During the early stages of entrepreneurship and especially if you are in the technology sector, certain legal mistakes can prove to be devastating. As a perfect example of what is occurring in the United States, Utah had over 100 acquisition and merger deals worth $10 billion finalized in 2013. However, of those, roughly 40 percent failed. To enjoy success as an entrepreneur, it is important to understand what the costliest mistakes are, as well as ways of avoiding them.
- Lacking Business Basics—Interestingly, many entrepreneurs do not have business basics in place. For example, you need to develop an early focus on what your business does, who the product or service is for, and what unique advantage you offer. Other critical factors include knowing who your customers are, raising adequate money without damaging any money-raising potential in the future, building a solid management team that establishes appropriate processes and systems, and choosing a reputable corporate law attorney who can identify potential risks so that ultimately, major legal mistakes can be avoided.
- Wrong Team—Without question, you must have the right team for your business. All start-up companies, particularly those involved with technology, struggle to some degree with operational and financial issues. Therefore, you need to consider people carefully—choosing those that you want on your team long-term who are also fully committed. The partnership that you create and the decisions you make are absolutely vital to your success as an entrepreneur.
- No Legal Operating Entity—Another costly legal mistake that many entrepreneurs make is failing to have a legal operating entity in place early on in the process. Although there are tax advantages linked to a Limited Liability Company, or LLC, investors are more interested in a C Corporation that holds the assets of a company, with preference for a Delaware C Corporation. Unless this entity is formed early, risk of poor planning, sideline agreements, and sloppy verbal commitments exist. As a result, raising capital down the road becomes far more difficult.
- No Established Vesting and Ownership Rights—From the start, both vesting and ownership rights must be addressed. Preferably, vesting should be based on well-defined objectives, as well as time and roles. In other words, vesting comes down to who was with the company first. Without a proper vesting schedule, all types of problems can develop among the owners or top executives of the company.
- Inadequate Protection of Intellectual Property—It is imperative to protect intellectual property. Today, it is more about who is the first to file a patent as opposed to who invented the product. Because of this, filings for patents should be done early and frequently. Executive Non-Disclosure Agreements (NDAs) protect future filings, discussions, and efforts. In addition, any relevant materials used in third-party discussions should be clearly labeled “Proprietary and Confidential.”
- Poor Understanding of State and Federal Securities Laws—From day one, these laws need to be addressed with a qualified attorney, or you could face both civil damages and criminal penalties.