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Avoiding Legal Risks Early in the Business Formation Process

Starting a new business is a lot like building a house.

The foundation must be strong and well-constructed, or the house comes crashing down. Over the years, I’ve seen hundreds of technology startups and new businesses start off with a great idea and fail to turn that idea it into a great business. One of the most common reasons they fail is because steps are skipped or ignored during the business formation process.

There’s a myriad of things that need to be done to lay a firm groundwork for your business and avoid risks. While the many tasks at hand can seem daunting for entrepreneurs and new business owners, cutting corners during the business formation is a recipe for disaster. That’s why involving an experienced lawyer early on in the formation of your new business is the best way to move forward with less risk.

How An Attorney Helps During The Business Formation Stage

Protecting your intellectual property (“IP”). There are four types of IP that are valuable to a business: copyrights, trade secrets, patents and trademarks. If they are not protected in writing and via appropriate procedures, they can be lost and jeopardize the future of the business.

Creating a Limited Liability Entity. Starting any business comes with risks, but that doesn’t mean you have to put everything on the line. A business attorney can help you set up a legal entity that protects your personal assets (e.g. home, car, bank account, children’s’ college funds) from risk.

Aligning equity and rewards with contribution. Partial ownership given in exchange for work is the practice of equity compensation. This can be given in a variety of ways such as stock and stock options, but it’s important the agreement fairly aligns rewards with the amount of work put in.

Writing a business plan. Writing a good business plan can help you focus your ideas and strategies, attract potential investors, employees and partners, and identify potential weaknesses in the business.

Not giving up too much to initial outside investors. When looking for investors, you need to think about long-term growth. Giving up too much equity, and the freedom to operate, to outside investors can disincentivize those working within the company and constrain growth.

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