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Five Pitfalls to Avoid if You are Starting a New San Diego Business

Launching your new San Diego startup is exciting and opens a new chapter in your life and in the lives of your family and your business partners. But, everyone knows that starting a new business can be fraught with dangers and risks. From an experienced and tested San Diego business attorney, here are five pitfalls to avoid as you start your new business.

San Diego Startup Pitfalls: Skipping the Founders Agreement

If you are starting your new business with partners and good friends and maybe family, it is important to create a so-called Founders Agreement. The Agreement does not have to be overly complex or long, but it should detail the ownership of the company, ownership of assets, how profits are to be distributed, who is responsible for capital infusions, how new owners are to be added, how disruptive owners are to be expelled, and similar issues. A Founders Agreement protects everyone involved in the venture and sets expectations. The time to come to agreement is at the beginning when everyone is emotionally connected and seeing eye-to-eye. Plus — and this is key — if the parties cannot agree on a Founders Agreement, then the parties are not really in sync with each other. Learn that at the beginning, not months and years down the road.

San Diego Startup Pitfalls: Failing to Incorporate

Incorporating — in various corporate forms such as a corporation or a limited liability company (“LLC”) — creates a completely separate legal entity separate and apart from you and your business partners. There are many advantages to this, and your San Diego startup should not skip consideration of this step. The advantages include:

Asset protection — your personal and family assets can be shielded from creditors and other forms of liability
Perpetual existence
More easily transferred
Status and credibility — there is more status and customer credibility being an “Inc.” or “LLC”
Tax advantages
Expensing flexibilities
Ability to build a business credit rating — again separate and distinct from your own personal credit rating/s

San Diego Startup Pitfalls: Neglecting to Have Employment Contracts

New business owners often think there is no need for employment contracts. But, like a Founders Agreement, employment contracts are essential, particularly for management employees. Again, at the beginning, when everyone is friendly, that is the time to draft agreements that set the expectations, limits, and the policies that will govern everyone for the next year or two or three.

San Diego Startup Pitfalls: Disregarding End/Exit/Separation Planning

One important pitfall to avoid is failing to plan for the end. This can be done as a separate Buy/Sell Agreement or as part of the Founders Agreement or can be built into the operating agreements, bylaws, and similar documentation. The planning here is for how ownership is terminated or transferred in the event of various eventualities. Planning for separation events is not just the unpleasant prospect of firing or termination, but also involves circumstances of an unexpected death, divorce, a personal bankruptcy of a shareholder/member/owner, bank receivership, etc. No one wants to have the new company in the middle of an unpleasant divorce battle. In another example, what happens if Maria suddenly passes? No one in the new company likes her spouse. Let’s deal with that problem now, at the beginning — we all agree that Maria’s spouse will be bought out based on this formula per agreement.

San Diego Startup Pitfalls: Ignoring Former Job Complications

Often a San Diego startup is formed after various owners finish their employment with other firms and businesses. Everyone must be careful to avoid any pitfalls that might flow from former employment contracts, confidentiality and nondisclosure agreements, and potential legal claims for trade secret misappropriation (e.g., use of client lists, proprietary process, secret formula/recipe and similar). All such issues should be fully explored prior to starting the new business.

San Diego Startup Pitfalls: Contact San Diego Corporate Law

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for San Diego and California businesses including help drafting Founders Agreements, employment contracts, and helping form your new corporation or LLC. Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard can be reached at (858) 483-9200 or via email.