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Common Legal Mistakes of Start-Ups

Business startups often make legal mistakes .The list below highlights some of the frequent legal mistakes made by start-ups. Blunders and mistakes are certainly a part of life and starting a business. But, we hope that the advice below will help you avoid a few.

Failing to consider vesting requirements on founder stock.

Does your start-up have more than 1 founder? If so, then the founders should consider imposing vesting requirements on the stock that they will receive.

Vesting is the process by which a founder accrues non-forfeitable rights in the stock over time. A typical founder vesting schedule vests an equal percentage of stock on a monthly basis over 48 months.

 In practical terms, vesting protects founders from the risk that a co-founder will prematurely leave with his or her slice of the company. For example, assume that 3 co-founders each receive a 1/3 interest in a company with no vesting restrictions.  In this example, a co-founder could leave after 1 month and keep his or her 1/3 interest.

Vesting protects against this unfair result. If the founders had adopted the 48 month vesting schedule noted above, then the departing co-founder would only have been entitled to keep a very small portion of his or her interest in the company.

Failing to consider Federal and state securities laws when offering and selling securities.

Is your start-up trying to raise capital? If so, then you need to be aware of Federal and state securities laws.

Absent an IPO, federal and state securities laws bar a company from offering or selling stock (or other equity or debt interests) unless a registration exemption applies. There is no “family and friends” registration exemption. Civil and criminal penalties may apply if a company sells securities without satisfying a registration exemption.

The bottom line: If you are attempting to sell a security (equity or debt in your company), then consult with a competent attorney to ensure that federal and state securities laws are not violated.

Failing to protect intellectual property

Do you know of any start-up that would say that its brand, business idea, and proprietary software and code are not that important? Probably not.

It is critical that start-ups protect their intellectual property. That protection could take the form of a simple assignment of inventions or a patent, trademark, trade secret, or copyright. Entrepreneurs must recognize the significance of IP protection and consult with competent advisors.

Failing to properly document employment relationships

Has your start-up hired employees? If so, then you should have standard employment documents that clearly define the employment relationship and protects the start-up.

The employment documents should include provisions regarding confidentiality, inventions assignments, and the at-will nature of the employment.


Categories: Startup

Photo of Nicholas M. Oertel

focuses his practice in the areas of Michigan non-property tax disputes, business entity selection, corporate transactions, and information technology.

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