Published date: October 28, 2022. 16:36
When starting an IT startup, there are a variety of legal risks that are often overlooked. Here are 20 of the most common legal risks and how to avoid them:
1. Failing to Properly Form the Company
Many startups are formed as LLCs or corporations, but fail to properly execute the formation documents or follow the required corporate formalities. This can lead to personal liability for the founders, issues with raising capital, and problems down the road if the company is sold or sued.
2. Failing to Protect Intellectual Property
IT startups often have valuable intellectual property, including software code, algorithms, and user interface designs. This intellectual property must be properly protected with copyrights, patents, and trademarks. Otherwise, it could be copied or reverse engineered by competitors.
3. Not Complying with Employment Laws
Startups often overlook employment laws, such as those governing payroll, benefits, and employee classification. This can lead to costly penalties and lawsuits down the road.
4. Not Having Adequate Contracts in Place
Many startups operate without adequate contracts in place, such as client contracts, vendor contracts, and NDAs. This can lead to problems with payment, delivery of services, and confidential information leakage.
5. Not Complying with Regulatory Requirements
IT startups are often subject to a variety of regulatory requirements, such as those related to privacy, data security, and marketing. Failure to comply with these requirements can lead to hefty fines and other penalties.
6. Failing to Properly Document Equity Grants
Equity grants are often made to founders, employees, and investors in IT startups. These grants must be properly documented in order to avoid problems with tax consequences, vesting, and dilution.
7. Not Complying with Export Control Laws
Many IT startups are engaged in international commerce, which can subject them to export control laws. These laws govern the export of certain technologies and can lead to hefty fines for non-compliance.
8. Not Having Adequate Insurance Coverage
IT startups should carry adequate insurance coverage for their business activities. This includes property and casualty insurance, as well as professional liability insurance. Otherwise, the startup could be exposed to significant financial losses in the event of a lawsuit or natural disaster.
9. Not Complying with Anti-corruption Laws
Many IT startups do business in foreign countries, which can subject them to anti-corruption laws. These laws, such as the Foreign Corrupt Practices Act, prohibit the payment of bribes to foreign officials. Non-compliance can lead to hefty fines and jail time for the founders.
10. Not Properly Documenting the Terms of Investment
IT startups often take investment from angel investors and venture capitalists. These investments must be properly documented in order to avoid problems with dilution, control, and exit.
11. Not Complying with Immigration Laws
Many IT startups employ foreign workers on H-1B visas. These workers must be properly documented in order to avoid problems with immigration authorities.
12. Not Adequately Protecting Customer Data
IT startups often collect and store large amounts of customer data. This data must be properly secured in order to avoid data breaches and compliance problems.
13. Not Complying with Environmental Laws
IT startups are often subject to environmental laws, such as those related to hazardous materials and emissions. Failure to comply with these laws can lead to hefty fines and other penalties.
14. Not Having Adequate Corporate Governance in Place
IT startups should have adequate corporate governance in place to avoid problems with shareholders, directors, and officers. This includes having a well-documented shareholders’ agreement, bylaws, and board minutes.
15. Not Properly Documenting Founder Agreements
Many IT startups are founded by multiple individuals. These founders should have a well-drafted founder agreement in place to avoid problems with ownership, control, and exit.
16. Failing to Comply with Data Privacy Laws
IT startups often collect and store large amounts of personal data. This data must be properly secured and comply with data privacy laws, such as the GDPR.
17. Not Adequately Protecting Trade Secrets
IT startups often have valuable trade secrets, such as source code, algorithms, and customer lists. This information must be properly protected with non-disclosure agreements and other measures.
18. Not Complying with Advertising Laws
IT startups often engage in online advertising. This activity must comply with laws governing false and deceptive advertising.
19. Not Complying with Consumer Protection Laws
IT startups often sell products or services to consumers. This activity must comply with consumer protection laws, such as those related to pricing, warranty, and return policies.
20. Not Having Adequate Contracts in Place with Third-Party Service Providers
Many IT startups use third-party service providers, such as cloud providers and payment processors. These contracts must be in place in order to avoid problems with service levels, security, and data privacy.