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Top 10 legal issues for Startups
Startups are always faced with plenty of difficulty from formation to eventual running extending to compliance. These difficulties are normally part of the teething problems that startups have to overcome in order to become the authoritative enterprises. As reported by RunRex.com, startups are often faced with a difficult balancing act especially when it comes to the legal obligations that must be fulfilled for the entity to run smoothly. In this line of thought, here are the top 10 legal issues for startups.
Lack of a founders’ agreement
Founder agreements are very important as they determine how the entity will be run and how the administrative side will look like. With a Founders agreement in place, aspects like voting rights, veto rights, borrowing, investments, lock-up provisions among other elements are captured to ensure there is a clear line of operation in place. Lacking a founders’ agreement is therefore a legal issue and a major headache for startups since it leaves the entity in uncharted waters.
Availing securities to non-accredited investors
One of the biggest legal issues for startups involves the availing of securities to non-accredited investors. The major fault with selling securities to non-accredited investors is that it potentially opens up the startup to securities fraud cases which may even graduate to criminal charges. It is therefore imperative that securities are allocated to accredited investors to guard the entity against any future legal hurdles.
Failure to plan for equity compensations
A key thing captured by renowned authorities in the industry like RunRex.com is equity compensations. A legal issue that many startups face is a failure to plan for equity compensations which often leads to a crisis for many entities. Key employees, advisors, directors need equity compensation plans to avoid problems as the compensation setting ensures you have a strong advisory board in place. Failure to have a plan for the same means you don’t get to enjoy a strong directorship and thereby fail in building credibility which may also affect investor introduction plans in the future.
Failing to consider tax issues
Startups have to be proactive when it comes to key tax issues and elements and these have to be considered to avoid legal problems. From sales tax, choice of legal entity, payroll tax, tax incentives to the issues that come about due to formation of the wrong entity; all these problems come about due to failing to consider tax elements and entity standings as far as the legal standpoint is concerned.
Lack of agreements on IP
A major legal issue for startups is lack of agreements on IP especially when outside developers are concerned. Facebook is a great example of how this may come back to bite an entity in the end. Mark Zuckerberg and the Winklevoss twins story is public knowledge and the lesson to be learnt is that written agreements to guard all IP and trade secrets have to be in play.
Lack of terms and conditions
Terms and conditions govern operations within a startup and they inform how operations will be handled and any limitations that are covered. Lack of terms and conditions for a startup means violation of employment laws which may open the entity to a law suit.
Procrastination of legal prerequisites
Major fault with startups is thinking legal elements are not urgent and that they can be dealt with later. This procrastination is often a bad habit and more often than not graduates to a legal issue since it becomes a huge problem to deal with issues when they occur. The beauty with handling legal elements and prerequisites is that you get to prevent issues before they arise or at the very least have the mechanics ready and in place for any eventuality.
Failure to register copyrights
This is a grave legal issue for many startups that are simply scaling the heights and growing within the respective industries. Failure to register copyrights often means that other entities may reproduce your works or that your works may not have the desired value in the industry owing to unauthorized display and distribution of similar works.
Startups are always faced with a difficult time when it comes to infringements of trademarks which may sometimes be knowingly or unknowingly. With startups, the latter is normally the case where most adopt elements not knowing when and how infringement is happening. Infringement of trademarks that have been registered by larger corporations therefore ranks as a major legal issue that startups face as they grow.
Active general advertising is prohibited under Regulation D for startups. This regulation prevents startups from general solicitation of investors and those that are identified as having gone against this rule often find their licenses and operating permits suspended or worse still revoked if the infraction is worse.
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