Legal Blunders Commonly Made by New Business Owners

Some of the trickiest and most foreign are legal because the legal world is unfamiliar and ever changing. What are some of the impactful legal mistakes founders make, what are the implications, and how can they avoid them or mitigate risk? For example, a founder might promise early employees equity in percentages without clarifying what vesting terms apply or what type of stock will be issued. Founders or early employees frequently claim that promises were made orally or by email. Founders or early employees frequently claim that promises were made orally or by email.

Early-stage founders face a multitude of challenges as they embark on their entrepreneurial journey. From securing funding to developing a successful product or service, every decision is critical to the success of their startup. However, one area that often proves to be particularly tricky and unfamiliar is the world of legalities.

As a partner at Grellas Shah, I have extensive experience in handling complex legal matters for both transactional and litigation cases. I have also worked extensively in the field of startup and venture law, advising on a wide range of corporate, transactional, and intellectual property issues. This has allowed me to develop deep expertise in navigating the ever-changing legal landscape and helping founders and investors mitigate risk.

One of the most common legal mistakes that early-stage founders make is failing to define their relationships properly. In the early stages, it is not uncommon for founders to discuss issues such as equity, compensation, and roles without documenting them properly. This can lead to serious implications down the line, so it is essential for founders to take steps to avoid or mitigate these risks.

  • The first and most crucial step is to use precise and unambiguous language when discussing any issues related to equity or compensation.
  • Clearly define the terms and conditions surrounding equity, including vesting terms and the type of stock that will be issued.
  • Avoid making promises or agreements without proper documentation and legal consultation.

Unfortunately, many founders are not well-versed in the legal intricacies of these matters and may unintentionally make vague or misleading statements. This can have serious consequences, as oral promises or informal emails can be interpreted as binding contracts, leaving a cloud of uncertainty over the company’s capitalization. This can be a costly and time-consuming issue to resolve and may even result in litigation.

As a result, it is not uncommon for early employees to claim that promises were made to them at the onset of the company’s formation. This is why it is crucial for founders to seek legal counsel early on and ensure that all relationships are properly documented and legally binding.

The recent lawsuit brought against Consensys and its founder/former CEO, Joseph Lubin, by early employees serves as a cautionary tale for all aspiring founders. In their claim, the employees alleged that Lubin had made specific and binding promises regarding equity and company structure, which were not adequately documented or legally binding.

“Fixing these [legal] problems dwarfs the cost of avoiding them in the first place.”

In the case of Consensys, the lack of proper documentation and legal consultation resulted in serious consequences as the company grew and became successful. The early employees, who had been promised equity in the company, were left with an uncertain future and had to resort to legal action to ensure their rights were protected.

In conclusion, it is vital for early-stage founders to be proactive in addressing legal matters and seeking proper legal counsel to avoid common mistakes. Taking the necessary steps to define relationships and document agreements can save founders and their companies from costly legal battles in the future.

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Kira Kim

Kira Kim is a science journalist with a background in biology and a passion for environmental issues. She is known for her clear and concise writing, as well as her ability to bring complex scientific concepts to life for a general audience.

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