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Starting a new business is always enthusiastic, exciting and driven by many expectations. Founders are greatly driven by their innovative ideas that they are totally absorbed in launching the product or service, making common legal mistakes in the process. So you do not make the same common mistakes again here are Top 5 Legal Mistakes Startups make and how to avoid them along with essential legal documents that are required in India to establish a startup.
Essential Legal Documents For Startup in India
- Business Plan: A legal document outlining business goals, strategies, business plan, existence details, founders details and other information of the business is all included in the Business Plan.
- Business License: Business license is evidence of the government allowing you to operate your business in a certain jurisdiction.
- Founders’ Agreement: This agreement includes all rights, duties, responsibilities and stake in profit-loss of the business.
- Employment Agreement: This document outlines the terms of employment with compensation, benefits and duties of the employee.
- Non Disclosure Agreement: Any confidential information that businesses do not want to be made public is included in this agreement, preventing other parties from disclosing business’s confidential information.
- IP Assignment Agreement: If a business has patents, trademarks or copyrights granted, then an assignment agreement of business is required, known as IP Assignment agreement.
- Vendor Agreement: If business will be working with vendors, having an agreement which outlines the terms and conditions of relationship with payment and delivery details is called Vendor Agreement.
Top 5 Legal Mistakes Startups Make:
- Neglecting Founder Agreement
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Founder agreement includes all rights, duties, responsibilities and ratio of Profit & Loss of founders, ensuring that founder’s agree with everything that is stated in the agreement. Especially, startups founded by emotional or blood relationships neglect making founder agreement due to trust and belief among themselves, and also for focus on early-stage enthusiasm. In today’s competitive era, startups constantly face new obstacles that surely affect their survival, therefore no one knows whether the startup will run successfully or not in the near future. These might result in losing their founders’ relationship. Hence, preparing a Founder Agreement must be the first priority to protect the founders’ relationship.
- Avoiding IP Protection
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IP is a protection of Intellectual property of the business that gets the trademark registered for services or any product of the startup. Almost all startups are established with their unique innovations or creations in any service or a product. But again almost all startups avoid it because of a lack of understanding, expensive fees, long procedures, underestimating its importance, focusing on early market access and undervaluing their potential. This surely creates many obstacles for the survival of the startup and will definitely decrease their revenue share in the market. Hence, getting patents, copyrights, trademarks and trade secrets for the startup immediately after innovating a product or creating a unique service should be done.
- Not Setting apart Personal and Business expenditure
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Many of the startups in order to pay less tax or lack capital, show less income by showing higher expenses by adding personal expenditure in it, not knowing the arising future legal complications. This mistake will definitely create consequences with bookkeeping, credibility of startup, unsound finances and many more. By choosing convenience and savings , startups have to face heavy legal complications in the long term and will not be able to create trustworthy business in the market. Hence, to get advantaged with taxes, accurate bookkeeping, legal protection, financial stability, creditable business, finance driven decisions and many more it is advisable to keep personal and business expenditures separate.
- Not Getting Business License
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A legal grant from authorities to establish a business, is known as Business License or Business permits. Many startups overlook the need to get business permits after registering their business. This leads startups to pay numerous penalties, increasing their unnecessary financial expenses. Getting business permits might be a complex procedure for founders, hence hiring a lawyer who has expertise in applying for business licenses and permits will make this process very easy. Hence, applying for business permits to avoid unnecessary legal repercussions should be considered.
- Not Obtaining Business Insurance
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In early times of growing startups, usually startups do not value their potential values until any business leader or investor recognizes it. Due to this, startups often keep delaying business insurance even due to its expensive cost, lack of awareness about its importance and focusing on product’s development and getting funded. But this will only increase the financial burden in the near future and may even cause heavy damage to startup assets. Hence, having insurance will provide financial security as well as will boost the business credibility in the market. Though paying periodic premiums might look like worthless investment, it will surely be delightful financial help in unexpected difficult situations of startups.
Conclusion
Startup is like an infant, entrepreneurs need to focus on it the whole day, in order to make it financially strong, effectively functionable and credible in the industry. It’s a very tiring process yet entrepreneurs choose to do so, because that’s what gives direction to their life. Avoiding legal mistakes startups often make will lead the startup to focus on growth and development of the business, and will also help in saving the funds for future investment in the startup. Thus, tick off the boxes of these legal documents first and then move further, on the path of successfully growing the startup.
