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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

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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

Start-up Advice

Should Entrepreneurs Lie? It’s A Tricky Question

In the hustle of the startup world, entrepreneurs often drop little white lies – and don’t even consider them to be lies. Where’s the ethical line?

Jason Feifer

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Gary Hirshberg knew the exact amount of money he needed to save his company: $592,500. It was 1988, and his fledgling yogurt brand, Stonyfield Farm, was near collapse – rocked by the closing of its third-party manufacturer, hemorrhaging money as it struggled to fulfill orders and unable to find new investors. But with that exact amount of cash, Hirshberg and his co-founder, Samuel Kaymen, calculated, they could open their own facility and regain their footing.

So Hirshberg drove down to his local SBA office with an informal proposal. “We’ve got a bank willing to provide the loan,” he told an officer, and he said his shareholders agreed to put up $100,000. All he needed from the SBA was its 85 percent loan guarantee, which would make the bank comfortable executing the financing.

The SBA liked what it heard, and that positive response set in motion the funding that would save Stonyfield Farm and enable it to grow into one of today’s most recognisable yoghurt brands. But in truth, the SBA didn’t know the whole story. Hirshberg didn’t have a bank lined up. His investors hadn’t committed the money. All he had was a vision for his company, a plan to save it…and, ugly as it may sound, a lie that would pull it all together.

Let’s put it bluntly: This is common. Entrepreneurs lie. It’s not like they regularly drop Theranos-level falsehoods to defraud customers and investors, but the scrappiness of entrepreneurship inevitably leads to some kind of deception. People say their company is bigger than it is, that they’re more prepared than they are, that they know how to do something they don’t. They spot an opportunity and they lie to get it, and that becomes part of their story – an origin that may one day even be celebrated, like how Steve Jobs famously faked his way through the first iPhone demo at Macworld even though the device itself was a buggy mess.

But here’s a question the entrepreneurship community has been struggling with for centuries: Is it OK to lie? And when does a lie go too far?

It’s tricky, because most entrepreneurs don’t see their deceptions as lies at all. Hirshberg doesn’t. “I mean, look – you beg, borrow, steal, stretch. You do what’s necessary,” he says today. In truth, the editors of Entrepreneur can get drawn into this logic. Just recently, this magazine ran a series of articles on bootstrapping, which featured a number of stories about entrepreneurs stretching the truth. One of them, for example, was about Anthony Byrne, the CEO of a Dublin-based company called Product2Market.

In the start-up’s early days, Microsoft considered hiring it but first wanted to conduct a site visit to make sure Product2Market had the necessary manpower. In reality, it didn’t. So in advance of Microsoft’s site visit, Byrne brought friends, family and neighbours into his office, having them pose as employees to make his startup seem twice its size. It worked. Microsoft signed on.

Related: 10 Successful SA Women Entrepreneurs’ Top Advice On Balancing Work And Family

After that story ran, an Entrepreneur reader emailed an objection. “I don’t think the magazine should be promoting people who got ahead by lying as an example for others to follow,” he wrote. But Byrne doesn’t think of his action as lying; he sees it as a simple act of survival. In a crowded industry dominated by big players, he needed to look larger and capable.

“As soon as we got our first big deal, I did in fact hire the right number of people to fulfill the contract,” he says.

This is also how Hirshberg of Stonyfield Farm sees his own circumstance. Rather than lying, he was creating an opportunity he knew he could fulfill. True, he didn’t have a bank or his investors on board with his plan. But he knew a banker that was interested in his brand and figured that if the SBA seemed on board, the bank and investors would follow. And that’s what happened. “It’s OK as long as you ultimately do deliver,” Hirshberg says.

But context is also important, he thinks. If entrepreneurs lie for the sake of lying, or for their own personal gain, that’s a problem. But what if it’s for a common good? Consider his plight, he says: Stonyfield Farm may have been small at the time, but it was employing people and supporting their families. Hirshberg’s wife was pregnant, and his mother-in-law and other family and friends had put significant money into the company. He’d tried repeatedly to save it by more direct means. He even found a potential manufacturer that promised to step in and help – but at the last second, the manufacturer tried changing the contract to steal the brand away.

Hirshberg and his co-founder nearly gave up. Then they made one last-ditch effort — going to the SBA. “I believe that determination is the most undervalued and essential ingredient for success,” he says. “More than a great product. More than financial acumen. More than great marketing. It’s just absolute determination, and as a corollary, believing in yourself when no one else does.” If they went out of business, lots of people would lose. He was determined for that to not happen. The lie was worth it, he says. It was just an entrepreneur doing what was necessary.

