Entrepreneurs generally do a phenomenal job launching their startups and developing their visions. Unfortunately, they can also make enormous, costly legal mistakes that can crush your business.  Recently, these 4 legal mistakes startups make were featured on VentureBeat.com.

Entrepreneurs generally do a phenomenal job launching the startups and developing their visions. Unfortunately, they can also make enormous, costly legal mistakes that can crush your business.  Recently, these 4 legal mistakes startups make were featured on VentureBeat.com.  The issues relate to the vesting restrictions related to founder stock and IP ownership.  I distilled the points here:

Common Stock Vesting Restrictions for Founders Stock
All common stock shares issued to founders in a startup should normally vest over time, i.e. be subject to vesting restrictions, as opposed to vesting on day one.  If the shares vested immediately, then a founder can quit the business on day two and take his/her shares with them without any obligation to contribute further time to the startup.  That is particularly bad news if your startup relies on any of the founders for their continuing labor contribution to the business, like coding the product/website, creating/editing/moderating content, or marketing the startup.

Startup IP Ownership   
Founders should put the startup first and do their due diligence upfront to prevent major legal headaches down the road to eliminate the typical issues that experienced investors will pin-point when doing their own due diligence.

IP generated by the startup should be owned by the startup.  Did any of the founders participate in the business while working for another company?  If so, this could taint or cloud the ownership of the startups IP.

IP created or acquired by a founder prior to the startup formally coming into existence should be assigned to the startup entity.  Imagine if one of the founders individually started a website that gained traction and he/she recognized that it required additional contributors in the business to achieve some huge success down the road.  He/she brings on two other co-founders and formalizes the business by starting an LLC.  The original founder should contribute the website and IP related to it to the startup entity in addition to formalizing their agreements in writing.

Similarly, IP created or supplied by outsiders, like developers or designers, should be assigned to the startup entity.

To read more about how these particular issues are addressed after a startup is an on-going business and raising money from investors, check out the article on VentureBeat.com:
http://venturebeat.com/2011/09/26/deadly-legal-mistakes-startups/