When you’re starting your business, it’s natural to want to focus on the things that you want to do and accomplish and put some of the more tedious chores to the back-burner.
You are the innovator, the dreamer, and what creative wants to be bogged down with the nitty-gritty of paperwork, forms, and contracts?
But in ignoring these details at the outset of your business, you could be placing your company’s long term future in jeopardy.
Hear more about problems startups have at the start with Peter, Jonathan, and Caroline Cummings on the eighth episode of The Bcast, Bplan’s official podcast (at 9:31):
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Frequently, it isn’t the obvious threat that seems to be staring us in the face that does a business in, but a seemingly inconsequential oversight that can spell doom for a company.
Here are some areas to pay attention to early, before they grow into larger problems.
Make sure you’re not violating employment laws
Not violating the law may seem like something of a no-brainer, but it’s possible to find yourself unknowingly in violation of your state’s employment laws.
You may have employees, contractors, or some combination of the two. And while you may not give too much thought to the difference between employee and contractor, there are important distinctions between each of these in legal terms.
If you start treating your contractors like employees, they will be seen as employees by the law, with all the implications that come with employee status. When you’re hiring people for your business, make sure that both you and your prospective hires understand their role at the company, and that you stick to those definitions.
If you’re unsure about employment law, you can consult this guide from the U.S. Department of Labor on federal regulations. Or if you’re looking for a more personalized touch, a quick Google search can help you find employment lawyers in your area.
Start off with the right entity
Many entrepreneurs aren’t experts in the fields of business law or incorporation, and even more are starting off on a small to non-existent budget.
In trying the do-it-yourself method to early legal matters, far too many entrepreneurs make mistakes in forming their business that can be costly in the long term.
When looking to form a business entity or structure, it’s usually a good investment to get assistance from a lawyer to do things right the first time, rather than having to pay later to undo previous errors.
Many startups opt for an LLC or C corp when forming a business entity, but consulting with an attorney is the best way to determine the correct option for you. If you’re looking for more detail on the differences in corporation types, this blog from Valcu founder Mark Oblad is a good primer.
Work with the right people
Starting a business with one or more partners is a bit like a marriage, with all parties involved making a big commitment with the best intentions.
But just like marriage, you don’t want to go into business with someone you’re not compatible with. We’d all like to think of ourselves as considerate and easy to work with, but the truth is that we all have our own traits and quirks that can endear or annoy.
The startup world can be a tough one, a daily grind that not everyone is cut out for. Your business can’t afford the delays that come with constant arguments and fighting.
Before taking the plunge, make sure that your prospective business partners are people you can work with long-term.
Have founders’ agreements in place
So you followed all the advice in the last section and did your homework on your co-founders before starting your venture, and things still didn’t work out.
One or more of your partners has decided to leave, and besides the emotional toll that can take on a business, there can also be legal or financial consequences as well if you haven’t planned properly.
When starting out, you should have all co-founders sign a founders’ agreement to avoid any complications around issues of ownership, equity, or voting rights that could arise. This is another area where we all like to think that we know the people we’ve worked with enough to think that they would act honorably, but it isn’t enough to hope for the best.
Preparing for the possibility that one of your co-founders will leave, or, less pleasantly, you will have to force them to leave, will keep your company from being thrown into further turmoil.
If you’re not sure about what to include in your founders’ agreement, this blog from Entrepreneur highlights the most important areas that should be addressed.
Assign intellectual property to the company
It would be natural to think that the work that is created by your employees or contractors would belong to your company and would stay with you should they decide to leave the company.
After all, you’re paying their salary or wages in exchange for the work, so it should follow that you own what they created for you. But the law surrounding that can be complicated, which is why your company should be prepared. As part of the hiring process, new employees or contractors should sign agreements that state that any work created belongs to the company.
Ownership issues are another area of concern when it comes to co-founder departures. If you’ve filed for patent, trademark, or copyright protection on works created by your company, but the filing is in the name of an individual co-founder, then the rights to those creations could come into contention post-split.
When filing for protection on your intellectual property, assign it to the business entity rather than a person to ensure a clean break should they leave the company. This sample agreement created by UpCounsel is a useful template to get started.
Handle problems now, not later
Perhaps the biggest mistake that startups make is believing that all of the above issues and more are things that can be dealt with at a later time.
Usually, by the time these small problems rise to the level of big problems, it’s too late for your company to try and deal with it in a way that isn’t painful to you and the business. No one has the foresight to know when disaster is about to strike.
And while it would be remarkable to be able to avoid it altogether, responsible entrepreneurs take the steps necessary to prepare for the worst-case scenarios that may befall their business.
It may seem like a hassle or an unnecessary drain on your limited resources to address areas that you may not think you’ll ever need to worry about, but it costs considerably less to get things right the first time.
Learn more about your business risks by visiting Traklight.
Disclaimer: This article is intended to be general information and nothing in this article constitutes legal advice. Please consult with an attorney before making any intellectual property or other legal decisions.