Starting a business is exciting—you’re building something from scratch, chasing a dream, and (hopefully) changing the world. But amidst the hustle of designing logos, pitching investors, and launching products, there’s one thing many startups overlook: legal stuff.
It’s not flashy. It’s not fun. But trust us—ignoring the legal side can lead to major headaches down the road. So, let’s break down the most common legal mistakes startups make, and more importantly, how to avoid them—without a law degree.
1. Not Incorporating Early Enough
The Mistake:
Many founders wait too long to incorporate their startup. They operate as a “partnership” or sole proprietorship while trying to validate the idea or get traction.
Why It’s a Problem:
Without formal incorporation:
- Founders are personally liable for debts and lawsuits.
- There’s no official structure for equity ownership.
- It’s harder to attract investors, who usually require a formal business entity.
Real-Life Example:
Imagine two friends, Alex and Sam, build an app together. They don’t incorporate, but the app starts making money. Suddenly, Alex wants a bigger cut, or worse—one of them leaves. Without clear ownership or legal structure, things can get messy fast.
How to Avoid It:
Incorporate early. For most startups, forming a Delaware C-Corp is the gold standard (especially if you plan to raise VC funding). It gives your business legal status, limits personal liability, and sets a clear foundation for equity and governance.
2. Skipping Founders’ Agreements
The Mistake:
“We’re best friends—we don’t need a contract.”
Famous last words.
Why It’s a Problem:
Without a founders’ agreement, there’s no clarity on:
- Who owns how much.
- What happens if someone leaves.
- Who’s responsible for what.
Startups often fall apart not because of bad ideas, but because of unclear expectations and disputes between founders.
Illustration:
Think of it like a band. If one member writes all the songs and another does the booking, shouldn’t they have a say in how the earnings are split? A startup is no different.
How to Avoid It:
Draft a Founders’ Agreement early. It should include:
- Equity split.
- Roles and responsibilities.
- Vesting schedule (we’ll explain that next).
- Exit scenarios.
Yes, it’s an awkward conversation. But having it now prevents big problems later.
3. Not Using a Vesting Schedule
The Mistake:
Giving founders or early team members all their shares upfront (called “fully vested”).
Why It’s a Problem:
Let’s say your co-founder gets 50% of the company but leaves after 6 months. They walk away with half your company—even though you’re the one sticking around. Ouch.
How to Avoid It:
Use a vesting schedule—a way to earn ownership over time.
A common vesting setup is 4 years with a 1-year cliff, which means:
- No shares vest until after 1 year.
- After that, shares vest monthly over the next 3 years.
This ensures that people only earn equity if they stay and contribute.
4. Ignoring Intellectual Property (IP) Issues
The Mistake:
Not securing rights to your own product or name. Or worse, using someone else’s IP without realizing it.
Why It’s a Problem:
- Your developer could leave and claim they own part of the code.
- You might get a cease-and-desist for using someone else’s logo or name.
- Investors will run away if your IP is a legal time bomb.
How to Avoid It:
- Make sure everyone (employees, freelancers, contractors) signs an IP Assignment Agreement. This means all work they do for your startup belongs to the company.
- Do a trademark search before naming your startup. You don’t want to find out your name is already taken after you’ve printed 5,000 t-shirts.
5. Not Following Employment Laws
The Mistake:
Treating employees like contractors, or forgetting to document employment terms.
Why It’s a Problem: Misclassifying workers can lead to tax penalties, lawsuits, and regulatory issues. Plus, not having employment contracts makes things vague and risky.
How to Avoid It:
- Know the difference between employees and independent contractors.
- Use proper employment agreements that outline roles, compensation, confidentiality, and termination terms.
- Follow local labor laws around minimum wage, benefits, and working hours—even if you’re a scrappy startup.
6. No Terms of Service or Privacy Policy
The Mistake:
Launching a website or app without a Terms of Service (ToS) or Privacy Policy.
Why It’s a Problem: These documents:
- Protect you from legal liability.
- Explain how you collect and use data (which is a big deal with GDPR, CCPA, etc.).
- Set rules for how users interact with your platform.
How to Avoid It: Use customizable legal templates from trusted sources like Termly, Iubenda, or Clerky. Or hire a lawyer to draft policies that reflect your specific business.
Even if you’re not handling sensitive data today, plan like you will be tomorrow.
7. Failing to Protect the Cap Table
The Mistake:
Not tracking equity properly—or worse, handing it out too loosely.
Why It’s a Problem:
- You could end up with too many people on your cap table (cap = capitalization).
- If records are messy, it’s hard to raise money.
- Dilution gets out of hand quickly if you’re not careful.
Illustration: It’s like handing out slices of a pie before the oven is even on. You might find yourself with crumbs when it’s finally baked.
How to Avoid It:
- Use cap table management tools like Carta or Pulley.
- Be thoughtful about who gets equity and how much.
- Don’t promise shares verbally—put everything in writing.
8. Not Getting Legal Help Early
The Mistake:
Trying to DIY everything to save money.
Why It’s a Problem: Yes, lawyers are expensive. But legal mistakes are way more expensive in the long run.
How to Avoid It:
- Budget for at least a few hours of legal advice early on.
- Consider working with a startup-focused law firm that offers fixed-fee packages.
- Use vetted legal templates—but know when to get a pro involved.
Final Thoughts: Legal Doesn’t Have to Be Scary
Think of legal planning like building a strong foundation. Without it, your startup might look great for a while—but cracks will eventually show.
The good news? You don’t need to be a legal expert. You just need to know what to watch out for, ask the right questions, and get help when it matters.
By avoiding these common pitfalls, you’re not just protecting your company—you’re setting it up to grow, scale, and thrive.
TL;DR – Legal Tips for Startups:
✅ Incorporate early
✅ Create a founders’ agreement
✅ Use vesting schedules
✅ Secure IP rights
✅ Follow employment laws
✅ Add ToS and privacy policies
✅ Track your cap table
✅ Get legal help when needed
Got questions about legal stuff for your startup? Drop them in the comments below or reach out—we’re here to make the business side of your dream a little less scary.
Photo by Sora Shimazaki: https://www.pexels.com/photo/close-up-photo-of-wooden-gavel-5668473/