by Faraz Siddiqui & Arjun Ahluwalia
Diving into entrepreneurship is an exciting time for start-up founders. Amidst the whirl of hiring like-minded, talented employees, building an awesome product and targeting the right market, founders find themselves inundated with an avalanche of tasks to build a stable foundation for their company from which to grow. In those early days, every aspect of your start-up's business requires focused attention and understandably, founders often unintentionally neglect or are unaware of critical legal and corporate issues that every business, big or small, must take care of to ensure good long-term health of their company and its business. More often than not, founders adopt a reactive approach which then leads to unnecessarily high costs down the road that could have been avoided with a more cost-effective proactive approach.
At Argentum Law, we want to ensure that you and your company are well-prepared and on a clear path to success. Based on decades of shared experience advising corporate clients, we identify common mistakes founders make so that you and your team implement a proactive legal strategy and build a truly stable foundation for your company to do great things.
Mistake 1 - Operating without a written clear shareholders' agreement
Start-ups are often cofounded by a team who have built trust amongst each other and find it uncomfortable to discuss the possibility of a fallout that could be fatal to their company. Founders may be unable to separate their personal and professional relationships and often forego setting up a solid foundation by formalizing their business relationship with each other through a shareholder's agreement. The shareholder's agreement is one of the most critically important documents for your company and its operations – it allows founders to deal with each other in a clear and precise manner and decide critical issues such as contributions, equity allocations, vesting, roles and responsibilities, day to day decision making, compensation and salaries, roles of advisors as well as the much awaited exit such as through a strategic share sale or an initial public offering. In many ways, a shareholder’s agreement makes disputes less likely, as it provides a clear framework and outlet for the company to operate efficiently.
Mistake 2: Relying on standard contracts and templates
Founders have limited resources and often times scarce funding so there is a tendency to adopt a do-it-yourself approach and use templates or standard contracts found via a quick Google search. Such templated documents can be a great resource as a starting point, however, they must be tailored to your start-up's specific needs, especially when it comes to relationships with employees and counterparties such as vendors, strategic partners and customers. As a founder, you must ensure good contracting health of your start-up through written agreements using simple and plain, easy-to-understand language drafted specifically for your business. Email us for our quick and dirty Contract Health checklist that can identify quickly whether your contract is fit-for-purpose.
Mistake 3: Inadequate strategy to protect assets
One of the most valuable assets a company owns is its intellectual property (IP) including trademarks, tradenames, trade secrets, know-how, copyrights and patents as well as software code, prototypes, designs, process diagrams and even social media handles. Operating without a well-planned IP strategy can be perilous for a start-up down the road. Besides IP registration, protect your start-up by evaluating and identifying valuable intellectual property and putting in place IP and invention assignment agreements as well as non-disclosure and non-compete agreements with employees, consultants and vendors. Another valuable asset of your start-up is your team – make sure that you retain employees through non-solicitation agreements with counterparties.
Mistake 4: Poor corporate housekeeping
Start-up founders are always on their toes solving problems and spending energy putting out fires that they often forget about the basics such as proper corporate housekeeping and governance. If you are looking to raise funds to take your start-up's business and operations to the next level, you must maintain timely and accurate records for investor diligence including financials, internal and external policies and contractual agreements. You must avoid co-mingling personal and corporate funds at all times and never sign contracts under your personal name as it can easily expose you to being personally responsible for the company's liabilities.
Mistake 5: Using the same counsel for all founders and the company
At the beginning of your start-up’s lifecycle it may appear that all founders and the company's interests are aligned, however, nothing can be further from the truth. As a business grows, its operations’ scale and its valuation increases, it becomes more imperative that each stakeholder engage their own counsel. As a founder, your counsel can ensure that your interests are protected without any conflict with the interests of your co-founders, investors and the company.
Future-proof your company and give your startup an edge over the competition. Argentum lawyers are on hand to help you get ahead of the curve!