·  Legal News, Analysis, & Commentary


18 Big Legal Mistakes Startups Sometimes Make

— April 28, 2023

A potentially devastating legal mistake is not having all employees sign intellectual property agreements before they work with the startup. ~ Julia Kelly, Managing Partner, Rigits

From patents derailing a startup to misread laws causing legal issues with foreign business partners, here are 18 answers to the question, “What are big legal mistakes a startup can make?”

  • Overlooking Existing Patents
  • Missing Secure Trademarks
  • Unclear Employment Agreements
  • Neglecting Compliance and Regulations
  • Intellectual Property is Unprotected
  • Ownership is Unclear
  • Inadequately Structuring Equity Offerings
  • Agreements Without Notarization Can Cause Issues
  • Forgetting to Make an Exit Strategy
  • Ignoring Tax Responsibilities
  • Improperly Vetting the Terms of a Financing Plan
  • Misclassifying Employees as Independent Contractors
  • Not Complying With Employment Laws
  • Poorly Drafted Contracts
  • Inadequate Incorporation
  • Failing to Get Proper Legal Agreements
  • Opting Wrong Country for Your Business Activities
  • Lack of Understanding of International Laws

Overlooking Existing Patents

Startups are all about innovation in products, services, and processes, and true to their genre, innovation brings them success, too. But one mistake that can put a startup into deep legal trouble is failing to check existing patents. Its innovators can patent any intellectual property so that no one else can use it for a specific period. 

Now, the problem with patents is that they don’t need to be mass-produced, marketed, or even sold for their patent to be valid. Even when a product, service, or process has not made its way into the market, a patent can still govern it. Failure to check existing patents can not only result in the startup’s derailment but can also subject them to lawsuits.

Riley Beam, Managing Attorney, Douglas R. Beam, P.A.

Missing Secure Trademarks

A common legal mistake made by startups is failing to secure trademarks. Your startup’s name, tagline, logo, and other branding elements are the most valuable assets you have. Failure to secure your trademarks quickly can create massive problems down the road.

Startups should not wait to secure their trademarks after launching, as it can lead to trademark infringement issues. Trademark registration is relatively inexpensive and can be done easily online. The extra cost is well worth it for the peace of mind it can provide you and your business.

Matthew Ramirez, CEO, Paraphrase Tool

Unclear Employment Agreements

When you’re going into business with partners or hiring your first employees, consult a lawyer to establish employment agreements. These contracts need to address every aspect of employment clearly to protect both your new employees’ interests and your business interests.

Don’t get caught up in the excitement of hiring and wait to establish these bases. Set up these agreements before you pursue any employees to cover rights and keep your business legally protected. If you rush them as an afterthought, you’re bound to miss something.

Shawn Plummer, CEO, The Annuity Expert

Neglecting Compliance and Regulations

I think the biggest legal mistake startups often make is neglecting compliance and regulations in the industry and location they are working. Failure to comply with them can cause heavy penalties, fines, and even strict legal action. This can be particularly damaging to a startup’s reputation and financial resources, as they may not have the funding to handle the legal fees, fines, or penalties and may end up getting into serious trouble.

So, I would advise them to do their due diligence and stay on top of compliance issues to avoid any legal headaches down the road.

Shaun Connell, Founder, Writing Tips Institute

Intellectual Property is Unprotected

A mistake startups can make is not protecting their intellectual property. By not filing patents or trademarks and failing to copyright their proprietary works, such as software, business plans, and materials, they risk another competitor stealing what is rightfully theirs and use it against them in the future.

Without proper protection in place, these valuable assets may become public domain with no compensation given to the creator. For example, when I first launched my business, I made it a top priority to safeguard our intellectual property. I knew that taking this step early on would ensure that I wouldn’t have to deal with any pesky legal troubles down the road, which could really put a damper on my company’s growth. 

Startups must avoid this big mistake and register their intellectual property rights with the USPTO or other relevant agencies as soon as possible to enforce them if needed.

Maria Harutyunyan, Co-founder, Loopex Digital

Ownership is Unclear

One of the most common legal mistakes made by startups is failing to determine ownership and control of the company. Every company must have a planned structure of who owns it and who has control over its operations. Otherwise, there can be serious legal complications down the line.

The best way to avoid this problem is to have a clear startup plan that outlines the roles of each owner and the division of responsibilities. This plan should be signed and notarized before any funds are exchanged. It’s also a good idea to have the plan reviewed by a lawyer before signing it to ensure that it complies with all applicable laws. By having a clear understanding of who owns what and who is in charge of what, you can avoid many of the common legal mistakes made by startups.

Luciano Colos, Founder and CEO, PitchGrade

Inadequately Structuring Equity Offerings

As per my knowledge, equity offerings must be properly structured to comply with securities laws and avoid legal issues with investors and government regulators. I am sure improperly structured offerings can lead to legal disputes and financial penalties.

Salim Benadel, Director, Storm Internet

Agreements Without Notarization Can Cause Issues

When I co-founded my health and wellness start-up three years ago, one of the biggest mistakes we made was failing to get into clear, binding, and notarized agreements. 

