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Legal Challenges for Startups and How to Navigate Them

Written by:

Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.

Legal Challenges for Startups and How to Navigate Them

We’re about to venture into the somewhat choppy waters of legal challenges for startups. But don’t fret — we’ve got a survival guide filled with expert advice to help you navigate these turbulent tides. Ready to chart a course through legal loopholes and potential pitfalls? Let’s dive right in!

Navigating Legal Minefields

As a corporate lawyer by trade, I’ve been uniquely positioned as a startup founder to navigate the complex legal landscape that comes with being an entrepreneur. The specific legal issues that a founder faces will mostly be dependent on the type of business they are in, but there are a few items that are consistent across any and all businesses.

The first challenge is to limit the business liability by legally incorporating, either with an LLC or Corporation, to ensure that any losses incurred are kept solely within the business and liability does not expand to the founder’s personal assets (although this is an easy hurdle to overcome with any lawyer, it is the most important step).

The second challenge is intellectual property and ensuring that (1) your business name and idea are not infringing on another currently existing business and (2) protecting your business name and idea to ensure that other people aren’t able to copy or steal your idea.

Regarding item #1, this involves a broad Google search and USPTO search, which can be done by the founder, but should also employ a lawyer to make sure there aren’t any similar names of companies in the same industry (e.g., there can be an Apple candy store, even though Apple, the computer company, is already trademarked since it is in a separate industry).

For item #2, this means making sure your work is trademarked, copyrighted, patented, or otherwise protected, which will depend on what the business is (names and logos can be trademarked, original works of authorship can be copyrighted, and novel ideas can be patented).

Eli Bienstock, chief executive officer of Toast

Infringement of Intellectual Property

Startups face many of the same risks that larger companies do but without the same legal resources to resolve potential problems. One significant risk is the protection and infringement of intellectual property. Startups must make sure their new ideas are properly protected and also ensure that their work does not infringe on someone else’s patent or trademark. Intellectual property litigation can be costly, so an ounce of prevention beforehand can save a startup needless headaches.

Also, startups should also have their employees sign contracts in order to protect their private knowledge. A non-disclosure agreement can prevent an employee from leaving the company and taking proprietary knowledge to a rival.

Perhaps the most important advice is to retain an attorney when you need one. Do not enter into serious contract negotiations without the advice of legal counsel. Such legal advice can save you time and money and avoid costly legal problems in the future.

Robert Bird, professor of business law and ethics at the University of Connecticut (Equity Now Speaker Series)

Hiring Lawyers on Budget

It’s not unusual for startups to get into legal trouble early on since many small companies rarely have the resources to retain a full-time lawyer. Without legal guidance, regulatory and contract problems can come up quickly. Here are some of the best ways for startups to navigate legal trouble. 

One of the best ways to avoid legal trouble as a startup is to get guidance early. However, this can be hard for some startups to achieve since legal counsel is expensive. If you can, try to build connections with local lawyers who can help you when you’re starting out. Providing essential services, like technical support or cybersecurity protections are some ways startups can connect with lawyers more economically. 

It’s important for business owners to know where their limits are. Many owners have some skills they can leverage when dealing with contracts or negotiations. This means they don’t have to worry about legal guidance in those areas. However, when you don’t know what you’re doing, don’t try to go it alone. You can’t learn everything you need to know about the law from Google, and an incomplete understanding can land you in hot water. 

When in doubt, business owners should document everything. Having information in writing can protect you later on. This can include contracts, operating agreements, new employee hiring processes, and more. Documenting your processes can give you a place to start from when you go get adequate legal support — and can protect your business if trouble comes up.

J. Tucker Merrigan, managing partner at Sweeney Merrigan Law

Resolution of Disputes and Litigation

It is possible for disagreements and conflicts to emerge throughout the trajectory of a venture, notwithstanding the implementation of optimal strategies. Startups should possess the necessary readiness to efficiently address contractual disagreements, intellectual property disputes, as well as conflicts involving employees or partners. In contrast to conventional litigation, alternative dispute resolution mechanisms, such as mediation or the utilization of the DIFC or ADGM Small Claims Tribunals, may offer a more expeditious and economical resolution. By integrating appropriate and enforceable dispute resolution clauses into contracts and consulting legal counsel promptly, entrepreneurs can effectively reduce the financial impact of prospective legal expenses in the event of disputes or claims.

