Liabilities That Can Destroy Even Very Promising Startups

Tommy Wyher  |

Startups much like any other business in its infancy is fragile as something as small as one missed deadline can dry up cash flow. With these small mistakes having the ability to destabilize the company it is important to look for these liabilities and take care of them as soon as possible. This does not guarantee a startup success but rather helps it avoid a shutdown due to outside factors instead of the quality of product or service they provide. A risk assessment can be useful but the most important thing a founder can do is to create a checklist of problems that could arise along with solutions. Problems outside of personal control should not be listed as this will have to be dealt with as all companies have some sort of adversity to face whether it’s a lost client or top salesperson. The following are liabilities that can destroy even promising startups with decent funding.

An Inconsistent Employee Termination Process

A startup with inconsistent employee termination processes leave themselves liable to a lawsuit from a disgruntled employee. For this reason equal punishments need to be doled out for similar actions as treating a star employee differently by not terminating or writing them up can do a few things. People will think if they do well enough that they can get away with more than their lower performing coworkers. A person could claim that they were not terminated due to their performance or actions but rather for their race, sex, religion, or political affiliation. When treating people differently in identical situations it can become difficult to prove there were not any other motives for the firing.

Company Cars and Employees

A founder that plans on giving employees company cars needs to learn more about insurance coverage details when they pertain to a business. Depending on the driver of the car these rates can skyrocket if a person has a poor driving record with a serious offense like a reckless driving or DUI. The last thing that anyone wants to happen is to have this happen or have anyone injured. Those who are going to be using company cars or company supplemented insurance need to undergo a thorough background check including their driving records. Company cars should be taken back if an employee decides to drive home from a company happy hour instead of Uber home. This could be construed as the company supporting this behavior through turning a blind eye and it could be portrayed this way in the local or even national media.

Outsourced Labor Taking Advantage Of Their Workers

A great example of outsourced labor devastating a business through their actions is a manufacturer working their employees long hours for pennies an hour. No matter how impressive the product is many large retail stores or online retail stores might not want to carry the product. The last thing that any company wants is to be associated with poor working conditions or even worse, child labor. Another example of this is outsourcing digital marketing to a less than reputable company. This can lead to the company website being deindexed from Google which for businesses in the US, could be considered the death penalty as far as the company website goes. Align your startup with reputable outsourced labor even if it costs a little more as it is worth the peace of mind.

Not Keep Information On A Need To Know Basis

The world of disgruntled employees could be vast and with the stress a startup causes people to do crazy things. Keep client information and other sensitive information on a need to know basis only. This means changing passwords immediately when a person is going to be terminated. At a startup this can be done while they are being let go because you’d be surprised the amount of information someone could steal in those few minutes they are clearing out their desk or emails. Keep all employee passwords readily available to management as well to see if logins are happening at odds hours. An employee could have the same password for every account they have and could be compromising both employee and client data through a hack of some kind.

NDAs and Non-Compete Clauses In Employment Paperwork

The disclosure of information to competitors can be devastating to a startup as in new niches there could be very few competing companies. Non-compete clauses are completely necessary in these situations as a former or current employee could be offered a job just for the information they have on a certain startup. Most people will not breach these employment contracts as it could be quite costly for them. Other companies will not hire them as it is a breach in business ethics and most likely would lead to legal trouble.

Maximize profitability and minimize liabilities through planning and binding paperwork. Do not let anything but the quality of product/service that is provided to determine the future of your startup!

DISCLOSURE: The author has no investments in any company mentioned and no plans of investing in the near future.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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