Connect with us

Start-up Advice

5 Common Legal Mistakes Start-Ups Make – And How To Avoid Them

5 Common legal mistakes start-ups make when launching their business — and how to avoid them.

Kyle Torrington

Published

on

business-start-up-advice

Getting your start-up off the ground will be one of the hardest things you ever do. All the lingo about being nimble, agile and lean certainly holds water, but when executed too casually, could scupper your venture by creating unintended legal loopholes that come back to bite you many months, or years later.

To equip your start-up for the unforgiving world of business, let’s explore five common legal mistakes start-ups tend to make when launching their business.

1. Nail down your founding documents

As early as possible, you need to secure all founding documents and agreements to govern the relationship between the company and its shareholders and directors. The most important of these documents are the Shareholders Agreement and Memorandum of Incorporation.

When your start-up is making the big moola — which we all hope it does — issues between shareholders become very real.

Related: 6 Common Mistakes First-Time Business Owners Should Avoid

Ensuring that you have the right mechanisms in place to solve shareholder or director issues will give your company a fighting chance to recover from such an event, or even help to avoid it entirely.

One powerful element to include in any Shareholders Agreement, for example, is a vesting schedule, best explained by bringing our typical start-up co-founder, Oom Piet into the mix. Oom Piet, as mentioned in a previous article of mine, is working hard at his entrepreneurial vision of creating an online peer-to-peer lending platform, Peer Lending R Us. Oom Piet’s co-founder, and 50% shareholder in the business, is Frikkie van Rensburg.

After a year of slaving away to make this vision a reality, Frikkie is forced to take cognisance of the commercial realities of starting and supporting a family, and Peer Lending R Us, although looking positive, is not doing well enough to support Frikkie and his family financially. Accordingly, Frikkie makes the tough decision to take up a job in the corporate world with a salary and no longer be actively involved in Peer Lending R Us.

Frikkie thus resigns as a director, but says that he will remain a 50% shareholder of Peer Lending R Us. This enrages Oom Piet, to the point where he considers shutting shop, as the burden to grow and run Peer Lending R Us is now all on his shoulders, despite Frikkie having and retaining the same equity stake in the business. Short of making Frikkie an offer to purchase his shares, without a vesting schedule, Oom Piet is stuck with this ‘deadweight equity’.

Avoid ‘deadweight’ equity

If provision had been made in their Shareholders Agreement for a five-year vesting schedule, for example, the situation would have been more palatable for Oom Piet.

This five-year vesting schedule could have stated that Frikkie’s 50% shareholding would divest to him in equal portions of 10% per year over the five-year period, which means that when he left after a year, Frikkie would only be entitled to 10% shareholding, and not the full 50%.

Related: 6 Costly Mistakes People Make When Starting a Business

2. Register your brand as a trademark

register-your-brand-as-a-trademark

Due to the trademark process taking around 24 to 36 months to complete, start-ups really cannot afford to waste time building their brand over a number of years, only to discover at a later stage in the lifetime of the company, that their company name is not available to be registered as a trademark.

The energy, cost and lost goodwill associated with re-branding can often cripple an established company, let alone a fledgling start-up.

Another reason to trademark, which is growing ever more important these days, is Google keyword poaching. Take Oom Piet’s Peer Lending R Us for example.

One day, Oom Piet decides to search to see how high Peer Lending R Us is ranked on Google’s search results. He soon notices that, when searching ‘Peer Lending R Us’, their competitor, RocketLend, shows up as the highest Google Adwords result.

Oom Piet is horrified to learn that RocketLend is using Peer Lending R Us as a keyword to show RocketLend’s own Google adverts. In approaching Google to remove the offending keyword for RocketLend’s campaign, he learns that, unfortunately, without a registered trademark, Google won’t even entertain his complaint.

This is a sad reality, but Google allows for keyword poaching to continue unabated unless you can prove that you have a registered trademark that comprises the offending keyword/keywords.

