Don’t Ruin Your Startup’s Success with Legal Troubles

An individual in a suit writes on a legal document.

We live in a litigious environment. Companies and people alike are willing to enter legal battles over things large and small. For startups with limited resources, this can cause a lot of problems.

Concurrently, if you run a startup company, you know that speed is key. You have to hustle and move quickly if you want to succeed.

These universal truths combine to create situations where startups are caught with their figurative pants down — i.e., many companies overexpose themselves while they focus on growth. Unfortunately, the results can be catastrophic.

It’s important, then, that you legally protect your business from day one. Take a leaf out of Nassim Taleb’s book and assume that the worst events may actually happen. Always hope for the best, but make sure you prepare for the worst.

To help, we’ve outlined key tips to help safeguard your organization from legal strife.

1. Partner with an Outsourced Lawyer

Budding startups can’t afford in-house legal counsel. To be honest, your growing business might not even need a lawyer on its payroll. However, this doesn’t mean that you should launch your company without legal help.

When you first incorporate your business, work with a lawyer to help you get set up properly. This starts the legal relationship with someone you trust. Then, if and when you need to engage a lawyer in the future, you know exactly who to call.

Already incorporated without legal help? No problem! Start vetting potential lawyers now. Build a trusting relationship and find someone you can work with in the future. Never go shopping when you’re hungry, right?

2. Operate Under Contractual Agreements

Handshake agreements always seem like a good idea at the time. And many times they work out great. But…sometimes they don’t.

It could be an agreement with a customer, supplier, vendor, or even an employee. When you’re growing a business, any chance to bolster your team, increase sales, or add additional value to your existing customers is an exciting prospect. So exciting, in fact, that many business owners assume that a backslap and a handshake is all that’s needed.

Sadly, this isn’t the case. You need to protect your organization with contractual agreements. If you don’t have an agreed contract, customers might stiff you, and vendors may overcharge you.

Even worse, some of your loyal employees might take legal action against you or leave to work for a competitor, thus harming your business.

To protect yourself, draw up a contract for every agreement. Make it enforceable in the terms and conditions. Keep countersigned documents on file where they can be easily accessed.

3. Purchase Insurance Policies

It’s probably safe to assume that you have personal health insurance. If you own a home, you may also have disaster insurance. Got in a car accident? Good thing you have vehicle insurance!

Insurance policies protect you from having to shell out thousands of dollars when things go wrong. Why, then, would you not protect your business in the same way?

Workplace injuries, general liabilities, and angry vendors are all causes of legal trouble. However, you can take out specific insurance policies that reduce the number of resources you’ll have to allocate to fight court battles and/or pay settlements.

4. Establish a Buy-Sell Agreement

Most startup companies launch with more than one founder. In fact, it’s common to have up to three co-founders who start the business together. Did you start your business with anyone? Are you operating under a partnership agreement, or another handshake such as the agreements we touched on above?

Even if you’re friends with your co-founders, there may come a time when viewpoints differ and someone wants to leave the organization. Or maybe a co-founder friend of yours falls under financial hardships and needs to take money off the table.

What do you do?

Well, if you don’t have a buy-sell agreement in place, the legal situation can become messy. Basically, a buy-sell agreement is a legally enforceable document that outlines what happens if and when a business partner leaves the company.

Entering into a buy-sell agreement ensures that everyone’s on the same page when someone inevitably leaves. You essentially avoid any awkward legal trouble before it ever happens.

5. Include Legal Disclaimers

Many legal battles arise from clients or customers suing a company. It’s easier to litigate against someone you don’t know, and if a customer feels wronged, there’s not a lot stopping them from attacking your business. It’s a business entity to them and they often don’t think about the people within the organization it may harm.

To prevent this from happening, ensure that you have proper legal disclaimers on your product, it’s packaging and included in your website. This protects your business by letting your customer know exactly what they’re getting themselves into when they purchase your product or service.

Then, if a customer ends up suing anyway, they won’t have legitimate grounds.

6. Work with Niche-Specific Lawyers

Ok, ok, this seems to contradict point number one, but we promise it doesn’t. Hear us out.

Working with an outsourced lawyer on general needs from day one is important. However, there will come a time when you face legal issues that require a specific skill set. When this happens, make sure that you engage a lawyer that specializes in that specific area.

If you’re dealing with employment issues, hire a lawyer who has experience. The same goes for patents and any number of business initiatives. Having a relationship with a general lawyer is great, but it might cost you more money in the long run if you use him or her for every single type of legal process.

7. Allocate a Legal Budget

Remember to prepare for the worst. Legal troubles may never come to pass. Chances are, however, that your business will incur legal expenses in some form or another.

Therefore, budget in some level of monthly or annual legal expenses. Then, if you need to draw up an employment agreement or go toe-to-toe with a patent troll, you’re already prepared.

Note: My team and I aren’t lawyers. While the above advice is sound, always speak with a legal professional before making decisions on behalf of your company

See…we use disclaimers too!



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Frank Mastronuzzi

Frank Mastronuzzi

Founding Partner @punchfinancial, VP Business Development @GreenoughGroup, CFO, MBA, SF-Based, consummate optimist, proud zio, proud daddy of Luca, the Wheaten