Three Legal Traps on the Startup Journey – How to Avoid Them

As in almost everything, even where formalism seems unacceptable and the main focus is on building a business, being a startup founder comes with its own legal traps. If the startup founder does not analyze these traps from the very beginning, avoiding them later becomes almost impossible—or they will inevitably start to show themselves when it is already too late. The main driving force of a startup is speed—fast delivery, quick decisions, rapid movement. But this speed, if not built on a solid legal foundation, can itself become a factor that hinders business development. In my experience, I have often seen startup founders who do not like to hear about legal matters, especially at an early stage. Lawyers and attorneys are sometimes considered a "profession of the old days." And yet, sooner or later, the moment arrives when a lawyer is needed—and the earlier you think about it, the better;

A startup founder faces several traps, perhaps without even realizing they exist. These traps are unknown to them because they are not a lawyer/attorney. However, knowing about these traps can save them from the additional costs, lost time, or emotional distress that accompany a startup as a side effect:

Trap 1: Rights within the startup are not defined in written form.
It must be accurately determined who the partner is, who the director is, what rights the partners have regarding the company and towards each other, what percentage of shares are distributed among them, who is entitled to what dividends/profit, under what conditions, and furthermore, when a partner has the right to exit the startup, what they can or cannot take if they exit, when they do not have the right to exit, the preconditions for exiting, etc. Agreements based on verbal rather than written consensus create problems, which sometimes leads to the closure of the startup.
Solution to Trap 1: For startup partners not to turn into plaintiffs and defendants in a short amount of time, practical advice from an attorney is essential. This implies not just advice, but that whatever the startup founders agreed upon verbally must be reflected in a written agreement. A written form protects both parties; consequently, in the future, neither party will be able to say, "we agreed on something else."
This trap mainly occurs in the period from the startup idea to its realization. Thus, avoiding this trap means that "in the future, both parties know what we signed," and we practically have concrete proof of "what the pledge was," which subsequently will not allow either party to dominate the other and/or use it against them;

Trap 2: Providing services without a written contract.
In most cases, if a business/startup is in its initial stages, it does not have the means or the desire to incur extra costs for legal/attorney services, because, in its view, it is simply money paid for nothing. However, providing services without a contract or downloading a contract from the internet has and will have its negative sides. Specifically, providing services without a contract creates risks—for example, the startup founder subsequently finding themselves in court without evidence regarding what services they provided and should have provided, what they could or could not perform, what the price of the service was, etc. Furthermore, a draft downloaded from the internet cannot be a solution because every contract requires an individual approach and drafting;
Solution to Trap 2: A startup founder does not need to have a team of lawyers and/or attorneys who will be with them every day. The solution is to order and receive an appropriate reusable contract, where the main terms, for example, are set out on the first page, while the rest consists of nuances that have been pre-agreed with them. In addition, this contract does not necessarily have to be on paper; it can exist electronically and carry the same legal force. "Are you a client? Let's agree on WhatsApp" might seem like an efficient route, but the risk and vulnerability are so high that it is better to have a contract, because truth verified by a contract carries more weight than just truth itself.
This trap mainly reveals itself when the startup moves into action—that is, the first stage is overcome, and there is a need to "create or expand the client base.";

Trap 3: Formally / unreadably signing a contract with an investor.
If a startup is successful or the founder wants to bring in an investor to grow their business, they are forced to bring a new player into the business, in most cases a new strong player who enters the game with their own lawyer/attorney and/or team of lawyers. Bringing in a new player does not mean the founder is giving up their business, but any agreement/deal signed with an investor requires a full legal review. It is one thing what the investor says, another what needs to be described in the contract, and a third how the startup founder must protect themselves from the investor. I remember at one meeting, when discussing the development of a startup, a powerful company asked my client to continue operating under the standard "Public Service Hall charter." If we had agreed, the startup founder would have practically lost not only their income but also control over the startup. Consequently, an attorney is not an obstacle to the investor's entry but a protective lever to ensure the business develops in your hands and not someone else's. Because, at the end of the day, this startup is yours, isn't it?!
Solution to Trap 3: Even though a startup needs an investor, the relationship with them must also be based on a written form. No one is saying the startup founder should be preoccupied with figuring out "what the content of the deal implies," but it is better for them to have someone who can explain in simple terms "what awaits them if they take this step." Consulting an attorney/lawyer is not a luxury. Just as marketing is necessary to make a startup more recognizable, a lawyer is "one of the pillars of long-term development." It is possible that the amount paid today for attorney/legal services will be far less than what might be lost in the future on a deal signed without an attorney/lawyer. Marketing is visible today and rarely looks at future development. As for a lawyer, a startup is not a one-time event for them, as the work of an attorney/lawyer is evaluated years later by the endurance of the startup. Therefore, being a pillar means helping "withstand all the storms" that await the startup founder and their startup;

