3 Legal Pitfalls Your Startup Must Avoid

Startups are great, as they help great ideas become innovative products that reshape the world we live in. However, quite many startups fail due to falling into one of the 3 major legal pitfalls. Read on to learn what these pitfalls are and how can you avoid getting in them.

Without much ado, the key legal dangers that hide in murky startup waters are as follows:

1. Working without written contractual obligations
2. Unknowingly violating someone’s intellectual property rights or patents
3. Unfair competition.

Let’s take a closer look at each of these dangers and how you can deal with them.

Working without written contractual obligations

Many entrepreneurs draw helping hands from their friends and relatives at the beginning of their startup journey. You know these people well, they are your homies and drinking buddies, they’ve seen you in good and bad times — you can trust them, right? So, if they can invest money/time/skills and help your product take off, you promise them a hefty reward in equity or a share of revenues if everything turns out right — and nothing if you fail. 

As you are close friends, you are quite content with verbal promises and don’t want to waste time and effort sorting out all sorts of details in writing. Most of the time startups fail, so it all comes to nothing, yes. However, what if the stars align and your product or service actually gains the attention of the target audience, is warmly accepted and actually passes the breakeven point heading towards profitability and success?

There are too many cases when your closest friends and best buddies say this was possible only due to their mission-critical input (most of the time it actually is that way) — and ask for a bigger share. This is a horrible situation when your word is versus theirs and an open conflict can destroy everything you have built so far. 

SOLUTION: Even if you don’t want to pay for legal consulting at the very beginning of your startup life cycle when money is very tight, you can just google for a suitable Service Agreement template and adjust it to the needs of your particular situation. Make a draft, discuss all the details, and sign two copies to reduce the risk of your partners trying to adjust the deal conditions on the fly.

As blatantly obvious as it might be, this is actually a step most often neglected by startups. The golden choice here would be actually contracting a legal advisor to craft bespoke contracts for all your co-founders and for-equity contractors. Even if it might seem an excessive precaution, it can save a ton, of time, money and nerves in the long run.

Unknowingly violating someone’s intellectual property rights or patents

Let’s assume you woke up with a great idea about how to make some aspects of our daily life better. You formulated it and googled for a couple of days checking for any mentions of similar ideas or products and found none (or vise versa, found an underserved niche where your product might successfully compete). Thus, you decided to invest a considerable share of your savings (or even money from your friends and relatives) into implementing this idea — and it seems something worthy is coming out of it.

Your MVP is nearly ready and you begin marketing it to ensure the target audience is aware of your offers and willing to buy once the product is released. Everything seems great until one day you receive an email with a laconic and ominous title: “Cease and desist”. From it, you will know that your brilliant idea happened to occur to another entrepreneur or enterprise executive quite some time ago, they have patented it and their product is also readying to hit the market. Any court of law will side with the party that has its intellectual property rights properly registered and patented, and you risk losing all the time and money invested in your product development, in addition to paying the legal fees for the lost court case.

SOLUTION: Googling is not sufficient as a means of checking the background. The IP items and ideas in the process of patenting are not publically available and are not indexed by Google. The only way to ensure you are safe on that front is by hiring an attorney firm to perform a patenting exploration, as they have the right to issue a legal request regarding the patentability of your ideas and solutions. The result of such an inquiry can also serve as proof of your rights in court, should some tricksters decide to steal your product by registering their rights behindhand.

Unfair competition

The team is the key asset of the business, so let’s say you are able to attract one of the leading sales managers from your competitors and he persuades all his clients to start using your product, using a wealth of insider information and personal relations with them. This way you get a large base of customers in one fell swoop. Isn’t it great? Actually, no.

There is a number of laws and restrictions against “unfair competition” in every country and state, and stealing customers from competitors in a way described above is a legally prosecutable offense. It might also involve breaking the NDA and the IP rights of the previous employer, so good professionals will not do it anyway. However, what to do if you have indeed recruited a specialist that was previously employed with your competitor?

SOLUTION: Make such a person sign an agreement that explicitly prohibits using insider information for unfair competition. This way, they either follow the fair play rules or if they infringe them — it is their legal problem, not yours.

Conclusions: avoid these 3 pitfalls and succeed!

As you can see, any startup might face these 3 challenges on its way to success. However, if you are prudent and cautious, you will face them prepared. Forewarned, forearmed, as the saying goes.

IT Svit follows these rules as we sign SLA, NDA and other legal agreements with our customers, which ensures both parties can safely fulfill their contractual obligations. Should you like to use IT Svit services for developing or updating your products — feel free to contact us at any time, we are always glad to help!