Starting a business? Take care of legalities now to avoid headaches later

by

When you’re young and in university, the world seems like your oyster.

You build dreams with classmates, roommates—anyone who will listen. However, when it comes to actually taking the plunge into entrepreneurship together, you need to be a bit more cautious.

Rubson Ho, co-founder and partner of Cognition LLP, says, “It’s one thing to be friends, it’s another thing to be business partners. It’s good to be friends with your business partner, but it can really test a friendship.”

It’s almost comparable to moving in with your best friend, except in this case the dividing factor is not toilet paper but salaries, shares or intellectual property. Many young entrepreneurs tend to jump into things and work on a handshake.

“For young entrepreneurs there is a certain sense of naïveté or optimism, where you think to yourselves we’re good friends, we can sort all this stuff out later and we’ll all come to terms without any issues,” says Ho.

More often than not this leads to trouble. Ho cites an example of partners talking about giving someone half their company without documenting or putting any parameters around it. Problems come up when one person feels that the other doesn’t deserve it while the other person expects it.

“One of the first things they should do is find an advisor to help them with proper ways to structure it,” says Ho. “The more time they take to do something formally up front will save time later on in fighting unnecessary battles.”

Ho suggests that anyone, but particularly young entrepreneurs, should always take a step back and formalize things. It’s not the most fun part of setting up your business, but he compares it to buying insurance.  You’re investing now to save yourself trouble later.

Ho says he thinks there are many more people starting their own businesses right out of school these days than previously. This was part of his inspiration in founding Cognition with his partner Joe Milstone.

Cognition itself is a start-up. Working remotely allows them to offer reduced legal fees, which is of obvious benefit to start-ups and young entrepreneurs.

“If you go into a Bay Street law firm, you’re paying for that Class A office space on the 57th floor of an office building and you’re paying for that art collection on the wall,” says Ho.

The two partners reasoned that by eliminating the office space component, they could cut costs dramatically and be able to do things such as offer free drop-in sessions on Tuesday afternoons.

Affording legal costs, even those as economical as Cognition’s, is still a challenge for many capital tight new businesses and young entrepreneurs who may have student debt and limited access to equity to start their business. Even if you can’t afford legal advice, Ho says he recommends that you still take the time to formalize things.

“Even if you don’t have a lawyer involved, if you take the time to sit down, talk about it, write it all down and sign it, sort of memorialize it, it’s still an agreement,” he says. It’s something that can be referred to during any later conflict that may arise.

Areas of potential future conflict include employee agreements and contracts with suppliers and other outside businesses. Intellectual property is a huge issue for many firms that Ho deals with in the tech industry. Although these challenges may vary with the industry you’re in, you can never be too careful.

This situation can become akin to those school projects where you get paired up with the class slacker, however here the stakes are much higher. “Its different when your livelihood is on the line.”

Click here to read more about youth entrepreneurship and other young Canadian entrepreneurs.

 

Share
About the author

Mira Saraf studied psychology and English at McGill University. When she graduated, she wanted to pursue journalism but somehow ended up working in Montreal's garment industry. From there, she moved to New York to attend FIT. She worked there for a year before moving back to Toronto to work for Winners. Two and a half years in she took over a year off to pursue writing education and a career in freelance writing. She has since returned to the industry and now works for Loblaw/Joe Fresh. She continues to write on a part time basis.