Launching a Startup? Avoid These 3 Common Legal Mistakes

Startup Legal Mistakes
Listen

More than 25 million Americans started or ran new businesses in 2016. Among those millions: plenty of first-time founders navigating a brand-new startup landscape.

In the excitement of finally launching a venture, legal questions and concerns may be at the back of a founder’s mind. But, they shouldn’t be, says Jack Steele, a lawyer at Pierce Atwood LLP who frequently works with new businesses. To avoid battles down the road—and make seeking funding, or eventually selling the company easier—legal issues should be top of mind from the start.

In a session with student founders through Babson College’s Arthur M. Blank Center for Entrepreneurship, Steele shared a list of some of the most common legal mistakes—and how to avoid them. He was joined by Joanna Geisinger, founder and CEO of TORq Interface, who shared her experience navigating legal waters with her ventures.

While the advice outlined below is a good jumping off point, don’t overlook the importance of seeking counsel from an experienced startup law expert early in the process.

Failing to Iron Out Equity Agreements

So, you founded a business with your friends. Great! Before you rush to get it up and running, ask yourself: How will you divide equity? What happens if one of your co-founders leaves after one year?

These are important questions to iron out at the beginning; when they’re left unanswered, startups find themselves in trouble. “If there are four co-founders, there is a very small chance all of them will be together after two or three years,” said Steele. “This is an issue with any new startup, but we see it a lot with students.”

Have the equity conversation from the start to determine how it will be divided among the founding team. These conversations might be awkward—especially if you ultimately don’t divide equity equally—but they’re important. And, the conversation shouldn’t end there.

“Let’s say four co-founders agree on 25 percent equity, then one leaves,” advised Steele. “Some ask how they can take that equity back. Basically, they can’t, unless they did something about it at the beginning.”

Here’s where vesting comes in. Under a standard, four-year vesting schedule with a one-year cliff, founders vest their shares during the four-year period. The cliff means founders won’t be vested any equity until they’ve been at the company for one year.

Though she has no co-founders, Geisinger utilizes the four-year vesting schedule for her company, and maintains the majority share in TORq. “I’m grateful that I have control over the company, and the ability to make decisions.”

Sacrificing Decision-Making Power in Exchange Capital

Speaking of decisions, here’s some food for thought: Does your capital come with strings?

It’s common for new ventures to seek outside funding, but not all money is created equal. Steele advises founders to consider the source, and think through the implications associated with where the money is coming from.

For example: Taking money from a strategic business partner may seem like a wise choice, but there may be expectations associated with that capital. “We’ve seen situations where the string is exclusivity, or a right of first refusal on a sale,” said Steele. “This can make it difficult to move expand your market, or eventually sell the company.”

Geisinger recommends making relationships with these strategic partners early on, but waiting until your venture is more established to seek their funding—a policy she has maintained when leading her business. “At the end of the day, I want to have a say in the direction my company goes,” she said. “Until you’re someone big, too, keep the big names out of your company.”

Crowdfunding might not be the way to go, either. Startups accepting crowdfunding might find it difficult to attract venture capital funding later on. Plus, keeping track of (and keeping happy) the high number of investors who typically participate in crowdfunded campaigns is a lot for a new business to manage.

Not Protecting Intellectual Property

Intellectual property is the ownership of ideas. Per Entrepreneur, “Unlike tangible assets to your business such as computers or your office, intellectual property is a collection of ideas and concepts.”

Protecting your IP can make your business more attractive to future investors, and prevent competitors from stealing your idea. Your business is built on your idea—but do you own it? When working with a tech firm while simultaneously developing TORq Interface, Geisinger made sure her contract explicitly stated she owned her IP.

The waters get muddy if you’ve worked on the idea while employed elsewhere. If you’ve signed a Confidentiality and Invention Assignment Agreement (CIAA), any work you’ve done or ideas you’ve developed as an employee related to the business of your employer are fully owned by your employer. The takeaway: don’t develop your idea on company time.

Consider having your employees sign CIAAs, too, so they don’t own the ideas they develop while under your employment. Consultants and contractors should sign IP agreements, too. And, don’t overlook filing for IP protection—a patent, copyright, trademark, etc.

 

Posted in Insights

More from Insights »

Latest Stories

a row of electricity meters
The Price of Power: What’s Driving Rising Electricity Rates? Electricity rates have been steadily increasing. Ryan Davies, a Babson professor of finance, unpacks the many reasons for that, including the massive data centers popping up across the country.
By
John Crawford
Senior Journalist
John Crawford
A writer for Babson Thought & Action and the Babson Magazine, John Crawford has been telling the College’s entrepreneurial story for more than 15 years. Assignments for Babson have taken him from Rwanda to El Salvador, from the sweet-smelling factory of a Pennsylvania candy maker, to the stately Atlanta headquarters of an NFL owner, to the bustling office of a New York City fashion designer. Beyond his work for Babson, he has written articles and essays for The Philadelphia Inquirer, Notre Dame Magazine, The Good Men Project, and other publications. He can be found on Twitter, @crawfordwriter, where he tweets about climate change.
September 30, 2025

Posted in Insights

The Babson community and mascot celebrate at the Roger Babson statue last year
No. 2 Again: Wall Street Journal Ranks Babson the No. 2 Best College for the Second Year in a Row For the second year in a row, The Wall Street Journal ranked Babson as the No. 2 Best College in the United States, lauding the College for its impressive impact on student outcomes.
By
Eric Beato
Editor / Writer
Eric Beato
Eric Beato is the Editor of Babson Thought & Action and Babson Magazine. A native of Chicago and a graduate of the University of Missouri School of Journalism, Eric has worked as an editor and writer at newspapers across the country, including the Chicago Sun-Times and Boston Herald. Eric joined Babson College in 2019 after working as the communications director for a private educational travel company and as the managing editor of six regional sports publications.
September 29, 2025

Posted in Community, Entrepreneurial Leadership, Insights, Outcomes

First row (left to right): Laura Bautista ’29, Ezel Bhatty ’29, Sydney Fojas ’29; Second row (left to right): Lucas Lebrija ’29, Tia Malhotra ’29, Remy Witt ’29
Class of 2029 Blank Leadership Scholars Bring Excitement to Campus The Class of 2029 Blank Leadership Scholars arrive at Babson equipped with entrepreneurial spirit and social impact experience, from launching nonprofits and tech solutions to championing environmental education.
By
Melissa Savignano
Writer
Melissa Savignano
Melissa Savignano, a content marketing manager at Babson College, has worked in higher education for almost a decade, where she tells authentic, compelling campus and community stories. Before Babson, she managed communications for Boston University’s largest college, the College and Graduate School of Arts & Sciences. She previously worked in client relations, helping brands of various sizes launch content marketing strategies and storytelling initiatives. When not at work, you will find her in the city of Boston, probably at the movie theater.
September 25, 2025

Posted in Community