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Legal pitfalls entrepreneurs must avoid

September 18, 2012

These are the three main legal pitfalls that businesses should know, especially new and young entrepreneurs, to stay afloat in the market.


By Michael Teoh

In Malaysia and the Asia region, especially among developing countries, legal practices and consequences are not taken as highly by startups and new entrepreneurs, most of which claim their ignorance over the importance of at least knowing the legal pitfalls for running their business operations.

Many have caused them money and lawsuits in the future, hence we have taken our entrepreneurs a  step into the legal Know-Hows for entrepreneurs.

Trusting your co-founders too much! Failure to document a Founder agreement at the beginning.

Failure to see partners come in to sign proper agreements during the formation of the company can lead to such consequences. This is what we can call the “forgotten founder” problem. Early partners or co-founders often drop out of the picture early due to disagreements, and you forget about them, but they don’t forget about the verbal or email promises you made.

Such legal problems would arise when greed comes into the picture at a later stage. Later, when your startup is trying to close on a financing or funding deal, or even going public with sales of stocks to the public, that forgotten partner surfaces, demanding their original share.

Startups and entrepreneurs can avoid this problem by incorporating immediately after early discussions and deciding who would commit in being partners with you in written form, and issuing shares to the founders accordingly, with their participation stated out in black and white.

Not protecting your ideas! Disclosing inventions before the patent application is filed.

Entrepreneurs often put off the hassle and the cost of filing a patent until first funding. They tend to trust their friends, mentors and partners too often and run the risk of their ideas being copied. Then they realize that they have talked to many people without signing non-disclosure statements, precluding a patent, or someone else has now beat them to the filing docket.

There is no excuse for not filing at least a provisional patent early especially for early stage startups with an innovative idea. This will hold your place in the patent line for a year, and the costs and time for this filing are much less. Even trade secrets need to be documented, and reasonable steps taken to keep them secret. Business plans and other documents should always be labeled as confidential.

Leaving your employees! Founders ignore non-compete clauses from former employers.

If you can avoid competition at the start, why not? Should one of your employees, partners or staffs decide to leave the business in pursue of other opportunities, you must ensure that you get them to sign a no-compete clause for a few months. Unfortunately, such practices are only done by international companies, and one should wonder, why would they do so?

If your new business is even remotely similar to that of your current or former employer, think hard about any written or implied non-compete agreements you might have.

Ensure that when you start bringing new employees in or getting new partners, do the same for every business partner or employee you may hire.The best way to short-circuit this problem is to have a frank and open discussion with former employers, perhaps under the guise of asking them to invest in your venture. This would give a smooth way to end the relationship, and get some money, or get their lack of interest documented in a note back to them. If a lawsuit is inevitable, better sooner than later.

These are simple steps in which all entrepreneurs and startups should pay attention to. Let us not blame our ignorance of such rules to cause us losses in lawsuits or legal proceedings in the future.

These are the three main legal pitfalls that businesses should know, especially new and young entrepreneurs, to stay afloat in the market.

[This content is provided by FMT content partner Entrepreneurs.my, one of Asia’s leading entrepreneur resource and community.]


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