Like any other business, entrepreneurs face numerous legal challenges when founding and building startups. These challenges often prevent founders from growing their company’s assets as much as they should. That’s why we’ve outlined here some of the most common legal issues startups need to be aware of.
Legal issues that startups simply can’t escape!
Just like traditional businesses, startup founders encounter various legal matters during incorporation and growth marketing strategy. Sometimes, they avoid turning to the authorities to resolve these issues. Other times, the problems arise from neglecting or violating certain laws themselves.
These legal entanglements can stem from many reasons. Since a significant percentage of startups face such challenges, Jahesh has prepared this article to guide you through them.
In fact, when startup founders launch their new ventures, they often make legal mistakes that can seriously damage them both financially and legally. In some cases, these issues become so overwhelming that they can destroy the company altogether. Moreover, legal troubles can undermine investor and shareholder confidence—one of the worst consequences a startup can face.
If you’re worried that your own startup might end up in the same situation, don’t ignore this article!
Legal problems can drag your startup to failure
Greg Myaskiewicz, an entrepreneur, startup founder, legal advisor, and angel investor, believes that most legal pitfalls affect startups during their early stages of growth. As you may recall, we’ve previously divided the growth of a startup into three main phases: early, mid, and late. According to Myaskiewicz, early-stage startups tend to repeat the same legal mistakes over and over again.
Sometimes these legal challenges grow so severe that they halt the company’s progress altogether. As he notes, the primary reason is that investors lose trust in the business.
In earlier articles, Jahesh discussed startup valuation in depth. One major factor investors consider in valuing your company is whether your startup has been involved in legal disputes. If it hasn’t, that becomes a strong advantage and increases your startup’s value—a key ingredient for growth and sustainability.
With that in mind, let’s review the most common legal mistakes startups make. Remember, these problems often arise from internal mismanagement, which is why Jahesh strongly recommends that every startup—especially early-stage ones—consult experienced legal advisors.
Mistake #1: Using informal or unwritten agreements
One of the most basic yet serious legal issues startups face is relying on informal or unwritten agreements between co-founders. To put it bluntly: a simple agreement that vaguely defines each founder’s shares is not enough.
Shareholders expect you to clearly outline all terms in a formal, written contract. This should include not just equity percentages but also detailed provisions about responsibilities, commitments, and decision-making processes. Without this, you risk serious disputes later.
Some key questions your agreement should cover include:
- How will equity be divided among founders?
- Does equity reflect each founder’s level of contribution over time?
- What roles and responsibilities does each founder have?
- What are each founder’s obligations, and what happens if they fail to meet them?
- Who makes key business decisions, and how? Majority vote, CEO authority, or otherwise?
- How much has each investor contributed initially, and how will profits be calculated?
- Under what circumstances would you consider selling the business?
Mistake #2: Incorporating as a C-Corp too soon
Another major pitfall is forming a C-Corporation right at the start. A C-Corp is a legal entity subject to corporate income tax, with shareholders taxed separately as well.
Many founders set up their companies this way without proper legal advice, unaware of the tax implications. What’s more, most investors avoid S-Corps or LLCs because of their complicated and costly tax structures. Choosing the wrong entity early on can create serious financial and legal headaches down the road.
Mistake #3: Choosing the wrong company name
It may sound simple, but picking an inappropriate business name has caused endless trouble for startups. To avoid legal disputes:
- Google it first – Search your desired name online to check for duplicates.
- Check trademarks – Verify with the trademark registration office whether the name (or a similar one) is already taken.
Skipping these steps could land you in expensive lawsuits.
Mistake #4: Ignoring taxes
One of the most common—and dangerous—legal oversights is failing to take taxes seriously. As a founder, you must ensure your company complies fully with tax regulations. Many startups, especially new ones, don’t fully understand their obligations. The solution: consult a qualified tax advisor or attorney early.
Mistake #5: Hiring ineffective legal advisors
Back to Myaskiewicz’s experience: when he started his own company, he spoke with hundreds of other founders who had horror stories about working with unqualified lawyers. For instance, one attorney told a founder it was fine to sign convertible notes with an 18% interest rate—an obviously terrible deal.
Startups operate in a unique space. You need legal advisors who truly understand the challenges of early-stage companies, not just general business law.
Mistake #6: Poorly drafted employment agreements
When hiring employees, you need properly designed contracts that address confidentiality, intellectual property, and non-compete clauses. Omitting these can expose your startup to major risks.
Always include provisions about company secrets and the consequences of violating them. Employment contracts aren’t just formalities—they’re essential safeguards for developing your business.
Final thought
Ignoring these legal issues can cost your startup dearly—even destroy what you’ve worked so hard to build. Paying attention to them from day one, with the help of skilled advisors, can protect your company, reassure investors, and pave the way for long-term success.