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Why startups get sued and, what your startup can do to avoid it!

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Many cash-poor businesses cut corners where they really can’t afford to, legal affairs.

Anna Pino, CEO of virtual accelerator Lighthouse Business Innovation Centre, says they see many instances where start-ups have tried to cut costs by copying things like privacy policies and terms and conditions off the Internet, in the process putting their businesses at risk.

She believes that while copying documents off the Internet is very risky, many lawyers would also agree that it’s not always necessary for start-ups to come in and see them.

This is supported by Scott Chamberlain, CEO of Chamberlains Law Firm, who says now start-ups have more affordable options available to them before they start incurring the hourly fees most people associate with a traditional law firm.

“One of the options available to start-ups is to use online legal documents,” says Chamberlain.

“While there are many online publishers providing “dead” templates that accept no responsibility, start-ups should insist on “live” online documents accompanied by a statement of legal advice,” he cautions.

Chamberlain has five ‘lawsuit repellent’ tips to ensure your business has the ‘minimum viable legal protection’.

  1. 1.       Shareholders Agreement – Ensure Internal Relationships are documented and solid

Founders should agree how the company will operate. This will include who will own it and control it, what will be contributed to its success, and the circumstances in which people can be forced to leave. Without this agreement, it can be impossible to be rid of under-performers and you may find yourself in business with someone’s spouse or relatives if they die or, get divorced.

  1. 2.       Remember equity is dearer than money

Founders can be tempted to offer equity as a way of covering initial costs. This is almost always a mistake. Aside from the complex tax implications, any new shareholder should be bound by the shareholder’s agreement. It’s important to remember that having too many small shareholders can pollute your share register and, make it almost impossible for your company to restructure or attract new investment. 

  1. Non-Disclosure Agreement – Protect yourself from potential investors becoming competitors

You often have to tread a fine line between secrecy and collaboration when it comes to sharing information about your business. Non-Disclosure Agreements can protect the confidentiality of any information you might have to disclose when exploring the possibilities of a deal or project with another individual or business.

  1. Terms of Service – Protect yourself from deadbeat clients

In real life things go wrong, shipments are delayed, products break and we sometimes have deadbeat clients. Service Agreements and Terms of Sale documents manage the fallout when things don’t go according to plan. Most importantly, they confirm ownership of intellectual property, limit your liability so that you are not unexpectedly liable for massive damages because of a missed shipment date, or a small-but-crucial failure to perform.

  1. Employment & Service Contracts – Protect yourself from employees and contractors

Businesses can get themselves into trouble if they don’t understand the difference between an employee and contractor. Start-ups can crippled by unfair dismissal claims from disgruntled ex-employees they thought were contractors, or payment of unpaid worker’s compensation premiums. Worse, while employers own the IP their employees generate, contractors own the IP they generate. You may find that someone else owns crucial parts of your business IP.

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