There are many ways in which a business’s prospects can be harmed in the early stages of a company’s development, and the last thing a start-up wants is to be on the cusp of receiving financing only to learn that a potential investor has uncovered a legal “gotcha” in the course of its due diligence. At best, fixing such a problem will be time consuming and expensive; and if the problem is severe enough it can even derail the whole financing. Fortunately, many of the common legal pitfalls start-ups encounter are easily avoided by keeping your lawyer informed about your plan so he or she can identify issues before they arise. Here is a list of five of the more common pitfalls to watch out for:
Failure to Adequately Protect your IP. To adequately protect your intellectual property, it is not enough to simply file for patent, trademark or copyright protection; it is also necessary to take precautions to ensure your IP is not misappropriated, such as putting in place internal policies and procedures for the handling of confidential information, and requiring your employees, outside service providers and business partners to sign non-disclosure agreements.
Complex or Confused Equity Structure. A company with a messy or poorly documented equity structure is a headache for potential investors and can be difficult to clean up, which investors often insist on before closing a financing. Companies need to be selective when issuing equity, be sure that all equity issuances are well documented, and be sure that equity incentive compensation granted to employees and others is subject to vesting and other standard conditions that protect the company.
Failure to Comply with Securities Laws. Every issuance of securities – including stock and options – by a private company must qualify for an exemption from federal registration requirements. Failure to comply can result in civil and, in extreme cases, criminal penalties for the company and its officers and directors. Most issuances of equity must also qualify for exemption from state registration in each state where securities are offered. In some cases, companies are required to make detailed disclosure to potential investors in order to qualify for an exemption.
Failure to Comply with Labor Laws. A multitude of federal and state laws govern the relationship between companies and service providers. In addition to laws prohibiting discrimination, federal and state regulations define an employer’s obligation to employees and others. Regulations distinguish between employees and independent contractors, and between so-called “exempt” employees and “non-exempt” employees, and getting these classifications wrong can result in severe pecuniary penalties.
Onerous B2B Contracts. In evaluating agreements with potential business partners, companies need to fully understand their legal obligations as well as their business obligations. Technical legal provisions, such as representations, warranties and indemnification, can have tremendous impact on a company’s potential liability under a contract. Overly onerous obligations can make a company less attractive to a potential investor.
Tags: Angel, contractors, contracts, employees, employment, family, Formation, IP, restricted stock, securities, stock, Stock options
Tags: Angel, contractors, contracts, employees, employment, family, Formation, IP, restricted stock, securities, stock, Stock options