Related: 21 Steps To Start-Up

3. If you have invented a new product or process, patent it

If you think that you have invented an entirely new and unique product or process, filing a patent needs to be done before making the invention public. This is particularly important since public disclosure of an invention in terms of the Patent Act of 1978 voids any possibility of the patent being registered.

This obviously carries with it the huge risk of copycats, simply reverse-engineering your invention, and exploiting it for their own financial gain, should you not obtain a patent for it.

Oom Piet, for example, only realised that his method of compressing and analysing the creditworthiness of potential borrowers on Peer Lending R Us, was unique enough to patent once he had been running Peer Lending R Us for a year.

Making the invention available in the public domain, i.e. through his platform, unfortunately rendered it unable to be patented, with the result that RocketLend was able to reverse engineer his invention and use it without any adverse consequences.

4. Securing your copyright over outsourced works

copyright

Software and Internet start-ups face an added burden, imposed by virtue of the Copyright Act of 1978, where outsourcing the creation of any works of art, such as logo design and software development, will entail that the subcontractor will own the copyright to that work, unless a Copyright Assignment Agreement has been entered into with the subcontractor.

If, for example, the software development of Peer Lending R Us was outsourced to a developer in India, the copyright to the code, allowing for Peer Lending R Us to function, in the absence of a Copyright Assignment Agreement, would be owned by the developer in India.

Related: 5 Steps To Protecting Your IP

5. Entering into contracts without fully considering them

Start-ups need to be flexible and be able to quickly respond to market changes. Entering into a contract without fully considering the terms of it could serve to drag your company down to the point that it can’t operate.

Peer Lending R Us, for example, enters into a lease agreement with a pre-furbished office rental company for a 24-month lease with an in-built 15% rental escalation clause, thinking it was a month to month agreement that Oom Piet could quite easily get out of. After one year of operating Peer Lending R Us, Oom Piet realises that he cannot afford the rental payments any longer, and tries to terminate the lease, only to discover that he is in for the full 24 months.

This cripples his company to the point that he can longer carry on trading, and has to shut shop. If only he was able to get out of the lease earlier and run the business from home, he might have been able to save his business.

These are just a few of the legal mistakes and misconceptions entrepreneurs face, and hopefully you are now better equipped to avoid such mistakes on your journey to becoming a unicorn.

Kyle Torrington is the co-founder of Legal Legends, a company that aims to revolutionise the legal industry by being Africa’s first eCommerce website for quality legal services aimed specifically at start-ups and entrepreneurs

Advertisement
Click to comment

You must be logged in to post a comment Login

Leave a Reply

Start-up Advice

Put On Your Wellies: It’s Time To Wade Into Risk

Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…

Chris Ogden

Published

on

risk-management-rain-boots

You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.

Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.

It is also unrealistic to assume that it isn’t worth taking this risk.

There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…

Step 01: Do your research

No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.

Step 02: Understand the costs

Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.

A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.

Step 03: Know when to walk away

As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.

You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.

Continue Reading

Start-up Advice

Mind The Gap

The entrepreneur’s guide to finding the gaps and building the right solutions.

Chris Ogden

Published

on

entrepreneurship-gap

Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.

Here are five…

1. Network

It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.

2. Look for pain

Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.

Be the Panado that fixes these pains.

3. Luck

luck

This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.

4. Luck needs courage

You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.

Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.

5. Pay attention

This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.

Continue Reading

Start-up Advice

5 Things To Know About Your “Toddler” Business

As you navigate this new toddler phase of your business, here are five things to bear in mind.

Catherine Black

Published

on

small-business-start-up

Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.

Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”

As you navigate this new toddler phase of your business, here are five things to bear in mind:

1. This too shall pass

Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.

2. Appreciate what this phase brings

The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.

3. Establish boundaries

Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.

4. Take a break

Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.

5. Give it space to make mistakes

While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.

During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.

While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending