5 Biggest Legal Mistakes That Startups Make Part 3 | Summary and Q&A

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January 30, 2014
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This Week in Startups
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5 Biggest Legal Mistakes That Startups Make Part 3

TL;DR

Learn from expert Scott Edward Walker about the common legal mistakes startups make, including choosing the wrong entity, not securing IP ownership, neglecting vesting schedules, failing to comply with securities laws, and not properly vetting investors.

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Key Insights

  • 😄 Startups should form as corporations in Delaware to align with investor expectations and ease future equity issuances.
  • 🎮 Securing intellectual property ownership is crucial to avoid legal disputes and maintain control over the startup's assets.
  • 🔬 Implementing vesting schedules ensures that equity is earned over time and protects against co-founders leaving without contributing to the startup's success.
  • 🤨 Startups must comply with securities laws and ensure they are only raising funds from accredited investors to avoid legal complications.
  • 🚂 Vetting investors and conducting due diligence helps startups find suitable partners who align with their goals and values.
  • 🪜 Crowdfunding regulations, although intended to democratize startup funding, have added complexity and challenges for entrepreneurs.

Transcript

name of this Workshop is the five biggest legal mistakes that startups make my name is Scott Edward Walker we're being filmed today so I'll wave to the camera here uh I didn't expect that so um I've done a couple of these workshops before and what I was going to do is come up with five new new mistakes but last night I kind of sat down I get calls ... Read More

Questions & Answers

Q: Should startups choose to be LLCs or corporations?

Startups should choose to form as corporations in Delaware, as this is where investors and the industry expect startups to be incorporated. LLCs are more suitable for hedge funds and real estate ventures.

Q: What are some issues with LLCs for startups?

LLCs have different tax laws and structures, which can complicate processes like issuing stock options. Additionally, venture capitalists typically do not invest in pass-through entities like LLCs.

Q: How can startups fix the mistake of choosing the wrong entity?

Depending on when the mistake is discovered, startups can either dissolve the LLC and form a new corporation, or convert the LLC into a corporation. The process can vary based on the state regulations.

Q: Why is it important to secure intellectual property ownership?

Investors and acquirers conduct due diligence on IP ownership, so having proper agreements and assignments in place ensures that the startup has ownership of its IP. Failure to do so can lead to legal issues and disputes.

Q: How can startups avoid legal issues with investors?

Startups should properly vet investors and do their due diligence before accepting funding. It is crucial to understand the investor's background, track record, and reputation to ensure a good fit for the startup.

Summary & Key Takeaways

  • The speaker, Scott Edward Walker, is a corporate lawyer specializing in startups and entrepreneurs.

  • He shares the five most common legal mistakes he sees startups make in his practice.

  • These mistakes include choosing the wrong entity, not securing intellectual property ownership, neglecting vesting schedules, failing to comply with securities laws, and not properly vetting investors.

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