Vicky Cano, chef & recipe developer at Mealfan

Navigating Digital Legal Regulations

Startups face pressing legal challenges. Intellectual property protection through copyrights, trademarks, etc., is crucial, especially in digital spheres, to secure legal ownership of creations. Staying compliant amid evolving digital regulations is also a moving target, making expert legal counsel invaluable for guidance. Contracts require meticulous review to avoid unfavorable terms and obligations.

Overall, proactive IP securing, regulatory awareness, and sharp contract scrutiny help startups navigate legal complexities, enabling vigilant defense of ownership rights and interests when small and vulnerable. With digital rules and competitors multiplying, prioritizing legal health helps ensure the long-term viability and competitiveness of budding ventures.

Nathan Jacobs, senior researcher at The Money Mongers

Data Privacy Laws in the US

Most startups face data privacy and security legal issues. It happened in our case, too. It’s more complicated in the US due to the lack of specific laws. The US doesn’t have a federal law for data privacy and security. Nonetheless, many US states have strict laws to protect customers’ data. Some states in this category are California, Colorado, Virginia, Utah, and Connecticut.

To deal with this legal issue, we accomplished comprehensive research on the laws of all states. We also took the help of legal experts. We implemented robust data security protocols and data storage practices to secure our customers’ data.

Ray Pierce, founder & CEO of Zippy Cash For Cars

Partnering Without a Written Agreement

While it is true that running a business requires lots and lots of expertise, the fact still remains that without due diligence and following due process, there would always be an increased chance of legal challenges. One of the legal challenges that startups face is making the mistake of beginning a partnership without a written agreement of acceptable terms and conditions. However, this hurdle can be overcome by thoughtful planning.

An agreement should be reached in advance, such that it would delineate the fundamentals of acceptable conduct allowed by partners and shareholders. The agreement must also accommodate how decisions are to be made and how profit is to be distributed amongst the shareholders. It should also contain roles and responsibilities and terms for buyouts for partners considering to live the business.

The truth is business agreements should never be established merely on a handshake agreement, even when they are in the beginning stage. This is where most startups get it wrong, resulting in legal challenges in the future. However, by clearly stating all terms and conditions in a contract, it becomes easier to avoid confusion and disputes in the event of disagreements.

Tim Hastings, general manager of Top Rated Law

Beware Outdated Online Information

When it comes to intellectual property, startups need to be wary of outdated information online. For example, European Union unitary rights such as designs, trademarks, plant variety rights, and some certified protections do not cover UK businesses any longer. Startups may still need to protect their business using these rights but will also have to protect themselves in the UK separately.

Rick Smith, founder& managing director of Forbes Burton

Don’t Fight Trademark Challenges from Corporate Giants

I co-founded a company that had a trademark challenge from a very large Fortune 50 company. Because our product was very different from the large company’s, we fought the challenge. Our attorneys assured us that if we really wanted to go up against this huge company, we would eventually win.

Instead, after losing many tens of thousands of dollars, we realized that we didn’t have the cash to fight.

That trademark challenge wasn’t the only reason we shut our company down, but complying with the requirement to dump our inventory and manufacture additional inventory was one of the top 3 reasons contributing to our demise.

Startups should take trademark challenges from large corporations very, very seriously, no matter how frivolous they seem to be.

Deborah Hower-Perkins, founder & CEO of Broad of Directors

Lease Negotiation

For startups, negotiating a lease can be tricky. Most entrepreneurs are not skilled in contract verbiage or negotiations on a contract. Small, seemingly innocent words can cause havoc in a lease; words like and/or, can/may, could/should, and can mean the difference between your company’s success or failure. Hire a really good business contract attorney. They are worth every penny you spend. Trust me, from personal experience.

Elizabeth Schwartz, founder & CEO of Redemption Road Foods, Inc.

