Top Legal Mistakes Startups Make and How to Avoid Them

Launching a new business is an exciting and energizing experience. There’s the thrill of innovation, the freedom of building something your way, and the hope that all your hard work will lead to long-term success. But amid the hustle, many startups overlook one of the most critical areas that can make or break their growth: legal foundations.

At Levy Zavet, we’ve worked with countless entrepreneurs who came to us after a costly legal misstep, a dispute between co-founders, intellectual property that wasn’t properly protected, or an investor agreement that didn’t hold up under scrutiny. These are avoidable problems, but they’re surprisingly common.

Here are some of the most frequent legal mistakes startups make, why they happen, and how to prevent them.

The Missing Shareholders’ Agreement

One of the first and most overlooked documents in a new business partnership is a shareholders’ agreement. At the beginning, things are usually amicable. Founders trust each other, and everyone is focused on growth. But when things go wrong, the absence of a clear agreement leads to confusion, resentment, and legal battles.

Without a shareholders’ agreement, decisions around ownership, voting rights, profit sharing, and exits are left open to interpretation. And that can be dangerous.

The solution? Have a proper shareholders’ agreement drafted early. Even if you think you won’t need it, you’ll be glad it’s there when you do. It sets expectations, helps resolve disputes before they escalate, and protects the business you’re working hard to build.

Delaying Incorporation

Many founders delay incorporating until their business is “official” or generating revenue. While this might seem practical, it actually exposes the business (and its owners) to unnecessary risk.

Without incorporation, your business doesn’t exist as a separate legal entity. That means you can be held personally liable for any debts, disputes, or damages. Incorporation also affects who owns what, including any intellectual property created in the early days.

To avoid future ownership disputes or tax issues, incorporate as early as possible. It protects your liability, legitimizes your structure, and makes you investment-ready from day one.

Ignoring Intellectual Property

Startups often thrive on creativity and innovation. Whether it’s your brand, app, software, product design, or written content, your intellectual property (IP) is one of your most valuable assets. But many founders assume they “own” their ideas, only to discover later that the rights weren’t properly protected.

In some cases, a co-founder or contractor may hold rights to something core to your business. In others, a competitor may register a trademark before you do. These are risks that can derail your momentum or end in costly legal action.

To protect your IP, work with a lawyer to identify what needs safeguarding. Use NDAs when discussing sensitive ideas, register your trademarks early, and ensure ownership of IP is clearly addressed in your employment and contractor agreements.

Using DIY or No Contracts

It’s not uncommon for early-stage startups to use free templates from the internet or to operate without formal contracts altogether. But vague or inconsistent agreements create problems when expectations aren’t met.

Whether you’re onboarding a contractor, signing a client, or entering into a lease, well-drafted contracts protect your rights, set clear terms, and reduce misunderstandings.

Don’t wait for a disagreement to discover your contract was incomplete. Start with properly prepared agreements tailored to your specific business needs.

Employment Missteps

In the early days, founders often rely on flexible arrangements with freelancers, consultants, or part-time help. But misclassifying someone as an independent contractor when they should be an employee can lead to claims for back pay, vacation time, or wrongful dismissal.

Even offering equity in lieu of salary can trigger compliance issues if not handled properly. Make sure your hiring practices align with Ontario’s employment laws. Define roles and compensation clearly, and use written agreements that reflect your intentions and obligations.

Fumbling the Funding Process

Raising money is a huge milestone, but it’s also one of the most complex legal moments a startup faces. From share dilution to SAFE agreements and convertible notes, the fine print of your deal can shape your business for years to come.

Founders are often so eager to secure funding that they agree to terms without fully understanding the implications, which can result in lost equity, lost control, or strained investor relationships.

Before you raise capital, consult a lawyer who understands startup financing. A well-structured investment protects your interests while keeping your business attractive to future investors.

Building a Strong Legal Foundation

Many of the mistakes outlined above come from the same place, a lack of awareness or a desire to move fast and figure things out later. While that approach might work in product development, it’s risky when it comes to legal matters.

At Levy Zavet, we help startups build from a place of strength. From incorporation and contracts to intellectual property and funding strategy, we guide founders through the legal side of entrepreneurship so they can focus on growth with confidence.

We offer free consultations, so whether you’re in the idea phase or scaling your team, we’re here to answer your questions and help you move forward the right way.