the 7 most common mistakes made by startups

Going into a new business is a big challenge. You have a detailed vision, you may have a business and financial plan in place. But few budding entrepreneurs think about the legal side of business, which is often crucial to success.

lidé pracující ve startupu, právní chyby ve startupu
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Are you starting to build a startup? You’re sure to be overwhelmed by all the information that’s being thrown at you. You’re focusing on your product and target audience, dealing with funding and marketing, finding investors and mentors for your startup, and it’s a lot to take in at once. Unfortunately, we don’t have any magic advice to relieve you of these worries, but instead we’ll add some well-intentioned legal advice on how to proceed so that you don’t make starting your business even more complicated. We base this mainly on the experience of our clients who may not have had similar information beforehand.

So which mistakes do you make as a startup founder?

1. Not having a good and unmistakable company name

Whether you are a sole tra der or a business corporation, the company name or brand under which you will offer and sell your products or services is always important. Whether it is memorable and trendy enough is left for others to judge. But don’t forget about the legal aspect. You could end up like our client, Mr. Mark, who spent many thousands on marketing consultations on the best name for his medical services company. After the final verdict was in, Mr. Marek outsourced the development of the company’s logo and visual identity and approached us for help with incorporation and registration. However, within a while we discovered that another company was already using an almost identical English name (with the difference of one letter -s at the end of the word, as an English plural).

Already when creating your name, check the names of your competitors and make sure that yours is truly unique and not interchangeable with the name of another business. It is a rule of law that the name must not only not be interchangeable with the name of another existing business and also not be misleading. This could mean, for example, that you have the word of a product in your name, but your company sells electronics, or the name includes a location but the company does not operate in any way. Even as part of the registration process, you may be asked to modify the name, for example by adding an additional word of at least two syllables. However, this is a significantly easier option than dealing with the company name in court after it has been established.

Are you starting a start-up?

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2. You have chosen the wrong form of company

Advising on the appropriate company form is not exactly easy. We often see advice for setting up a startup in a form that will be suitable not only initially, but also with regard to the intended growth of the company. This certainly has some merit, unless you have large capital and investors. However, starting a stock company if you are starting your project alone in your garage is definitely not the best idea. Remember that the more complex the form, the higher the cost of setting up and then also running it. A joint stock company is suitable for those who aim high and the prestige of the legal entity is also important. However, a multi-member management company, which is generally more complicated than other companies, is not a good place to start. On the other hand, a limited liability company or a public company is definitely a better option for the budding small businessman, especially in terms of cost.

Of course, there’s no shame in trying a sole proprietorship at the beginning, which allows you to save on taxes compared to a limited company. If your business goes well, you can add to the complexity by setting up a limited company or a public limited company.

Are you choosing between a trade certificate and an LLC? Read our article where we list the pros and cons of both options.

3. Loss of know-how

Startup is usually not just a normal start-up (such as setting up an e-shop or starting a massage service). Instead, startups are typically associated with innovative business concepts, new processes and advanced technologies. Have you come up with something that has the potential to change the world one day? Then don’t let it get stolen! Sign non-disclosure agreements ( NDAs ) with important suppliers, employees and customers. And don’t forget your partners. Otherwise, it can easily happen that your valuable, long and carefully built know-how ends up with your competitors or somewhere on the Internet, or your (former) business partner becomes your new competitor. You really don’t want that.

A non-disclosure agreement that is truly intended to provide effective protection must include penalties for breach of confidentiality, typically a contractual fine. Otherwise, it risks becoming a toothless piece of paper. The sanction should be proportionate to the nature of the confidential information and should not exclude any compensation for damages suffered by the protector as a result of the disclosure.

Tip: We have covered the terms of a non-disclosure agreement in detail in our article.

4. Intellectual property or industrial property without protection

The previous topic is loosely linked to the current one: trademarks, domains, patents, utility models, etc. are the essence of any business. Don’t start one without proper protection of your IP (intellectual property). There is nothing sadder than having a competitor register your trademark after your business has taken off. We know the story of an experienced lawyer who had his investment in a promising startup “stolen” in this way.

In protecting your IP, also keep in mind the potential expansion of your business abroad. If you plan to sell your goods or services in Slovakia, register everything you need here right away. Keep in mind that many IP rights can be registered at EU level and therefore with protection in all member states.

5. Poorly set terms and conditions and contracts

Terms and conditions are a key document in relation to your customers. And having them set up badly can backfire badly. Like, for example, Susan and Honza, who started an online sports and sports accessories business. However, their terms and conditions did not include proper information about complaints, for which they were fined by the Czech Trade Inspection Authority. When we consulted with them on their case and created new terms and conditions, we discovered that they had used a model terms and conditions from the internet. However, this was primarily aimed at a different type of business and was not applicable to their project. In fact, dissatisfied customers can be worse than fines.

Tip: We have covered e-shops and their nine most common mistakes in their terms and conditions in our article.

It does not pay to underestimate any legal documents. Just because you take notes at the time you sign a contract with your business partner and feel that you are both on the same page, doesn’t mean that a year from now you won’t be reading each other’s business contracts in a different way. Properly drafted and unchallenged contracts will bring order to your startup so you can focus on the project itself.

6. Unlawful hiring of employees

Many startups don’t know how to hire an employee properly or what it even entails when they want to fire them. In doing so, they often underestimate the complex legalities that taking care of employees entails. However, having the right employee relations in place is key to the success of the collaboration.

Poorly set up relationships end in leakage of know-how and experience, lawsuits and visits from the labour inspectorate. A separate issue is also the so widespread Schwarz system.

It is equally important to pay attention to social security and health insurance contributions for each employee, otherwise you run the risk of heavy penalties.

So pay attention to all documents that relate to HR. It will save you a lot of setbacks, disappointments and avoidable problems.

From our law practice: in our practice, we see start-up entrepreneurs who surround themselves with friends and acquaintances who work for them. Everything is “on good terms”, so to speak, or they formally cover themselves with an employment contract or a work contract randomly downloaded from the internet. Our client was also unpleasantly surprised in this way when he was sued by a former co-worker for invalidity of his termination. After careful examination of the original cooperation agreement under which the cooperation began, we discovered that it (quite erroneously) referred to the Civil Code’s provisions on guardianship of incapacitated persons instead of the intended work contract.

Tip: Watch the video on the topic: How to set the terms of cooperation with a freelancer.

7. Without consulting a lawyer

No, we don’t want to “warm the soup” and advertise our services. But we know from feedback from some of the clients mentioned above that it is advisable to consult a lawyer about some of the most important things in life. And starting a start-up is undoubtedly one of them.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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