corporate and securities lawyer to advise you on conforming to the many legal requirements the industry presents.

Navigating the Path to Becoming a Successful Startup

Whether you are new to the startup industry or a startup guru, there are several legal issues you should keep an eye out for. Being proactive in assessing these issues will set your company on the right path to becoming profitable and marketable.

  •  Selecting the Right Type of Legal Entity from Early in the Company’s Development

Corporate formation is one of the most important steps in ensuring a startup’s success. The company and its founders need to assess their goals and choose the type of legal entity that best helps to further those goals. Further, the type of entity that is chosen must be able to insulate founders from personal liability and allow the business to issue equity compensation or receive venture capital funding. These are among the many factors that must be taken into consideration when deciding which legal entity is best suited for the startup from a legal, tax, and investment perspective.

  • Agreeing on and Properly Documenting Founders’ Roles and Responsibilities

Startups are often founded by a close group of colleagues, family, or friends. However, a casual nature of conducting business should be avoided. Each role and relationship within the company should be formalized in writing, including each person’s title and responsibilities. Decision-making protocols, dispute resolution mechanisms, and ownership and exit strategies should also be put into effect in policies and handbooks, as well as maintaining a company minute book with written resolutions that have been signed off on.

  • Complying with Securities Law when Raising Capital

Again, do not let the seemingly casual nature of a startup get you in trouble with securities laws. Federal and state securities laws and regulations are difficult to comprehend and failure to abide by them can lead to the downfall of any startup. Capital-raising and finding suitable investors for your particular business are both critical to the success of your startup and involve securities laws. An experienced securities attorney will identify any potential securities issues that your startup may face, and address them accordingly.

  • Properly Structure any Equity Plan for the Benefit of Executives and Employees of the Company

Establishing equity and incentive plans carries legal implications and tax consequences that must be adequately addressed. Some of the issues to consider in this area include how much equity should be designated for employees, and the consequences of an equity plan for future investors. These actions also implicate securities laws, meaning that a startup company is best advised to keep abreast of these issues through the advice of a corporate lawyer.

  • Properly document Customer, Supplier, Employee, and Other Key Third-Party Relationships

It is best practice to create forms and agreements that properly memorialize arrangements with customers, suppliers, and employees. Also important are well-drafted commercial contracts, which should include provisions that address indemnification and limitation of liability.

Successful Startups have Great Lawyers

The success of your startup company depends on a myriad of factors. Don’t let the legal and regulatory issues that arise in the startup formation process keep your company from reaching its full potential. The most effective way to navigate the many legal issues and requirements is to consult an experienced corporate and securities law attorney who can identify and address any potential issues and opportunities for growth. Taking this proactive measure will serve to further your startup’s goals and create a solid business foundation.