According to Bureau Labor of Statistics, less than 50% of new businesses survive after the first five years, and statistics drastically vary on the failure rate of startups. Forbes estimates that anywhere between 80% and 90% of startups fail within the first few years. While most entrepreneurs are optimists by nature, it is sensible to be realistic and to face some the some of the reasons so many startups fail.
Setting up a startup involves a lot of work, many things require attention, including finding a niche, developing proof of concept and hiring the first set of workers so mistakes are bound to happen. One of the most common are most startups make a mistake is establishing a solid legal foundation. Of course, you do not want to make the same mistakes as someone else – you need to learn from it.
1. LLC Member Agreements
Apparently, two founders, rather than one, significantly increase your odds of success. According to Inc. startups with two founders raise30% more money than their competitors. While a partnership will definitely increase your chances for success, you need to know who owns what from the beginning. What are you responsible for? What will happen if a co-founder decides to leave at some point? You need to process all of these things, because it is impossible to take someone to court when it was never identified what his role in the company was. Co-founder fights have the tendency to get nasty, so you have to have a formal agreement from the start.
2. Oral Agreements and Handshake Deals
Startups often make the mistake of relying on oral agreements and handshake deals because they believe there is a strong relationship between the parties they work with and that there is a certain amount of trust they can rely upon. However, although an oral agreement and/or a contract may be legally binding, this approach is generally fraught with difficulties because when an issue arises, each party’s recollection of the terms tends to differ. In addition, if the terms are unclear, enforcing such agreements becomes nearly impossible.
3. Compensation Insurance
Just because you treat your employees “good”, does not mean you are not breaking any employment laws. In order to be less susceptible to workplace lawsuits, you need to stay up-to-date regarding the various federal and state laws that affect you. Workplace accidents can and do happen in any place of employment. In fact, last year, over 76,000 workplace injuries were reported in the United States, according to the Health and Safety Executive. In order to avoid these lawsuits, you need to carry worker’s compensation insurance. This insurance prevents a worker from seeking damages in excess of the payments received by worker’s compensation insurance. If your business is not insured, most employees will hire an experienced personal injury lawyer and take you to court.
4. Protecting Intellectual Property
Most founders are only thinking about how to create the best product they can and how to get most consumers to use it. However, what they often do not see coming is that their success can make them a target for frivolous litigation. If you have intellectual property that is meaningful, you have to protect it. Filling a patent allows you to stake a claim to that property, monetize it through licensing while protecting what is yours. According to TechCrunch, around 19% of venture-funded companies filed for a patent before they even received funding; furthermore, 33% of funded businesses file for a patent at some point in their life cycle.
Hire an Experienced Legal Team
In a misguided effort to save money, startups often hire inexperienced legal counsel. Rather than spending the sum needed to hire competent legal counsel, startups will often hire lawyers who are relatives, close friends or others who offer steep fee discounts. By doing so, the startups deny themselves the advice of experienced lawyers who can help them avoid many legal problems. What’s more, you should consider interviewing several law firms and determine if they have experience in areas such as contract law, IP law, employment law and tax laws, among others.