We had signed a deal with a supplier for a large order of yoga mats. The mats were supposed to be delivered in three batches over 12 months. However, the supplier changed the pricing in the second delivery. 

We challenged this, of course, but sadly, our initial agreement had not been notarized. Although we eventually won the legal battle, it wasted so much time and resources. We had to end the initial agreement we had signed with the supplier, and it was difficult to find someone else who could fulfill our order on short notice.

Logan Nguyen, Co-founder, MIDSS

Forgetting to Make an Exit Strategy

It’s important for startups to have a clear exit strategy in place, whether that means selling the company, going public, or other options. Failing to do this can lead to legal issues and disputes among founders and investors. It’s important to have a plan in place to maximize the value of the company and ensure a smooth transition.

Jake Smith, Managing Director, Private Number Plates

Ignoring Tax Responsibilities

Taxes can be one of the most daunting areas for any business, so it is essential to get it right from the start. Many startups cannot understand the complexities of their tax obligations and make mistakes that are both costly and difficult to correct. Familiarize yourself with the local tax laws, including how to file taxes correctly, pay estimated taxes, and ensure that the business complies with applicable tax laws. The structure of your business also affects how you’re taxed, so ensure you set up the proper structure that is most beneficial for your business.

Karl Robinson, CEO, Logicata

Improperly Vetting the Terms of a Financing Plan

Not properly vetting the terms of our financing plan was a dilemma I faced myself when I was starting my first business. 

I found that while it helped me in the short term to raise some initial capital; it ended up saddling us with long-term debt that we would have been better off not having. It was a major blow to our budget and took us a long time to recover from. 

Luckily, I learned an important lesson the hard way—always carefully consider the legal implications of whatever financing you enter before it can put your business in jeopardy.

Daniel Pfeffer, CEO, Scrape Network

Misclassifying Employees as Independent Contractors

I believe that misclassifying employees as independent contractors might land startups in legal problems. Independent contractors do not have the same rights as employees, and businesses must follow strict rules when recruiting them. Employee misclassification as independent contractors can cause back taxes, penalties, and lawsuits. 

Startups should thoroughly assess each worker’s job requirements and obligations to determine if they are an employee or an independent contractor. They should also verify that when paying independent contractors, companies follow federal and state tax regulations.

Tiffany Hafler, Marketing Coordinator, Blockchain Lawyer

Not Complying With Employment Laws

I understand that employment regulations can be complicated and are constantly changing. I believe startups must adhere to laws governing minimum wage, overtime, and employment benefits. 

Failing to follow employment laws can lead to litigation and large fines. To ensure compliance with all applicable rules and regulations, startups should collaborate with expert employment attorneys. Startups must accurately designate employees as exempt or non-exempt from overtime pay. 

Companies should also follow anti-discrimination legislation and make reasonable accommodations for disabled personnel. Startups should also have a strong sexual harassment policy in place and provide frequent harassment prevention training.

Cindi Keller, Communications Coordinator, The Criminal Defense Firm

Poorly Drafted Contracts

Woman holding sign that says Read the Fine Print; image by Geralt, via
Woman holding sign that says Read the Fine Print; image by Geralt, via

I think legally binding contracts are essential for a startup company. They control your interactions with vendors, consumers, and business partners. 

Contracts that are poorly structured can lead to disagreements and potential litigation, which can be costly and time-consuming. Working with an experienced attorney is essential to ensuring that contracts are simple and legally binding. 

Include payment conditions, delivery dates, termination provisions, and dispute resolution processes in a well-drafted contract. It should also outline each party’s rights and responsibilities, as well as any warranties, indemnifications, and liability limitations.

Tim Allen, Director, Oberheiden P.C.

Inadequate Incorporation

When beginning a business, it’s critical to select the appropriate legal structure and file the paperwork to incorporate your firm properly. Among the options are a sole proprietorship, partnership, LLC, or corporation. If you cannot incorporate properly, I believe you may be held personally accountable for any debts or legal troubles that develop, and you may not take advantage of certain tax breaks or legal safeguards.

Adam Garcia, CEO, The Stock Dork

Failing to Get Proper Legal Agreements

A potentially devastating legal mistake is not having all employees sign intellectual property agreements before they work with the startup. This agreement ensures that any ideas generated by the employee during their employment stay in the company’s ownership, even if they leave or end. Without this agreement, there is less protection for a startup against former employees making claims on the IP.

Julia Kelly, Managing Partner, Rigits

Opting Wrong Country for Your Business Activities

The citizenship of an entrepreneur matters a lot. Business owners should consider other aspects, which include the legal viability of their venture in a certain nation, the local tax laws, and their capacity to raise capital in that nation. There have been many instances where a single error results in substantial financial loss or prevents a business from operating because it doesn’t adhere to local standards.

Jay Soni, Marketing Director, Yorkshire Fabric Shop

Lack of Understanding of International Laws

Startups that operate globally must understand the legal and regulatory environments of the countries in which they do business. Failing to understand international laws can lead to legal issues with foreign governments and business partners.

Nilesh Rakholia, Director, Abelini

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