Not everyone is going to accept this. Purists will surely say Hirshberg and Byrne and others are just liars justifying their actions. But Tomas Chamorro-Premuzic, a professor of business psychology at University College London and Columbia University, who has written about lying in entrepreneurship, thinks they’re onto something.

“If you can somehow measure harm to others, that is the limit,” Chamorro-Premuzic says. He believes most entrepreneurs tell lies when they think the falsehoods will do no harm. Had Hirshberg failed to get bank financing, the SBA simply wouldn’t have offered the loan guarantee. Had Byrne been caught, his deal with Microsoft would have fallen through. They were largely victimless crimes, wasting little more than someone’s time.

Related: “See The Gap, Be Decisive And Love What You Do” – Advice From A Fempreneur

The way Chamorro-Premuzic sees it, the greatest lie we all tell is that we don’t lie. “There’s a reason why we have to all pretend the world is more honest than it actually is,” he says, “and that’s because we’re part of the same world that thrives with at least a certain level of getting away with some deception.” And he says creative people — the kind of fast-thinking, big-dreaming people who often become entrepreneurs – tend to lie more than others. The truth, he says, is that people in business expect some kind of transactional lie – whether it’s from a job applicant, a potential partner, or someone else.

“The system is encouraging at least some form of fact distortion, and rewards it,” he says. “If you ask an interviewee if they enjoy working with others and they say, ‘Most of the time I don’t,’ they won’t get brownie points for being honest. You’ll say, ‘This guy is antisocial.’”

So what’s an entrepreneur to do? Simple, says Chamorro-Premuzic: Treat lying as a tool to be used in very particular moments. It cannot result in harm to individuals. It must lead to an opportunity you can genuinely succeed in. And very critically, it cannot become a foundation you build on with other lies. “The brands that people trust, the products that people trust, clearly are created and run and owned by cultures that respect the customer,” he says. “Long-term focus requires honesty.”

Seen this way, a lie is a gamble – a slight tilting of the odds in a critical moment. But what follows must be truthful, because, as our liars say, that’s the only way to build an honest company.

This article was originally posted here on Entrepreneur.com.

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Start-up Advice

The ‘Anything’ Entrepreneur

Most entrepreneurs are told to ‘stick to their niche’ but what happens when you make diversification your key to success?

Rowan Fine

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Traditionally, entrepreneurs are told to stay focused and stick to their niche. But what if this advice isn’t always the right thing to do? What if this isn’t the perfect plan for your business, especially when you are facing a mercurial economy and a complex market? The instructions to build a thriving business aren’t set in stone, they’re as fluid as the customers and markets that inspired their creation in the first place. So, instead of hugging that niche rut, here are seven steps to intelligent diversification that could make a huge difference to your business…

1. The price tag

Having a niche business can become expensive, especially if you purchase stock from a specialised or niche supplier. They tend to charge a premium as they have the expertise and market position that allows them to do so. If you instead look to selling a variety of products and solutions, you can reduce the prices for your own bottom line as well as that of the customer.

Often, you are paying for a brand and not the deliverables so ensure that you’re investing into solutions that add value to your business not weight to your bottom line.

Related: How to Start A Business When You’re Flat Broke

2. Variety is key

To survive in this economy, small business owners can no longer afford to only offer single product lines. By adapting and diversifying, you ensure your business isn’t the one left behind. Your competitors may very well be planning on introducing complementary products and services that boost existing offerings or add value. Don’t be the business that hasn’t been paying attention to the customer’s need for more bang for their buck.

3. Bolt on is bolting in

Offer your customers bolt-on extras where you can. This furthers the value you can add to your service and the value that the customer perceives you are offering to them. Extended warranties and value-added services not only add value, but they add longevity to your customer relationships. This means that you build depth with your customers as opposed to a hit and run sale.

Related: How To Start A Business With No Money

4. Build a fence

When you diversify into a variety of solutions and services, you are giving yourself the opportunity to ring fence client spend. They won’t need to go to a multitude of suppliers as you will become their trusted one-stop-shop. You can then use this as an opportunity to showcase other products and services and to use your relationships to pitch clients into new areas of your business.

5. Client retention

When you have a rich pool of resources and strong client relationships, then you build trust and you prove to your clients that you have what it takes to get them what they need. When you’re trapped into single product lines you can’t offer this level of depth to your clients and they will simply go elsewhere.

