The Most Common Legal Mistakes Made When Starting a Startup Project or Starting a Project

Starting new companies and starting projects means the potential for return on investment, rapid growth and profit, especially in the area of ​​SMEs. Establishing companies with a profitable business plan can result in profits, but in practice examples of failed attempts at Start-Up Projects are more common.

In this regard, the most common mistakes and risks when starting a company or starting a project are the following omissions:

1. Absence of a detailed contract between the founders or unclear and imprecise contracts with the founders or participants in the project

In the absence of a legal culture in these areas and owing to the prevailing model of oral collusion between business participants, it often happens that business participants themselves have sown the germ of future disputes. This is simply inevitable – life is more imaginative than any predefined rules or arrangements. In this situation, in the absence of a contract, detailed and precise, business participants will soon be in a position to recount their supposedly reached agreement, interpreting certain elements of that agreement in one way or another.

Another danger is that business participants find the law clear and do not need to regulate relationships if they have already been regulated by law. This is a capital mistake, given that in this case one enters an uncertain zone of court interpretation that should be adjudicated in a relationship, and often the court’s interpretation of a disputed relationship will be significantly different from the intention that business participants had when starting out project.

It is often the case that a startup or project involves more people involved. Thus, some of the founders / participants of the project bring in money or non-monetary capital into the company or project, some bring ideas, concepts, know-how, some intellectual property rights. In order to accurately regulate the relations of the project participants and to determine in advance the manner of profit distribution, losses and other rights and obligations, the agreement should be confirmed by signing the founders / participants in writing. Contractual provisions should be clear and precise in order to minimize the possibility of a dispute between project participants. The contract should in particular define the obligations and responsibilities of the founder / participant in the project, as this is the only way to ensure the proper fulfillment of obligations and assumption of responsibility. The contract of the founders / participants in the project is especially important if it is planned that the founders / participants in the project have an active role in the company’s business, that is, the realization of the project. Specifically, if a particular project founder / participant is expected to invest some time, work and knowledge in the company’s activities / project implementation, its rights and obligations on the basis of the contract should be clearly defined.

Furthermore, the Companies Act (Art. 199) defines that the assembly is composed of all members of the company, and that every member of the company has the right to vote in the assembly in proportion to the share of its share in the share capital of the company, unless otherwise provided by the founding act. Therefore, it is necessary to evaluate in a timely manner the possibilities of abuse of voting rights by certain members and the possibility of blocking the decisions of the assembly of the company (especially in two-member companies), and by founding act regulate the issue of majority required for decision-making in accordance with the best interests of the company or the project.

Finally, in order to ensure the success of the project, that is, the business activities of the company, it is recommended that the founder / participants adopt an appropriate Business Plan. The founders / participants of the project may be inactive regarding the adoption of the Business Plan, which may harm the newly established company or project. Therefore, it is advisable to define in advance the deadlines for the adoption of the Business Plan and possible liability of the founder for the lack of timeliness in this regard.

2. Absence of standardized and customized contracts for the benefit of your company regarding your business

In practice, almost every newly established company will be involved in market flows involving business relationships with various operators, contractors, subcontractors, suppliers, experts or external associates. In order to avoid many different contracts with different legal solutions, it is highly advisable to standardize all contracts concluded by the company. This applies in particular to the provisions governing the obligation to pay compensation, the possibility of termination of contracts and confidentiality of information.

3. Absence of standardized labor contracts and acts

The general acts of the company in the field of labor law, as well as the company’s Employment Agreements, must be harmonized with the provisions of the Labor Law. It is recommended that such contracts be drawn up in consultation with labor law experts, in order to avoid the risks that the company may be exposed to in the event of a dispute with employees. If employees within the company are given the opportunity to obtain specific know-how, that is, specific knowledge or contacts, it is advisable to contract obligations regarding non-compete once the employee ceases to be part of the company.

4. Inattentive treatment of intellectual property

Intellectual property rights are becoming an increasingly important factor in the operations of companies, especially in the IT sector. In this regard, it is important to protect all ideas, concepts and methods to the fullest extent possible in order for the company to maximize profits through the use of its intellectual property. The most important issue is the protection of the know-how of the company, which, although not formally subject to protection before the competent authorities, with the advice of experts, can be legally protected if it is recognized and defined in a timely manner, that is, at the time of the company establishment or the commencement of the Project.

5. Non-treatment of important business tax implications

Different forms of organization of the company entail different tax treatments. Therefore, it is necessary to carefully consider all the tax and parafiscal obligations arising from the establishment of the company or in connection with the project, and to adapt the business plan to the objective capabilities and best interests of the founder of the company or participants of the project so that the company will continue to be profitable upon payment of all levies.

6. Activities with a business name which is a registered trademark or has a domain problem, etc.

When a business name is a significant element of the business of a company or project, it is important that such a name is inventive and does not conflict with already registered third party trademarks, since in that case there is a possibility for third parties to oppose the use of such business name and to prohibit further use of the same.

Practice shows that it is best to choose a domain at the very beginning of a start-up or project. In order to avoid problems with the registered domain and the possibility of any confusion in the market, when choosing a domain, care should be taken not to be similar to the domains of other market participants, especially those engaged in a similar activity. Domain names similar to well-known brands should also be avoided, to avoid any possible intellectual property rights disputes.

7. Non-engagement of appropriate lawyer-expert

All of the above issues should be discussed with a lawyer – an expert in corporate, commercial and securities law; contract law; labor law; intellectual property rights, real estate rights, tax law, franchising rights. The timely engagement of a lawyer, an expert in the above fields, who actively participates in the founding of a company, the realization of a project, the preparation of various contracts, the protection of intellectual property rights, tax advice, greatly reduces the risk of failure of a Start – up or project.