As I wrap up my first 2 years of lawyering on behalf of start-ups here in New York City, I’d like to shed some light on 5 common startup founder legal mistakes that seem to be a common occurrence at even the savviest of companies:
1. The Handshake: I understand that your co-founder is your best friend from kindergarten, but when it comes to business- treat it like business! A not so fun common mistake is never solidifying the venture with a proper contract in place. Such things like clearly defining ‘who does what’ and ‘who owns that’ may be worth mentioning before your startup churns a profit. I mean really, who wants to deal with that awkward convo anyway? Also, piecemeal “agreements” through email correspondence will likely not cut it here either.
2. Titles Gone Wild: Waiting for the “right one” is not just for romantic relationships. Before you call someone your CTO or your Co-Founder, make sure you really mean it. Would you go around telling people they are your best friend (BFF, homie, compa’) without any real friendship? Probably not (I think?). So why do that with your business? Even if you are a little desperate for teammates, loosely giving titles to anyone you come across may derail your success down the line. What if Forgotten CTO #4 comes back to haunt you when your company gets bought? Also, Venture Capitalists see right through those “quicky” teams, so Think Before You Title (TBYT).
3. Corporate Formalities: When things go sour with your once friendly co-founder, making sure you have a solid business formation may be your best asset. Such things like proper business setup, following company protocols, and documenting corporate minutes will help ease the blow of a Founder Split. Hence, having a solid foundation does start with business formation, but it does not end there. The “file it and forget it” mentality should not be used here!
4. The Side Gig: If you are like most people and are not immune to a slow economy, having two or more jobs is a common lifestyle choice. So it’s likely that you may be working at a part-time or even full-time gig, while getting your startup off the ground. A common pitfall here is that depending on your Employment Contract, if your startup falls within the same or similar or remotely competitive industry of your current employer – you may be in for a surprise! Some people forget to read their Employment Contracts and guess what? There may be some language in there that limits what you do off the court (aka in your personal life). Failure to read may mean failure to launch!
5. Yay, Taxes: Just because your new company doesn’t make a profit, it doesn’t mean you could freely ignore filing any taxes at all. I am not a tax professional or tax attorney whatsoever, but I must say- this is an area where things can go really sour. Hence, having a business tax advisor, CPA, or other tax professional guide your way through your tax liabilities and responsibilities may be a safe bet to make. Also, forgetting important tax filings, like your 83(b) filing may be something you’d like to avoid too. Remember, an overcautious approach to taxes is likely a good thing.
The Bottom Line: Even though budget, time, and energy constraints can curb certain ‘cautionary’ alternatives, don’t let that nudge you into a common startup pitfall. Also, when in doubt, turn on your entrepreneur thinking cap and strategize before you act. Most mistakes get made when decisions are made in a hurry!
My Disclaimer: All of my blogs, including this one here, is for general information purposes only. Use this general information as a conversation starter and please do not rely on this general information as legal or tax advice because this is not legal or tax advice. Also, no attorney-client relationship is created from you reading this blog or interacting with my website. Do not post confidential information because it may no longer be deemed confidential. Keep it classy!