6. Communication and collaboration

Diversification also offers you the opportunity to communicate more regularly with your clients. Instead of only selling to your customers seven or eight times a year, you can talk to them several times a week. Instead of just supplying products, you are helping them to deal with their day-to-day challenges and requirements. This allows for richer upselling and even more opportunities to engage.

Read next: 21 Steps To Start-Up Success

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Start-up Advice

How To Forge Your Own Path In Business

Finding your own way doesn’t require reinventing the wheel.

Timothy Sykes

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You don’t need to be a visionary to forge your own path in business.

Honestly, you don’t even need to be a business owner to forge your own path. It’s more about a state of mind where you’re able to think for yourself professionally. To clarify, that doesn’t mean you’ve got to be a lone wolf: ideally, you want to be able to to work with and even for others, but without being a follower.

The ability to balance being an independent thinker yet simultaneously remaining accountable for your actions will make you a much more valuable worker, no matter what field you’ve chosen. The good news is that with targeted effort, anyone can adopt this mindset. Here are some of my tips for how to forge your own path in business, and why it matters.

Learn the rules first

This might sound out of place in a post about how to forge your own path in business. After all, aren’t we talking about independence?

Here’s the thing. Before you want to break the rules, you have to actually learn what they are. Take the time to learn the “rules” of your trade before you start trying to reinvent the wheel. You’re likely to pick up wisdom that will serve you, even if you intend on using the rules to inspire new and creative ways of breaking them.

Related: 30 Top Influential SA Business Leaders

Seek guidance

Once again, you might find yourself thinking: Why should I seek out guidance if I want to forge my own path? Picture a cliche movie scene of a parent teaching their kid how to ride a bike. There’s that magical moment where the parent lets go of the back of the bike, and the kid is doing it on his own.

In business, you often need that initial helping hand before you can ride smoothly on your own. Before you can think for yourself, it can be helpful to absorb all of the wisdom you can from others.

One powerful way to do this is to find a mentor, or someone established in your field or a similar field who can give you words of advice and help you avoid making mistakes. Another is to make sure to take part in networking groups and to engage with other entrepreneurs. The more people you connect with and the more knowledge you gain, the better!

Set realistic and specific goals

If you want to gain confidence, become an independent thinker, and a better problem solver, do this one thing: Set realistic and specific goals.

Say that you want to increase sales for your business. It may not be realistic to say that you want to double your sales, but to simply have a goal to “increase sales” isn’t specific enough. However, setting a goal of increasing sales by 20% this year might be more realistic and is definitely more specific.

A goal like this is motivating, as it gives you something specific to work toward. It also allows you to break it down into actionable steps. You can begin to problem-solve, making specific plans for ways in which you could make your goal a reality. As you reach these milestones, you’ll gain more confidence in your abilities, which can help you move forward more confidently in your career.

Observe, but don’t copy

It can be very helpful to look at what your competitors and other entrepreneurs are doing. It keeps you relevant, gives you ideas, and can help keep you nimble in your chosen field.

However – this is important – you should never copy what others are doing. For one thing, it doesn’t work. Say you see someone killing it with a brand new hummus restaurant start-up. You can’t just start crushing chickpeas and expect success. There are lots of inner workings to the business that you’re not privy to, so even if you were to try, you couldn’t quite replicate someone else’s success.

Further, by the the time you copy, you’re already a follower and behind the curve. It’s better to use the information you observe as data, so that you can gain insight on things like effective marketing techniques and aesthetics, and apply these things to your own original ideas.

Think for yourself

You probably already guessed this one, but to forge your own path in business, you need to learn to think for yourself. So…how do you do that? Education is key. You need to absorb all of the knowledge you can, talk to as many people as you can, and observe as much as you can.

It’s almost like you’re forming your own personal library of data and resources. As time goes on, you’ll become better able to use this knowledge that you’ve gained to put your own unique ideas out in the world. You’ll be better able to generate ideas and to come up with intelligent solutions.

Related: Business Leadership – Learn How To Embrace Change

Let yourself grow over time

Ultimately, if you want to forge your own path in business, you need to be patient. Expertise, independent thinking, and autonomy won’t all happen overnight, so take the pressure off of yourself.

Remember: Patience is a trait of some of the most successful people. Focus on progress, not perfection. If you want to be successful for the long haul, allow yourself to learn and grow and continue to improve over time. Slow but steady, right?

This article was originally posted here on Entrepreneur.com.

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