This post is also available in: Spanish
When you start a new venture, you are bound to make mistakes. Learning from your mistakes is part of the process. But, some mistakes can be more costly than others, and some big mistakes can be easily avoided with a little bit of forethought and a focus on the bigger picture.
You’ve got an idea that keeps you up at night. You think about it at work, and you can’t wait to work on it when you get home. You spend every spare minute on your computer, at your drafting table, or in your garage, and all you want is for the world to take notice. In short, you are (or you are about to be) an entrepreneur.
But, before you rush into launching your startup – before you build a website and start posting about your innovation on social media – there are some mistakes you need to make sure you avoid. Here is a list of 10 common mistakes that can lead to issues (both legal and financial) down the line:
1. Not Forming a Legal Entity
In almost all cases, startup founders should operate their business through a legal entity. In the United States, we’re generally talking about forming either a corporation or a limited liability company (LLC). Forming a legal entity has numerous benefits – including liability protection for the company’s owners – and the relatively modest costs involved are well worth the investment.
If you do not form a legal entity, not only do you face the risk that you could lose your personal assets (such as your savings, your car, and your house) if something goes wrong, but you will also disqualify yourself from seeking outside investment. While it is possible to form a corporation or LLC later and transfer the business assets into the company, the far better (and least costly) option is to operate under a legal entity from the beginning.
2. Not Forming a Legal Entity Properly
When we say to form a legal entity, we do not mean giving your credit card number to some company that promises to cheaply “file your LLC online.” You need to make an informed decision about where you form your company, and you need to make sure that you follow all of the steps involved in the process. This includes filing the Articles of Incorporation or Organization, drafting a shareholder or member agreement, filing foreign entity registrations and business license applications (if applicable), opening a business bank account, and preparing all of the other documentation needed to establish your corporation or LLC as a stand-alone entity.
3. Not Reviewing Agreements
As you hire freelancers, buy software licenses, and take the other steps involved in getting a startup off the ground, you need to make sure you understand the terms that apply. You should own the rights to anything your freelancers develop. Do you? You should be able to use your software for commercial purposes. Is commercial use permitted under the terms of your license? These types of things matter, and you do not want to make the mistake of signing an agreement you haven’t taken the time to read and understand.
4. Not Clearing Trademarks and Domain Names
For many startup founders, discovering the perfect name is a moment of pure elation. You’ve got the product, and now you’ve got the brand to build around it.
But, is your chosen brand name – your trademark – available for use? Or, has someone else already adopted the same (or a “confusingly similar”) trademark? Keep in mind that registration with the United States Patent and Trademark Office (USPTO) is not a requirement for trademark protection. If you do not “clear” your trademarks and domain names (i.e., if you start using them without doing your due diligence to find out if they are legally available for use), you could end up building a brand that you will be forced to abandon – while potentially paying damages to a trademark owner.
5. Not Registering Trademarks and Domain Names
Once you clear your trademark, you need to register it. You should also register the affiliated domain names and social media accounts. Although USPTO registration is not a requirement for trademarks, registration affords numerous benefits, and the last thing you want is to start promoting your trademark only to later find that someone else has scooped up your desired domain names and social media handles.
6. Using Third-Party Content You Find Online
Content posted online is subject to copyright protection, and if you use someone else’s photos, videos, or text without permission, there is a good chance that you are engaging in copyright infringement. Contrary to public belief, very little of what is available online is actually in the “public domain.” In some cases, attribution may be all that is necessary (for example, if you use content that is subject to a Creative Commons license), but you need to make sure you respect the author’s or owner’s rights before you use online content for your own commercial purposes.
7. Assuming Later Isn’t Too Late
In many cases, startup founders don’t form companies, don’t clear and register their trademarks, and don’t bother with securing appropriate licenses because they assume that they can do so later – perhaps once they have received some initial seed funding. But, the reality is that later will often be too late. If you happen to get sued before you form your corporation or LLC, your personal assets will be exposed. If you don’t register your trademark and someone else does, you will be geographically limited in your use – which means that you likely won’t be able to promote the brand online.
8. Trying to Do Too Much on Their Own
Startup founders often fall behind and make mistakes because they are trying to do too much on their own. They typically (i) don’t want help, (ii) can’t afford help, or (iii) don’t trust anyone to handle things for them. Growing a successful startup inherently involves relying on others; and, from legal to accounting, there are several functions that are best left to experienced professionals.
9. Relying on Free “Advice” Online
In the same vein, many bootstrapping startup founders will try to do it all by relying on free “advice” they find online. While looking at professional blogs and respected publications is a good way to find basic information, you simply won’t find the personalized and in-depth advice you need on the web.
10. Overlooking the Business’s Implications for Their Personal Life
Finally, when you form a business, you need to take into consideration how being a business owner impacts various aspects of your personal life. Let’s consider your estate plan as a simple example: Who would own the business if you died tomorrow? Would he or she have the knowledge and resources to keep the company going? For startup founders, the need for business succession planning is just one of many reasons to make sure you have a sound estate plan in place.
Speak with a Startup Business Lawyer at Jiah Kim & Associates
If you are thinking about starting a company and would like to speak with an attorney, schedule an initial consultation at Jiah Kim & Associates. To speak with a startup business lawyer in confidence, call (646) 389-5065 or book an appointment online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
This post is also available in: Spanish