Top 5 Legal Mistakes Made by Tech Founders
Starting a company requires that you focus on many different aspects of a business all at once. Making legal mistakes can be very costly in the future if not properly addressed early on. The following are the most common legal mistakes we see with start-up tech companies:
1. Failing to file an 83(b) election
If you are receiving equity that is subject to vesting, it is important that you file an 83(b) election with the IRS within 30 days of receiving the equity grant. The 83(b) election allows you to pay taxes on the entire equity grant (including the portion that has not vested) based on its present value and not when the equity vests. Theoretically, when the equity vests in the future, it will be much more valuable. You will pay less in taxes if you file the 83(b) election properly.
2. Failing to ensure IP is owned by the company
Many times founders do not realize that IP (whether it be created by developers, designers, artists, etc.) is not owned by the company unless there is an IP assignment agreement in place. By getting IP assignment agreements signed early on, you avoid the issue of cofounders and service providers having additional negotiating leverage when you ask them to assign IP to the company.
3. Not having the hard conversation with cofounders about roles and equity splits
Founders sometime think that they can put off discussing roles and equity splits. However, often times once the company is beginning to get traction, the founders are unable to come to an agreement, which causes problems for the company.
4. Failing to subject cofounders to vesting
Subjecting cofounders to vesting prevents a cofounder from walking away early-on with a portion of equity without having contributed enough to warrant that portion. This can demotivate other founders who want to continue to grown the business. Additionally, it can prevent the business from surviving by messing up the economics of the cap table.
5. Building the company around a name that infringes on someone else's IP
Too often founders do not take seriously enough the implications of trademark law. Make sure the name you are planing to market your company under does not infringe on someone else's trademark. If you do not take this initial step, you may end up sacrificing the goodwill you have built in your name and potentially facing a lawsuit from a third-party.
"A smart man makes a mistake, learns from it, and never makes that mistake again. But a wise man finds a smart man and learns from him how to avoid the mistake altogether."
If you are a tech founder and have questions about one or more of these issues, feel free to contact YourCounsel at firstname.lastname@example.org for a free consultation.