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5 Expensive Legal Mistakes To Avoid When Starting A Business

Bootstrapping businesses can be difficult, quite risky and far more expensive than entrepreneurs anticipate, particularly when entrepreneurs adopt advice from the internet, engage in “DIY” documents or execute strategies that aren’t fully thought out. A ‘risk’ is simply a situation that has consequences or loss, danger or damage – all consequences that are best avoided. Here are some common mistakes that entrepreneurs make, that can easily be avoided.

Having the wrong structure

The UAE is extremely open to trade and business and there are several platforms available to pursue innovative ideas. The first and the most exciting step to bringing an idea to fruition is setting up a company and obtaining a license. All commercial activity needs a license issued by the relevant regulatory authority. The UAE provides several incorporation options to entrepreneurs exploring setting up new businesses. Choosing the wrong structure or having the wrong licensed activity (or not having a license at all) can subject one to penalties of all sorts or even worse, expose shareholders to personal liabilities therefore if you intend operating a business, first get the right license.

Starting a business in violation of employment agreements

Moonlighting is never advisable as this poses a serious violation of law and contract in the UAE. If an individual on an employment visa, validly employed as an employee starts up a business, it should always be with the written consent of the employer. It would also simply be unethical to invest one’s time in another venture whilst legally employed to work and be paid for such work by another. Best to be safe than sorry in this regard.

Lack of agreements or signing unenforceable agreements

A lot of business transactions are still done on the basis of trust and although verbal contracts are valid and binding if they can be proven, the most trusted and reliable form of contract is always the written form. Contracts are useful to confirm the detailed terms agreed by the parties so there is no confusion if at all a dispute occurs in the future.

An endemic trait in the startup community is where entrepreneurs enjoy using “free” documents from the internet or forms shared by other friendly founders. There is the misconception that minimising legal fees would save money to use perhaps in product development. There is also a misconception that “Off-The-Shelf” form documents can save money although business fail to understand that each business operates on unique models and the risks for each business cannot be fully addressed in “Off-The-Shelf” contracts or those downloaded from the good, old internet. Failing to document specific risks associated with one’s business by using off-the-shelf documents or having none, can easily lead to loss and damage when risks occur.

Not registering intellectual property

Intellectual Property, especially in the current economy is probably one the most valuable intangible assets a company can have. An ‘asset’ is simply something from which the owner derives current or future economic benefit. The value of Intellectual Property comes from the future economic benefit it can bring its owner and its ability to exclude competitors from a particular market. Novice founders are so focused on product development that they forget about registering their intellectual property leaving it out there, unclaimed, for competitors to usurp with ease. A popular mistake is where businesses hire web or application developers without any security that the business will own the product when complete.

The advice here is easy to assume – businesses should register its intellectual property or lose out on value that could perhaps someday run into millions.

Not understanding worst case scenarios

A classic trap that founders fall for is they think they know everything about their business simply because they started it. There is a modern saying, “You don’t know what you don’t know”. Risks cannot be avoided permanently or fully – this is a fact, but a business can mitigate risks to a good extent by either insurance or contract. It is however necessary to go through a painful process that we classify as addressing the “What If” scenarios. If pain points and possible worst case scenarios are assessed in advanced, proper measures can be put in place either by insurance or through contracts to avoid such scenarios.

In conclusion, not being aware of risks or worse still, pretending they don’t exist, is a mistake, and more often than not, leads to expensive mistakes. Such mistakes are easily avoided by simply being aware and taking necessary action to mitigate.