Start-ups – 6 common mistakes plus practical solutions

In Austria, as well as worldwide, there is a constantly growing number of start-ups that want to revolutionize the market with new ideas and creative approaches. However, despite the enthusiasm and potential that many start-ups bring to the table, many unfortunately fail within the first few years of their existence. According to a study by the Institute for SME Research, around 50% of start-ups fail within the first five years.
An often underestimated aspect of setting up a business is legal support and protection. In many cases, commercial success depends not only on the business idea, but also on the right legal structure and the right decisions. This is where commercial law comes into play, as it plays a decisive role in the success or failure of a start-up.

In this article, we would like to look at the most common mistakes made by start-ups in Austria and show you possible solutions from the perspective of business law.

Here are the 6 most common mistakes made by start-ups and our approaches to solving them

Choosing the right type of company is one of the first and most important decisions a start-up has to make. There are various legal forms in Austria, including the limited liability company (GmbH), the public limited company (AG), the general partnership (OG) and the limited partnership (KG). Each of these legal forms has different legal, tax and financial implications.

Error

A common mistake when choosing a company form is that founders do not sufficiently consider the advantages and disadvantages of the respective legal form.

Young founders in particular often tend to set up a partnership (such as an OG or KG) out of ignorance or due to low initial capital, although a GmbH – despite the higher share capital – is a safer choice in the long term in order to minimize the liability risk.

Solution approach

Start-ups should consult a lawyer and a tax advisor at an early stage in order to choose the right type of company for them. Particular attention should be paid to liability issues, the tax burden and flexibility in company management.

A GmbH is often a very good choice as it offers the advantage of limited liability, which is particularly important for founders who do not want to be liable with their private assets.

Another common mistake made by start-ups is the insufficient or inadequate drafting of important agreements, particularly articles of association and investor agreements. These documents are not only important for company management, but also for the legal protection of the parties involved.

Error

The start-up agreement is often drawn up without legal support or sample agreements from the internet are used without taking the specific needs and structures of the company into account. This can lead to problems later on, for example when dividing up company shares, regulating decision-making powers or agreeing on the exit plan.

There are also frequent errors in investor contracts, such as unclear provisions on the rights and obligations of investors, equity shares or exit strategies. This often leads to conflicts that can jeopardize the long-term stability of the company.

Solution approach

It is crucial to draw up a clear and legally watertight start-up agreement from the outset. This should not only regulate the contractual basis for the collaboration, but also deal with possible scenarios such as the departure of a founder or the division of company profits and shares. Investor agreements should also be formulated clearly and transparently in order to avoid disputes later on.

Legal support is essential here, as these contracts have long-term effects on the company and its structure. Early legal advice can help to avoid many problems later on.

One of the biggest reasons why start-ups fail is insufficient funding. Even the best ideas need capital to grow. A common mistake in this regard is inadequate planning of the capital structure and financing options (often no business plan available).

Error

Many founders initially rely on equity or small loans to finance the company without realistically assessing the long-term financial needs of their business. This often means that the company quickly faces liquidity problems, especially if it fails to attract sufficient investors or other financing options at an early stage.

Another mistake is the incorrect management of equity and debt capital. Giving too many shares in the company to investors or taking on too much debt can jeopardize the future of the company.

Solution approach

Early and realistic financial planning is crucial. Founders should not only rely on bank loans, but also consider alternative sources of financing such as business angels, venture capital or crowdfunding. A balanced capital structure, in which the ratio of equity and borrowed capital is chosen sensibly, is an important step towards putting the company on a solid footing in the long term.

Founders should also regularly monitor their liquidity and draw up appropriate financial plans that take into account not only the growth of the company but also unforeseen risks.

Especially in technology-oriented start-ups, which are often based on new ideas, products or software, the protection of intellectual property is of crucial importance. A common mistake is that founders do not adequately protect their inventions or ideas, which can lead to significant losses if competitors develop similar products or technologies.

Error

Many start-ups neglect to register patents, trademarks or copyrights before launching their products on the market. In other cases, intellectual property is not clearly transferred to the company if several founders are involved in the development. This can later lead to disputes over the rights to a technology or product.

Solution approach

Start-ups should develop a comprehensive strategy for protecting their intellectual property as early as possible. This can include registering patents, trademarks or designs, but also securing the rights to software and other innovative products.

An experienced intellectual property lawyer can help to take the right steps and ensure that the company protects its innovative strength from potential imitators.

Start-ups often face the challenge of operating in a dynamic market environment. Legal compliance requirements and regulatory requirements are often perceived as a bureaucratic hurdle and neglected.

Error

A common mistake is that start-ups do not obtain the necessary licenses, permits or market analyses required to operate their products or services. This can lead to legal problems and expensive sanctions, particularly in regulated sectors such as the financial, healthcare or food industries.

Solution approach

It is important that start-ups deal with the relevant legal requirements and regulatory provisions right from the start. Early advice from a lawyer who specializes in commercial law or the start-up’s particular area of expertise can help to avoid legal stumbling blocks.

Another common problem of start-ups is the lack of scalability and adaptability to market changes. This affects not only the business strategy, but also the legal structures.

Error

Many start-ups initially only focus on a small market segment and neglect to adapt their business models and legal structures so that they are scalable to larger markets or international markets. This affects both the company organization and the legal agreements with partners or customers.

Solution approach

Start-ups should design their business models and legal structures from the outset in such a way that scaling is possible. This applies not only to the financial structure, but also to the contracts and legal agreements with partners and customers. Flexibility and the willingness to adapt to new market conditions are crucial for long-term success.

Founding a start-up is an exciting and challenging journey. Many of the common mistakes that start-ups in Austria make are due to a lack of legal planning and legal advice. Sound legal support from the outset can help to avoid these mistakes and put the company on the road to long-term success.

An experienced business law lawyer can support start-ups not only in choosing the right type of company and drafting contracts, but also in financing, protecting intellectual property and ensuring legal compliance. Taking these aspects into account from the outset increases your chances of long-term success and avoids costly and risky mistakes.

The decision to become self-employed is a big step and can be both challenging and extremely rewarding. In Austria, there are numerous aspects that should be considered in order to make a successful start to self-employment. In this article, we would like to give you some useful tips to help you start your business.