Less than a decade ago, Uber came on the scene and changed the way traditional business is done. What’s more, the company introduced a new generation of young entrepreneurs who are disrupting and challenging industries such as transportation, travel and retail.
However, for every Uber and Airbnb, you have a dozen or so failed startups. And while the chances of your company surviving past the 5 year mark are actually better today than they were in the 1980s – according to research from Dr. Scott Shane – survival rates aren’t exactly high.
Why are Startup Failure Rates Still High?
Recently, CB Insights took a look at the post-mortem of more than 100 startups and compiled a list of the Top 20 Reasons Startups Fail. The list included reasons like “got outcompeted” and “poor product” however, you can clearly see that each of these reasons is due to a leadership failure at some level.
Seeing how a majority of today’s startup founders is so young, it’s understandable why so many of them feel like they have too much on their plate every day. But the problem is, startup founders prefer to tackle problems when they arise, often underestimating legal requirements.
In some cases, things turn up fine, but when they don’t, startups take massive hits. For instance, successful fantasy sports startups Draft Kings and Fan Duel are currently taking a lot of heat from the State Attorneys General about the legality of their business practices.
And those aren’t alone. As Wire reports, Theranos is also facing scrutiny for state regulators about the company’s blood-testing technologies. And Zenefits’ last CEO was actually forced to quit because of alleged violations of insurance brokerage laws in a number of states.
What Can Go Wrong?
Some companies fill their trademarks and sign all the agreements before the law interferes and anything happens. But as you could see from the examples above, the companies who fail to do their homework get hit hard by their legal indifference.
So in order to help you bypass all of these legal troubles, here are a couple of common legal pitfalls you need to pay special attention to:
Legal Problem #1: Business Registration
When starting a business, the first logical step is to register your company, right? Well, you’d be surprised how many people choose to put this off until they are ready to look for investors. But you need to watch out because this can land you into serious tax trouble.
What You Need to do?
Even you may not want to incorporate your startup well before you go looking for investments, you should do it a month or so before you start pitching VCs. This will not only protect you from the Income Tax Department, but also bring discipline to your organization.
Legal Problem #2: Copyright Ownership
Since we’re living in the age of Internet, some copyright laws definitely need some tweaking. Nevertheless, most companies that are looking to get past these laws fail to do see. For example, a major steaming service, Grooveshark was forced to shut down its operations in 2015, after a lawsuit.
What You Need to do?
If you’re using art inspired by some pop-culture phenomenon for marketing purposes or if you’re selling products based on already existing property – fan merchandising stores fall into this category – you need to see if copyright laws in your country permit this. Copyright infringement can be detected easily in this day and age, so be careful.
Legal Problem #3: Surety Bonds
These bonds don’t usually appear on a lot of people’s checklists when starting a company. However, surety bonds are one of the most important mitigation tools – they provide a guarantee that your company will fulfill any duties or follow a contract in accordance to the laws.
What You Need to do?
While laws obviously vary from country to country, in some countries, a startup can’t even get off the ground without surety bonds, while others don’t. The best thing to do would be to evaluate your business and particular industry, and if needed, look what are the surety company ratings in your country or region.
Legal Problem #4: Founders’ Agreement
People always disagree on some things and arguments are bound to happen from time to time between startup co-founders. Housing.com saw 3 of its 12 co-founders leave at the same time, just a few years ago, and the company took a large blow and even lost some important investors in the process.
What You Need to do?
If you manage to form a bulletproof founders’ agreement before you get your business off the ground, you’ll be able to provide a clear roadmap for you and your co-founders, and clear any possible doubts. Even if you and your co-founding partner are the only employees in your company, you should still work out an agreement before the money comes into play and complicates everything.
Additional Legal Issues You Should Pay Attention To
- Intellectual property – Every business from an ordinary brick-and-mortar shop to an advanced tech startup has certain intellectual property needs. These range from simple like filling a trademark for the company’s logo to complex like seeking a patent for an algorithm.
- Customer/Vendor relationship – Some startup founders simply think too big in the beginning and gloss over the fine print. But you need to structure your customer/vendor relationships properly, and avoid any potential issues you might not be aware of.
- Employee documentation – As soon as your company starts expanding, you’ll probably start hiring new employees. And whether you hire full-time workers or part-time freelancers, you need to have the right documentation in place to protect your company and its assets.
The last thing you should know is that there’s no tried and true formula for how much money you need to spend on legal fees in order to keep your business afloat. The matter of the fact I, you’re probably going to overlook a thing or two and you probably won’t be able to afford every single legal fee.
With that being said, you also need to be aware that certain basic legal issues can kill your startup from the get go and if you want to make it past the first 12 months, you need to focus on them right away.
The sooner you resolve these legal issues, the sooner you’ll be able to focus on your business operations and help your business grow. So dedicate a portion of your budget for these legal fees, because just a couple of months down the line you might find yourself in an awkward situation.
Author: Oliver Curtis
Hi there. I’m Oliver. I’m just a young boy from the outskirts of… Okay, that’s a lie, I’m not a young boy anymore, although I certainly feel that way at heart.