5 Legal Traps Start-up Founders Should Avoid | Ep. 203 | Business Podcast
I’ve found that successful Start-up Founders have serveral traits, one is they believe they can do something that sounds impossible to other people. This unwavering optimism allows Founders to take risks that under other circumstances might not seem reasonable.
Unfortunately, this admirable optimism sometimes leads entrepreneurs to take legal risks that they shouldn’t take.
Listen to this episode to educate yourself on five legal traps that you want to avoid as a business owner.
Links and Downloads
- IP and copyright legal template mentioned in this episode. Email support @ brandoncwhite.com with “IP and Copyright Template” in the subject line to get a copy.
Hello Friends. Welcome to the Edge. Today we’re talking about five legal mistakes. Business owners should avoid. Welcome to the Edge podcast. Your weekly playbook about the inner game of building a successful business making you a happier, healthier and richer business owner and here’s your host, Brandon White.
The first legal mistake business owner should avoid is not getting their co founders and employees to sign a copyright. And if the agreement, what these agreements are is it basically says anything that you create during quote unquote work hours or for the company the company owns it. Whether that’s a copyright, if you’re writing code or IP intellectual property and you want to get this done at the very beginning, trust me I made the mistake going back and trying to correct this becomes a problem because people say, well I don’t think so and I am including a download in the show notes of a mutual beneficial I. P. Agreement.
Now I don’t want you to break another mistake that I’m going to talk about in a minute, which is don’t use standard contracts, but I’m giving you this download to use. It’s an open source document that I have used myself that is more beneficial to both parties, meaning some people might have a side gig and if they have that side gig you trying to own? It could seem onerous. Now you as a business owner could decide to say, hey look I pay you, I don’t want you having side gigs. We own everything. You certainly can do that. But in today’s age a lot of people do do side hustles.
They can be good and what this says is if you do something unrelated to the business, you can own the tip. But if you do something that does relate to the business, we have the ability to license that with no royalties. But you own the I. P. But we get to use it and it just seems like a friendlier agreement. Now I don’t want you to break the upcoming mistake which is you standard agreement. So make sure that you get your lawyer to review this document before you hand it out. But I’m giving it to you as an example, I’m not a lawyer but I am a business guy who’s made a lot of mistakes so make sure that you get everybody to sign some version of this after your lawyers, I have reviewed it.
The second legal mistake to avoid is don’t sign standard contracts. What people have a tendency to do is they’ll say, hey I can go in legalzoom or I could go here I go here and I can download this template or you’ll piece together an agreement with multiple agreements or contracts that you’ve gotten and you’re like, oh that’s good enough. It can work out fine. But when things go bad, it will go to the contract and if you haven’t written that contract correctly to be fair and protect you and your company then you can be in a world of hurt and it can be the difference in some cases it can be the difference of your whole company going out of business because of it.
So spend a little bit extra money with a lawyer to customize it to the needs that you have lawyers these days can use a standard agreement that they have and then customize it and still save you money. So don’t sign standard agreements, Make sure that you get them customized for your needs. The third legal mistake to avoid is make sure that you get equity agreements in writing. This is by far one of the biggest mistakes that business owners, founders, entrepreneurs, startup, founders, whatever you wanna call it, make because everybody’s singing kumbaya in the beginning and they’re all rowing in the same direction at least do you think you are?
And having an equity agreement can be really tough. It’s a tough conversation. It’s basically saying, I think that I’m worth X and I’m contributing X and you’re worth this and if you have more than them, then it makes them feel inferior and think all of these things, it’s an uncomfortable discussion. But if your professional with one another and everybody understands it, it can be completely professional, but don’t avoid it. Trust me because when you do start making money and then you have to have that discussion, that’s going to be a really hard one to have.
And it’s going to be a hard one to win if winning is even possible because lawyers will get involved and once that happens it just turns into a mess so make sure that you get your equity agreements, you agree to the equity split and you get it in writing The 4th legal mistake to make, which a lot of small business owners, medium sized business owners even because it could you start from small, you start small and then you get big and even big ones is avoid asset mingling. So what will happen is the company might not have enough cash flow.
So you’ll buy something for the company and you’re get not reimbursed because the company doesn’t have money. And effectively what happens is downward spiral. And from a court perspective, what you’re building this company for forming the company for is it’s a separate entity, especially if you have a c. Corp or any corporation, but it’s a separate entity from you and your personal assets. And that’s why you incorporate whether that’s an L. C. And S. Corp C. Corp whatever you’re doing.
But what happens is that when you start co mingling asset and you start paying company bills out of your personal credit card and then the company can’t pay you back because it doesn’t have money then what can happen is the courts can come and say, well we actually, yeah you have this corporation but you’re mingling on your assets and then it can turn into an utter disaster, especially if you have a partner and they get divorced. Well that divorce, while you may not think can affect you, it can absolutely affect you in your business. So a better practice is if your company doesn’t have cash flow, then put the money into the checking account that is a business checking account. Make sure your business has a business checking account, don’t run your business out of your personal account, get a business checking account, put the money into the business, record that as equity paid in and then pay it out.
Or you can loan the company money. But if you do that, make sure that you have your lawyer and your accountant in the loop. Because there’s certain things that you have to do, you just can’t loan the money, can’t loan the company money interest free or something like that. There’s, there’s thresholds and I’m not going to go into it because I don’t want you to quote me. I want you to go talk to your financial person, whether that’s your accountant and your lawyer or one or the other to get the answer to this. But from a high level here, do not mingle your assets. It can ruin you. And the company.
And the 5th mistake to avoid business owners is play by and enforce the rules. When things get crazy, things start moving fast, you can start getting loose on rules that you’ve enforced for once. You don’t enforce them within your company. They are not necessarily rules anymore. And there’s an argument that you didn’t enforce them. And then there’s local, state and federal laws out there that you can start skirting because things are happening fast or you need something. And I’m not saying that business owners try to break the law, it’s that things just happened fast. So you sort of just make it happen. But these things down the road can really come back and bite you And you don’t want to do that.
You don’t want that to happen. You don’t even want to have to deal with it. It will cost you 10 times what it would have cost you to actually do it right by slowing down a little bit, possibly paying some money? That’s painful if it’s a fee of local fee or whatever that is to make it happen. And as importantly as the local, state and federal laws, again, it’s internal to your company. If you set rules and regulations and you’ve got to follow them, including yourself. Otherwise they’re not rules anymore. And that can be hard and it can feel like you’re boston people, but it will pay off in the end and truthfully, everybody will be happier because there won’t be anxiety around. Well, can we break the rule now or can he break the ruler?
Can she break the rule or when that happens, there’s a lot of uncertainty and uncertainty raises anxiety, anxiety takes a toll on people and then it hurts their productivity which ultimately hurts your company so you don’t need to be a butt buster but do enforce the rules And there you have it. five legal mistakes to avoid as a business center. Thanks for being generous with your time and joining us for this episode of the edge before you go. A quick question, are you the type of person who wants to get 100% out of your time? Talent and ideas. If so you’ll love our monthly edge newsletter.
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