8 Major Legal Risks Faced by Startups

‘Startups are not as fancy as they look’

Startups can be a rollercoaster ride for entrepreneurs. Entrepreneurs encounter many risks in their journey of Startups but the legal risks are something that can not be avoided and should be taken seriously. Here, we are trying to get an overview of the legal risks that are faced by Startups.

The Startup word itself looks very appealing. And for the millennials, it is a way to get the life of their dreams but the amount of hard work, patience, and planning one has to put in is the key factor. Besides, the challenges and risks which one should be aware of.

As the millennial generation is much more attracted to startups but Startups can look fancy from afar. But when a person actually puts in the hard work then he/she understands the practicality, uncertainty, and risk involved. The risks can be financial risks, legal risks, and many more but here we are only focusing on Legal risks that are faced by Startups. These risks can be eliminated with proper strategy and planning. And if proper actions are taken the risk can be reduced if not properly eliminated.

Let’s find the Major legal difficulties faced by Startups.

1. Proper Documentation

The first and foremost thing for any startup is to have documents in an organized manner. If you decide to do a venture, the documents, and other formalities are not properly done then your startup will become null and void.

For instance during an agreement you are unable to present complete documents then you are liable to pay penalties which is not good for your business.

2. Legal composition of Business

This is a vital risk that should be avoided to run a business and the foremost thing to be stressed upon. The composition or ownership of any business is very important. The tax responsibility of any firm and the personal liability of the owner can be done with ease with legal funding options. It will help in saving the tax and personal interests of the owners.

3. No forgery of website T&C (Terms and Conditions)

For any online business or E-commerce, it is essential to have terms and conditions posted on the website as per many countries' laws. There are many agencies like The ACCC ( Australian Competition and consumer protection) that work for the public welfare. The ACCC believes in Transparency, accountability, Confidentiality, and Proportionality. And there should not be plagiarism meaning no business can copy another company’s T&C. Plagiarism of terms and conditions is much worse than not having at all. If this happens then it may cause a legal risk that will negatively affect the business.

4. Legitimate Licenses

Every business has some legal rules and regulations. And to do the business hassle-free there are some permits and licenses that should be taken by the owner. And that too a real license if the license is not legitimate, then the owner is in a position to pay a hefty amount which may cause losses to the startup.  So to avoid this type of legal risk owners should consider the appropriate professionals who have a clear view of the types of licenses and permits which should be taken to run the company successfully.

5. Disputes and Discrimination

In any organization, disputes among the staff are quite normal but disputes are caused by partners, stakeholders, and customers. These disputes will take up a bad face and the consequences have to bear by the business which is also a legal risk.

Discrimination by age, color, or gender is a growing problem in organizations. But the law says “if any worker who feels that he/she is being dominated by anybody can give an application to the Fair Work Commission for resolution of the situation”. This anti-discrimination law is to make a fair decision in favor of the workers who are been bullied by higher authority. That also becomes a legal dispute and the authorities should keep that in mind to avoid this type of situation by listening to the problems of workers and bringing a solution in a fair and impartial way.

6. Accidents in the workplace

Sometimes workers, work in a workplace and met with an accident that can cause grievance injury to them. They can file a legal case against the company or can ask for compensation which is a legal risk for the firm. So to avoid or lessen this type of situation a company must have a safety team and system who will keep a check on both the workers as well as the machines.

7. Protect Intellectual property rights

Intellectual property rights are those rights that can be taken for newly invented things discovered by you. and these rights will shield your discovery. The discovery can be a product, a brand name, a logo, a recipe anything. So Copyright is to be used to get the right or ownership of any content to safeguard your work and prevent it from copying or stealing. This is also a legal risk and to prevent this make sure you patent and secure your product so no one can copy it.

8. No agreement of shareholder

A shareholders agreement should essentially be the cornerstone of any business or startup venture between founders and partners. There must be proper documentation of the agreement of shareholders to avoid conflict between the partners.

Furthermore, a shareholder’s agreement acts as a protection between partners, if problematic situations arise and it is seen to be more efficient as co-founders will spend less time debating, arguing, and litigating when in difficult situations as they have the agreement to refer back to.

Ignoring the need for a shareholders agreement creates a larger risk because as with any business, problems may arise between the partners, especially in startups and it is necessary to have a balance and clues to those situations to act as an effective guidance mechanism on what to do in those circumstances.

Let’s take a case study that will clear everything about the legal risks

In 2014, a developer developed an app that is a quiz app, and inference has been taken from an app that is developed by Cambridge Analytica. The name of the developer is Aleksandr Kogan. He got 27000 installations to his app from users. He could manage to access the data of his friends and when the app asked for grant permissions that app saved all the information.

This information created 30 million psychographic voters' profiles. And Trump tie-ups were already in Cambridge Analytica and this information was used to target ads for a campaign like Brexit.  As news spread in the market, Facebook's share instantly fell to 18% in 10 days and people in aggression started the #deletefacebook movement. So this case study shows that if legal professionals saw that earlier then this situation can be avoided.

Conclusion

In a journey of a startup, Entrepreneurs must look into the legal risks that may pose some threat to company issues. Or they can personally hire legal professionals who will look into this matter closely. These professionals will tell the precautions that should be taken to avoid these risks. And there is no doubt that any startup will lead to millennials being keen on the startups. So these types of hurdles should not create any problems and must be eliminated so that a business can run smoothly.

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