Compliance Costs

From my experience, I can say that one of the biggest legal challenges a startup can face is the burden of compliance costs. There is no doubt that startups generally operate on limited resources, especially in the case of finance. However, if a startup has to face the burden of complying with various regulations, then it will definitely be a challenge for a startup finance-wise. I can say that regulatory and legal compliance definitely can take a good amount from the finance budget of a startup. Due to this, startups have to show innovation and deal with other problems with few resources.

Maxine Fraivillig, operations and marketing manager and senior relationship manager at Malta Sotheby’s International Realty

Avoiding Trademark Misconceptions and Ownership Errors

Having pioneered the field of Branding Law and working primarily with startups/entrepreneurs for the past thirty years, here are three very common but easily avoidable mistakes: 

  • Using a brand name with the mistaken belief that filing as a corp or LLC with the Secretary of State confers trademark protection
  • Applying for a trademark and/or using a brand name without properly clearing it first with a thorough database search, including all possible variations, checking for similarities in sound, appearance, and meaning
  • Choosing a trademark that’s generic or descriptive rather than coined, arbitrary or even suggestive as generic marks are unregistrable and descriptive marks are considered ‘weak’ and difficult to enforce

BONUS: Mistakenly believing that hiring an independent contractor confers copyright ownership as a work made for hire. Instead, the contractor automatically owns the copyright unless otherwise assigned by written agreement.

William Scott Goldman, managing attorney & founder of Goldman Law Group

Early Stage Employment Strategy

One area that startups need to have covered before they hire even a single employee is the legal aspects of employment. They need to make sure that their employment and hiring policies comply with labor and nondiscrimination laws from day one. Most of this information is easy to look up online, but going over things with a legal expert at least once before hiring is a smart idea.

One way that a lot of entrepreneurs “get around” many of the legal issues with employees at the very beginning is to start by hiring freelancers or contractors instead of standard employees. This won’t be a long-term solution for most businesses, but it’s a good way to get the manpower you need to tackle other tasks — like setting up an HR department or researching labor law.

Ben Michael, attorney at Michael & Associates

From Visibility to Profitability

Some of the biggest challenges facing startups are (1) creating visibility for your venture within the confines of ethical and legal rules within your respective field and (2) negotiating the terms of the services/products you provide in a manner that creates sufficient profit to stay afloat. As a lawyer with several years of professional experience the above issues are an immediate and ongoing hurdle that requires finesse to overcome. Without the funds that existing entities, businesses, and ventures possess, finding cost-effective ways to create a name for yourself is challenging.

Cost-effective options such as social media have opened up opportunities to demonstrate both success and branding. Further, setting immediate and long-term goals in terms of capital, expense, and level of expansion can help new startups function in the long term. After all, attaining success is a marathon, not a sprint!

Gary Ter-Kazaryan, founding partner at Sentry Legal Group

State and Federal Law Compliance

One of the challenges that startups face here in the USA legally is compliance with federal and state regulations. Depending on the type of business, startups may have to comply with various laws and regulations at both the federal and state levels, such as labour and employment laws, consumer protection laws, environmental laws, tax laws, securities laws, etc.

Compliance with these regulations can be complex, costly, and time-consuming, as they may vary across different states and industries. One of the examples is the Internal Revenue Service where this government agency handles taxes and collects them from businesses and individuals. Failure to comply with these regulations can result in penalties, fines, lawsuits, or even criminal charges. Therefore, you should be aware of the legal requirements for your business and seek professional advice if needed.

Chetan Patil, owner of Suemybroker

Founder Agreements & Regulatory Compliance

One of the biggest hurdles is accurately and properly getting the founders to get the agreement between themselves in place. This is a vital part of being completely formed and ultimately attracting investors. If the founders of a company cannot come to an agreement between themselves, investors will (and I have seen them) question the founders’ ability to operate and grow the company.

Outside of formation, regulatory compliance is a major hurdle. Depending on the type of business, major regulatory issues may come up. A lot of times, founders think these can be easily resolved. However, the time for things such as a money transmitter license can take months, which could completely derail the launch of a company.

