A startup’s life may be tenuous, and a wrong step might be devastating. Constance Bagley, a Harvard Company School professor, outlines the most common legal blunders made by entrepreneurs, including anything from choosing the incorrect lawyer to inflating the business plan.
Not Incorporating Early Enough:
The so-called “forgotten founder” is a difficulty that develops when a partner in the enterprise’s startup later pulls out. When the business receives funding or is ready to go public, this partner returns, maybe with an exaggerated perception of their role, and demands shares.
Issuing Non-Vested Founder Shares:
Vesting safeguards the members of the original team who are responsible for moving the company forward. People’s shares will vest if they stay on the team and are productive. If they leave sooner than expected, the stock can be collected and delivered to whoever is brought in to take their place.
Hiring A Lawyer Who Hasn’t Worked With Entrepreneurs Or Venture Investors Before:
Many venture capitalists claim that their choice of legal counsel influences their assessment of an entrepreneur’s judgment. Lawyers who haven’t worked with entrepreneurs or venture investors before are more likely to focus on the wrong things and miss more subtle potential pitfalls.
Failure To Make An Election Under Section 83(B) Promptly:
If stock is purchased with a considerable risk of forfeiture, the IRS does not consider the transaction completed until the threat is removed. The IRS then assesses the difference between the initial purchase price and the fair market value later and taxes that difference as regular income.
Thinking That Any Legal Issues Will Be Resolved Later:
There’s a temptation to believe that “after I have my funding, once I’m up and running, then I’ll have time to employ the attorneys; right now, I’m rushing to finish my business plan and raise money.” This is a logical fallacy. Many of the things raised here are issues that you cannot fix later.
That is a compelling incentive to retain the services of an experienced law team such as The Benton Law Firm. In the early phases of a project, you may keep excellent legal expertise for a tiny sum of money. It will be far less expensive to get it right from the start than attempting to figure it all out and repair it afterward.