5 Legal Mistakes Often Made By Startups

Entrepreneur magazine recently posted an article on their blog describing five overlooked legal mistakes that entrepreneurs often make. It’s a good worthwhile read. The mistakes mentioned are:

  1. Making handshake deals (i.e. not in writing) with clients and vendors.
  2. Choosing the wrong business structure (i.e. sole proprietorship, LLC, Corporation).
  3. Entering into a partnership without a detailed written agreement.
  4. Entering into a 50-50 partnership.
  5. Filing a trademark without doing a detailed and extensive search before hand.

I wholeheartedly agree with four out of the five common mistakes. Perhaps the one I may partially disagree with is mistake number 4: entering into a 50-50 partnership. 50-50 partnerships can certainly present challenges when it comes to governing a company and general decision-making when there is a deadlock between the partners. However, I think categorically ruling out such an arrangement is a mistake. Rather, if the partners desire to establish a 50-50 partnership and that relationship is important to them, they should plan ahead and consider adding detailed provisions in their partnership agreement which deals with deadlocks. In addition, the company buy-sell provisions will have to be carefully considered as well.

Article Referenced: Five Overlooked Legal Mistakes Entrepreneurs Make

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© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

About Alexander Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

You can read more about Alex here.

Comments

  1. Ah, brilliant. I made four out of five of these mistakes my first decade in business.

  2. I’m going to have to take issue with number 5 too. “Filing” a trademark application without extensive research isn’t really on the list of the Top 5 biggest mistakes. “Using” a trademark without extensive research, marketing your company under a certain name and then finding out you have to change it later – that definitely belongs on the list. (I might have to make a blog out of that – would you mind?)

  3. Alex, I agree these are the most common mistakes done by startups. Trademark filing without extensive search is one major issue at the same time
    1) selecting a simple domain name is one key factors.
    2) I feel the steps followed by startups will be wrong may be lets say

    Scenario 1;

    1) LLP or Sole or Partnership Company Registration with name “ABC Solutions LLC”
    2) Trademark Search – ABC Solutions
    3) Domain Name Registration – http://www.abcsolutions.com
    4) Trademark Registration – ABC Solutions

    This is totally wrong – Chances of failure are more than 70%. Also, there might have been lot of money spent.

    Scenario 2:

    1) Domain Name Registration (even if they go wrong it will not cost much)
    2) Trademark search (It is free or cost very less)
    3) LLP or Sole or Partnership Company Registration

    It will be the right procedure, chances of failure or loss of money will be less than 25%

  4. ooops !!!

    4) Trademark Registration

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