Eric Proos, private practice attorney & owner of EJP Law

Challenges for Car Industry Startups

One of the legal challenges that startups in the car buyers industry may face is compliance with consumer protection laws. These laws are designed to ensure that consumers are treated fairly and protected from fraudulent activities. For startups in the car buyers industry, there may be specific regulations related to the sale of used car parts that need to be adhered to. As a startup in the car buyers industry, it is important to thoroughly inspect and test the parts to ensure they are in good working condition and safe to use.

Failure to do so can lead to legal consequences if a customer is injured or property is damaged as a result of using faulty parts. Buyers may have certain expectations when purchasing used car parts, and startups must ensure that they fulfill these expectations and provide adequate support in case of any issues or defects.

Mike Falahee, owner of Marygrove Awnings

The Costly Gamble of Cutting Corners

Startup businesses often struggle with balancing what costs and corners to cut. This often falls to legal matters. Do you hire a lawyer to create your business entity and service contracts, or do you find a template on Google and hope it’s good enough? The same goes for trademark intellectual property decisions.

The problem with not getting proper guidance on legal matters is the ramifications could be huge. What happens if you spend a couple of years establishing a brand only to receive a cease and desist notice that your trademark infringes on a federal trademark? Not only do you have to completely change your branding, but you also may owe significant fees. It’s a hard balance because startup businesses do not have an endless amount of money, but I think the best decision a startup owner can make is to at least have an initial discussion with a business lawyer to evaluate the risks of cutting corners and costs.

Paul W. Simon, founding member of Simon | Paschal PLLC

Essential Agreement Templates

When bringing on a partner, you have to make sure that the share of the pie is divided equally to the work that is being performed or planned to be performed. We created an MOU before our signed Operating Agreement to ensure that everyone received their dues. I had a previous business partnership that went badly, and there were no documents signed and no agreements in place. I lost thousands of dollars and over 200 hours of work.

Every business owner should have the following 3 agreements on hand in a templated form:

  • NDAs —so that you can be protected if you are sharing private information
  • MOUs — so that everyone can be on the same page about the nature of the partnership and work
  • Service agreements — if you are doing business with other businesses or have a service that you are offering others before you begin the work, make sure terms are outlined, such as timelines, payment schedule, deliverables, and the scope of work

Phoenix Jackson, owner of Phoenix Affect (TED Talk)

Keeping up with AI & Cybersecurity Regulations

Keeping up with technological updates as a startup is one of the hardest ones. I’m talking about AI regulations, as the recent New York Times lawsuit could expedite the introduction of laws against artificial intelligence. Startups face challenges around cybersecurity as well.

I own a real estate marketing agency that we launched during COVID-19 with my brother, and we find it challenging to reach out to a specific demographic without violating their data privacy. We work with real estate developers who are targeting HNWI prospects. It has been challenging to work around this but we’ve got a few solutions on the way from the legal team.

Colin Hannan, principal of Proven Partners

Implement NDAs from the Start

Many startups run into issues by not implementing NDAs from the very start. Some leaders bring those first employees on and give them full access to their intellectual property without making them sign a proper NDA, while others drop the ball when meeting with potential investors. It’s understandably uncomfortable to ask an investor you’re trying to impress to sign an NDA, especially if you’re worried it could risk your budding relationship. Still, any smart investor will see the steps you take to protect your business as a good thing — especially if they plan to go into business with you!

James DeLapa, director of marketing at Wrike

HR Compliance

HR compliance is a complex beast, and startups without enough cash, time, or expertise to create and maintain proper HR standards can face a significant risk of financial and legal loss later. Many startups can’t afford to hire a single HR expert, let alone build an expert team to ensure every document is signed and every protocol is in full compliance. Misclassified workers, improper training, mismanaged tax payments, and unfair compensation or discriminatory work policies cannot go under your radar, especially in those early days when your success is so fragile. 

If you can afford to hire an in-house HR expert, outsource to a reputable agency that knows their stuff. The costs may be big to outsource HR, but they far outweigh the potentially catastrophic losses you otherwise face.

Robert Kaskel, chief people officer at Checkr


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Legal Challenges for Startups and How to Navigate Them