Chioma and Raina are very good friends and have been working together in the banking sector for almost a decade.
Seeing a gap in how long it took small businesses to obtain a loan from banks, they decided to create a software to solve this problem. They immediately coined up a name for their business and called Jerry, a programmer to develop an app for them.
Chioma's wealthy uncle, Chief Obi, gave her a cheque of 20 million naira as his own investment in her business.
After confirming that they had enough capital to begin their operations, Chioma and Raina set up interviews for their potential employees.
You can say they did everything "as e dey hot".
What could go wrong, right?
Well, in our opinion…MANY THINGS, if not everything!
Chioma and Raina's story is a typical example of how many startups started or are operating their business. Many things are done without the thought of future legal implications. This is because when forming a business, it's easy to get caught up in the excitement of getting things up and running. However, failing to take the appropriate legal steps can get a company off on the wrong foot.
Let's consider top legal mistakes startups make which yours should avoid.
- Not setting up your business properly - Many startups in their excitement and rush do not obtain appropriate legal advice to understand the correct business entity to register. Choosing a business entity is dependent on various factors such as the peculiarities of your business, regulatory issues and factors relating to your business sector. Some register as a business name instead of a limited liability company which protects your personal assets from any liabilities your business might suffer. You can read more on this here and here.
- Not having crystal clear agreements with your co-founders - Like Chioma and Raina, you and your co-founder(s) could be friends and may think your friendship is enough to sustain your business partnership. Questions such as who controls what, who owns what, and who does what will eventually arise so it's better to pose them right at the beginning. This is important not only because it will prevent the possibility of future dispute but also because knowing the answer to these questions will also define every co-founder's responsibilities. You can learn more here and here.
- Not having employee contracts - Everyone who will work for you or with you must know clearly all that their job entails. Salaries, working hours and other details need to be clearly spelt out. You can read more here
- Not Protecting Your Intellectual Property - Chioma and Raina must be clear with Jerry as to who owns the source codes and every other thing involved in the development of their software. You cannot leave things like this to chance. Learn more on protecting your IP here.
- Not Getting Writing Important Terms Down - A deal sealed via a WhatsApp voice note won't protect your business when problems arise. The terms of every deal and who has what responsibilities need to be penned down. Chioma and her Uncle must have documents that clearly state what he gets as an investor and his limits.
Talking to a lawyer is your best bet in avoiding these mistakes. You can access one here.