In addition to this, the following potential traps should be highlighted:
a. Trap: Inattention to intellectual property rights.
For example, failing to register a logo with Sakpatenti (National Intellectual Property Center), which may later become the distinguishing mark of the startup but remain unprotected, meaning the loss of ownership rights to the logo/trademark. Yet, it takes only 3 to 6 months and costs approximately up to 300 GEL. Whereas, if someone else uses it, you will be able to demand compensation for damages and prohibit its use by others through legal mechanisms. On the one hand, this is a declaration that you will constantly protect your investments, and on the other hand, you are telling the consumer that "you are not a one-month business that might disappear tomorrow." This challenge is more often faced by tech startups, where a unified workspace might not even exist, but their workspace and/or recognition is defined by their unique logo or trademark, which determines their source of income, because "the brand determines the quality of the service provided," which needs protection.
b. Trap: Unregulated employment relations.
Even though a startup does not mean a large company, there are still minimums that must be regulated between the employee and the employer. Drafting an employment contract for the employee in such a way that tomorrow they do not end up in the ranks of a competitor without you having a defense mechanism outlined in the employment contract. Or avoiding a scenario where the startup founder has to spend their time in court proving whether the person was hired on a probationary period or a 1-year or 2-year contract. Ultimately facing the risk that for a person hired for 3 months, they might have to bear the financial cost of 9 months' salary, penalties, etc. Not only possibly paying money to someone else but also having to hire an additional attorney for this case—all just because they did not have a partner-attorney by their side who could explain in simple terms the difference between a probationary contract and a regular employment contract. An investment in an attorney, which would be significantly less, could save future costs. Signing a 3-month contract is only an exceptional case, and this must be fully and properly outlined in the employment contract in advance with the help of an attorney. Moreover, only compliance with the law ensures for the startup founder, through their partner-attorney/lawyer, that they pay enough today so as not to pay tenfold tomorrow. You will agree that an employer/startup founder who favors fair contracts will attract exactly what is essential for any startup: "exceptional and talented employees," who will provide the opportunity for long-term development. An employment contract is nothing more than an agreement on the rules of the game; accordingly, an employment contract not only allows for the influx of talented employees but also ensures their retention;

In summary, it must be said that a lawyer/attorney for a startup founder is not just someone to call when "the trap has sprung" or to be "its solver." A lawyer/attorney is a person who is the startup founder's partner. If the startup founder's activity is focused on the further development of the business, the lawyer/attorney's activity regarding the startup is focused on ensuring that its development does not halt. The logic here is simple: if the startup's business develops, the reputation and image of the attorney, as well as the cost of their services, will increase accordingly, because it is a rare startup founder who forgets the person with whom they built a "successful business." Consequently, the attorney's goal in most cases aligns with the startup founder's goals—"for the business to be successful.";

Startup founders often wonder: "Where can I find an affordable attorney?" An attorney's fee depends on the volume of work, so it is difficult to state an exact amount. However, you can start with recommendations from other startup founders, LinkedIn, or platforms where attorneys specialized in startups operate. Many offer a free initial consultation where you discuss your needs. Do not be afraid to openly discuss your budget—this will help you find the right solution for you. If you are looking for a partner, contact me through any means acceptable to you, whether face-to-face or remotely, via the ZOOM platform, a remote consultation, or a partnership;