We just stumbled upon an article from Harvard Business School from 2003 which lists common legal mistakes of entrepreneurs make. Legel issues are always difficult to grasp at first, but once understood things are actually quite straightforward with only small issues. There are certain terminologies which might be specific to legal documents, but once you read a certian amount of documents, you will have no problems at all reading them or actually also reproducing them.

Mistake #10: Failure to incorporate a legal entity early enough
They mention this because oftentimes team structure change in the early stages of a business and if you do not have a legal structure clarifying the share distribution among the founders. Also should all founders assign to the new company all their inventions and work related to the company’s proposed business.


Mistake #9: Issuing founder shares without vesting
To vest shares protects the core team of a business idea because only if they remain with the team will their shares vest. Else, they will be retrieved and handed over to someone else who is productive for the business.


Mistake #8: Hiring a lawyer not experienced in dealing with entrepreneurs and venture capitalists
Lawyers who do not have such experience will most likely put their effort into the wrong things. This is not only time-consuming and costly but might actually also lead to a more important issue being left out.


Mistake #7: Failing to make a timely Section 83 (b) election
This is a specific issue for the US only, but similar situations are found elsewhere which is why we mention it. An 83(b) election allows the tax calculation to be made based on the value at the time the shares were issued which is most likely way less than at a later timepoint.


Mistake #6: Negotiating venture capital financing based solely on the valuation
The valuation is not everything that counts. There are other issues that need to be checked: 1) What is the reputation of the investor? 2) Do they stand by the entrepreneur if he or she stumbles? 3) What is their network like? 4) A no-name firm offering the highest valuation is not necessarily the best choice.


Mistake #5: Waiting to consider international intellectual property protection
There are a lot of country-specifics when it comes to IP. The entrepreneur must take smart decisions when it comes to brand protection in markets of interest at the early stage.


Mistake #4: Disclosing inventions without a nondisclosure agreement, or before the patent application is filed
This is of course a tricky issue because for example VCs hardly ever sign NDAs. But for sure everyone else should be signing an NDA.


Mistake #3: Starting a business while employed by a potential competitor, or hiring employees without first checking their agreements with the current employer and their knowledge of trade secrets
Recruiting is a very time-consuming activity. Going through the process and then hiring someone who is or was involved with some direct competitor at that time could result in problematic lawsuits. Even though there are national differences, there are certainly some issues related to this in each country. Even after leaving a company, one still cannot use or disclose the company’s trade secrets.


Mistake #2: Promising more in the business plan than can be delivered and failing to comply with state and federal securities laws
If you promise something while knowing you cannot perform that promise, that is considered fraud. A business plan has the sole purpose to make an honest appraisal of what is doable and what you plan to do in the near future.


Mistake #1: Thinking any legal problems can be solved later
Thinking that everything can be solved later once funding is available is a shortsighted logic.


Read the original article here.