Avoid the Top 3 Legal Mistakes Entrepreneurs Make
For new entrepreneurs, building a business can be a period of trial and error. Part of the adventure is wading through daunting legal matters.
The three most common mistakes entrepreneurs make in the early stages are failing to adequately protect their intellectual property (IP), not formalising the equity arrangements among founders and inaction or haste in choosing the right structure for their business.
How can entrepreneurs protect their IP early on?
Before you form an entity, people are chatting; they might be at their current job, maybe they spend a couple of hours collaborating. And there's a question, when you develop a business around that: Who owns that idea?
Once you form an entity, that company doesn't own that IP unless you get it into the entity. You get it in by licensing it or by an assignment of the IP. All the founders--anyone with whom you collaborated, anyone who gave you a nugget of an idea--needs to assign the IP into this company.
How can founders avoid disputes over equity arrangements?
It's sort of like an antenuptial contract. The way we propose it is, the company is going to have to exist when one of you leaves. So picture yourself as the founder who stays. Would you be OK with that other guy walking away with 50 percent of the company? If you wait [to formalize equity agreements] and things have gone sour, that's when you end up paying people a lot more than they would have gotten. One of the biggest reasons for failure we see is this type of founder fighting. If you don't have the equity sorted out, it becomes all-encompassing and nasty and personal.
What are some considerations when forming the company?
Making sure you are choosing an entity in a jurisdiction that makes sense for what you're doing. What happens is that there are so many choices that people choose the wrong one, or they push it off and don't actually form the company. There are a few types of entities. You must understand the implications of each one before deciding on the appropriate entity for your venture.
How do you choose?
It would be a 60- to 90-minute discussion to talk about all these issues--the difference between the various types of entities as envisaged in the new Companies Act, how you are going to split your equity, what everyone's titles are. You can get things done in a week or two, more quickly if needed.
The mistake is in not forming the entity, or just forming an entity that your buddy who's a real-estate lawyer told them to form without really thinking it through. There's this inertia and fear when making the quickest decision as opposed to the right decision. It's helpful to talk it through with a corporate lawyer.