February 21, 2020

The Struggle Is Real: 7 Legal Hurdles to Entrepreneurial Success

In the initial stages it can be difficult for founders of start-ups and small businesses to afford competent legal counsel due to lack of funds and resources. The good news is even when entrepreneurs find their knees badly skinned from hitting those hurdles, with a good coach and team behind them, clearing those hurdles is just a matter of time.

1) START WITH A SOLID FOUNDATION

In the very beginning, when everyone is giddy with the novelty of an idea, and the world of possibilities, those handshake deals seem more than enough, and so much simpler than digging deep into the complexities every detail of the intended relationship. The reality is, however, that the devil is in the details. So often founders believe they have a shared vision, but without taking the time to put that vision on paper, do not realize where variances exist. Outlining these details early on in the company’s formation helps everything else to fall together organically. In the early stages this can occur with minimal conflict. As more time progresses this become more complicated because each founder may have expended time, effort and energy, or made promises to third-parties that are not aligned with the other founder’s vision. Having each founder execute a Founder’s Agreement helps to avoid misunderstandings by documenting each founders’ expectations, roles, responsibilities, and commitment to the company’s unified goals and objectives.

2) FROM THAT FOUNDATION BUILD A SOLID INFRASTRUCTURE

Formation of a legal entity for the company, whether a corporation, an LLC, or some other legal form, is important for purposes of limiting the individual liability of each founder. There is no universal “right” or “wrong” answer to the question of what form of entity is best for a start-up. This is a determination made based upon an evaluation of a myriad of factors. Often start-ups will get hung up on the perfect form of legal entity and forgo forming any entity for lack of being able to come to agreement. What is important most of all is to form an entity, and thereby limit individual liability of each of the founders.   

After forming the entity, it is important to put in place governing documents for that entity. For a corporation these are called bylaws and shareholder agreements, and for a LLC these are called an operating agreement. Drafting and having each founder sign off on the terms of these governing documents helps to ensure agreement on how the company will be managed.  These documents form the blue-print upon which the company operates.

In addition to considering the tax implications of the form of legal entity chosen, the founders should consult competent tax advice to address ancillary tax considerations as early on as possible in the life-cycle of the company.

3) PROTECT WHAT YOU CREATE WITHIN THAT INFRASTRUCTURE

As big a mistake as it is to frivolously spend borrowed funds when the ultimate success of the company’s business-line or ability to secure investors is unknown, it can be equally damaging to not spend money in certain key, strategically planned, and value added areas while in the start-up phase. The founders of the business need to be willing to invest, often through their own personal funds to improve prototypes or services and enhance the effectiveness and efficient of the same. Engaging tax and Legal counsel early on can help founders to make those personal investments in a manner that they get “credit” for doing so when the company does have meaningful value. Money earned by the business should be re-invested towards real growth and not spend on creating a false impression of success among competitors and peers.

4) RESPECT EMPLOYEES & DEMAND THE SAME LOYALTY

A frequent cause of problems for start-ups is when employees are not trustworthy and steal – whether intellectual property, or actual monetary sums. It is critical that employees are treated well and respected by the founders of the company. Often employees are working at less than competitive wages in the interest of furthering the company’s start-up mission and are prone to feel underappreciated for their efforts.   

Although when small in size the company will not be legally required to comply with certain employment and labor laws, the founders should still strive to follow the intent and purposes of those laws to ensure employees are treated fairly and equitably. All employees should be required prior to employment to sign confidentiality and assignment agreements for work they perform while employed by the company.

Start-ups need to be careful to not fall in the trap of hiring fast, and firing slow. Founders of start-ups often are not business persons by trade and fall prey to making hiring and firing decisions based on emotion rather than an objective focus on the best interest of a company. One problematic employee can quickly sow the seeds of dissension among the entire team.

Do not grant employees equity within the company without first consulting experienced counsel on the tax, securities, employment, and other implications.

5) THIRD-PARTY RELATIONSHIPS – DOCUMENTATION IS YOUR BEST FRIEND

As a start-up you will quickly find yourself needing to enter into many different arrangements with different third parties to support your product or services, or as the ultimate end-user of these products. Often the promises made to you by one party will be critical to deliver to another party on your promises to them.

It is critical there is a legally binding contract governing all business arrangements and clearly setting forth each parties obligations and responsibilities. If you agree to hold harmless or indemnify another party for breach, or require the other party to do the same for you, it is crucial to carry the requisite insurance to cover those liabilities.

It is helpful and cost-effective to engage counsel to develop a form contract specifically tailored to your company’s business goals and objectives when dealing vendors and clients, and to customize certain key provisions related to breach of contract, insurance, indemnification and hold harmless to mitigate your companies risk exposure.

6) TEMPER EXPECTATIONS – UNDER-PROMISE AND OVER-DELIVER

It is a dog-eat-dog world out there and when the competition is fierce, or your feel your competitors are belittling you it is tempting to over-sell your product or services based on what you hope to attain, but which remains yet to be proven. This is a dangerous path and which can expose your company unnecessarily to significant losses as a result of claims of breach of contract and misrepresentation, or even fraud.

Exercise caution to make sure you do not bulldoze ahead relying on unproven assumptions. Listen to your customers. Often although an idea works on paper, in theory, or on a small scale this doesn’t translate to where you can replicate it on a larger scale or with multiple different variables in play. Be very careful not to make legally binding promises, guarantees or warranties that you cannot deliver on. Carefully craft any legal promises made in the early stages to include requisite disclaimers, hold harmless, indemnification, and limitations on liability to make sure one broken promises doesn’t result in a lawsuit that bankrupts your dream.

7) KEEP ABREAST OF THE CYBER-WORLD

The cyber world has created a new subset of hurdles that even the smallest of startups must navigate and proactively address. The moment your company has employees, or even if you are among multiple founders, it is critical to have policies governing acceptable use of company devices and the company’s name over social media. We live in a world where things can go viral quickly, and an offensive statement, or costly promise can easily be attributed to your company and cost you everything.


By Rupa S. Lloyd, Shareholder, GrayRobinson, P.A.

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