How To Avoid The Common Mistakes That Startup Founders Make
By Jon Sabol, Managing Director & Regulatory Counsel at Pericles
It seems like almost every week, the Pericles team helps resolve thorny issues for startups and their founders that could or should have been avoided if they had been considered earlier. I’ve highlighted a few of the most common (and avoidable) foundational issues that we often deal with in hopes that it helps a few founders starting out.
And to dive deeper into these issues and hear about a whole lot more, join us in person on Thursday February 9 at P&T Knitwear on Manhattan’s Lower East Side for Disrupting Delaware: Smarter Strategies for Starting Your Startup where Bradley Tusk hosts a panel of legal and startup experts. The event is free and open to the public. Refreshments will be served.
Now for four common mistakes that startup founders make — and how to avoid them:
Choosing to incorporate in home state — or Delaware — without considering more advantageous options
For many founders, where they incorporate is an afterthought, and many startups incorporate in their local jurisdiction, which may be the right choice for many small businesses. While founders should be focused on building the right product and getting it to market, where you incorporate can have a real impact on a company for years to come. Performing some research into the advantages of various jurisdictions is often worth the time. For many businesses, picking jurisdiction like Delaware, which is known to have a number of legal, regulatory and tax advantages, could be the right choice. For others, it may make sense to register off-shore to take advantage of favorable tax treatment or other regulatory considerations. For Web3 and other digitally native companies, especially those with an interest in unique structures like forming as a Decentralized Autonomous Organization (DAO), finding the right jurisdiction may be one of the most important decisions the organizers make. A number of jurisdictions, including Wyoming, Vermont, and Tennessee, along with new entrants like the Catawba Digital Economic Zone, a Pericles client and special economic zone, have enacted laws and regulations tailored for recognizing DAOs and other innovative ways of organizing that could be the best fit.
Avoiding the conversation around founder disputes and equity
If you’ve seen the Social Network or are otherwise familiar with the drama between Mark Zuckerberg and the Winklevoss twins, you know the potential high-stakes fallout that can occur when there’s a dispute over a company’s early success. Many founders we work with are young and start their companies with friends or as a side-hustle and sometimes overlook or fail to plan for what happens when a dispute occurs between founders or early employees. These disputes can take different forms -- from a team member moving on from the project but trying to retain their equity or a power struggle between founders to take control of a company. Regardless of how they take shape, fights can sink a startup or otherwise have a significant negative impact on a company by turning investors off or sapping precious time and resources. While it may be difficult or uncomfortable to anticipate or plan for these scenarios, it’s important for founders to think through the possibility of such a dispute so they can either be worked through amicably or have structures in place where these types of disputes don’t take down the company.
Neglecting IP from the start
Even if you don’t have to patent your idea (and especially if you do), intellectual property issues impact every start-up. Almost every start-up should protect the rights to its name and/or logo through a trademark filing. Although many founders are reluctant to engage lawyers early on, hiring a good IP attorney to file trademark applications and potentially other IP protections is typically affordable and worth every penny. We’ve seen more than one startup that has had to change its name or logo six months or even a year after starting because they failed to perform this needed work at the outset. Addressing these issues by hiring an IP attorney early on and performing comprehensive searches to make sure the name and logo you want are unlikely to start a dispute and then filing the appropriate application are critical ways to avoid brand headaches down the road.
Forgetting about anti-money laundering requirements
If you’re selling goods or services over the internet and especially if your company handles customer funds, you’ll want to consider whether you have any obligations under the laws intended to prevent money laundering and terrorist or other illicit financing, along with the laws that enforce financial and other types of sanctions. If your company operates in the financial services or gaming sectors, these considerations can turn into some serious compliance obligations. Every founder who thinks that it’s possible that they have some obligations under these regimes should put in the work early to get comfortable that they either don’t have obligations or finding ways to comply with the law with the least amount of friction possible. Many startups wrongly assume these rules don’t apply to them and it can be difficult to remediate these issues once bank accounts are formed or companies are fully operational. For better or worse, these rules, which can be complicated and opaque, apply to more companies than you would think and it’s critical to put safeguards and processes in place to address these very important concerns.