Start Now or Regret Later: Legal Mistakes That Can Cripple Your Startup

1. The Rush to Launch, The Price to Pay

When I first met the founders of a promising Kenyan SaaS (Software as a Service) startup, they were on a high. Their platform had gained real traction, they’d onboarded a few early clients and they had just been shortlisted for a regional accelerator.

“We’re moving fast,”

one of them told me proudly.

“We’ll handle the legal stuff once money comes in.”

Then came the investor due diligence.

Within 48 hours, the accelerator flagged five red flags:

• Their business name wasn’t registered and someone else had just reserved a similar one.
• They had no signed founder agreements, despite one co-founder having already left quietly.
• Their privacy policy didn’t match their actual data handling, putting them at odds with Kenya’s Data Protection Act.  
• Their main client contract had no jurisdiction clause and there was confusion about how to go about enforcement.
• They had zero IP protection for the software, which had been built by a freelance developer who was never formally contracted.

The client they were most proud of, a mid-sized telecom company, backed out of the renewal, citing

“legal exposure.”

The investor deferred their decision. The co-founder who’d left demanded equity, verbally promised, never documented.

That’s when they walked into our office.

We didn’t start with a pitch deck. We started with a diagnosis, the business was growing on top of legal quicksand.

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2. No Paper, No Protection

Like most startups, the founders assumed that legal formalities could wait until they were

“worth something.”

They had split equity with a handshake. One co-founder handled the product, another managed clients and the third was mostly absent but still “part of the team.” Their agreement? A few WhatsApp messages, one Excel sheet and some emails with hopeful percentages. No shareholder agreement. No vesting terms. No clarity on decision-making in case of conflict, death or exit.

Then things got serious.

A prospective investor asked for their cap table. They sent a Google Doc.

Next question,

“Who owns the IP?”

No one had an answer. The software had been built before the company was registered.

Final straw, a disgruntled ex-contributor surfaced with screenshots showing they’d been promised 10%. He was now threatening to sue.

The investor walked.

What most founders don’t realize is that without paper, there is no protection. Kenya’s Companies Act allows for flexibility in shareholder structures but without a formal Shareholders’ Agreement, everything falls back to the default legal provisions. Which rarely favour startups.

Investor-friendly terms like vesting schedules, tag-along rights, founder lock-ins or dispute resolution clauses aren’t

“nice to have”,

they’re basic infrastructure.

The founders weren’t the first to learn that the hard way. They just happened to learn fast enough to survive it.

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3. Your Code Isn’t Yours (And Neither is the Brand)

Still with the SaaS startup as they were preparing for a funding round when a simple question stalled everything:

“Can you confirm ownership of your tech stack and brand assets?”

The truth? They couldn’t.

Their platform had been built by a freelance developer they met through Twitter. No formal contract. No IP assignment. Just a chain of M-PESA payments and a few friendly emails. The logo? Created by a design student in exchange for

“exposure”

nothing signed, no terms agreed.

When the investor’s due diligence team dug deeper, the red flags multiplied:

     i.         The developer hadn’t transferred any rights. Legally, he owned the code.

   ii.         The brand materials were copyrighted to the designer by default.

  iii.         No NDA had been signed, meaning trade secrets were completely unprotected.

In Kenyan law, unless explicitly assigned in writing, intellectual property created by independent contractors belongs to the creator, not the client. That means your app, your logo, your UI/UX… could legally be someone else’s.

The startup didn’t just risk embarrassment, they risked being locked out of their own product.

This is more common than founders admit. In the early days, people prioritize speed over structure. But when things work, when traction comes or funding becomes possible, the IP chaos surfaces. And it can kill momentum instantly.

Today, that startup has enforceable NDAs, signed IP transfer agreements and clear internal IP ownership policies. But they had to backtrack and rebuild what should’ve been handled on day one.

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4. Casual Staff. Costly Claims

One of our clients, a tech-enabled logistics startup, thought they were playing it smart. They’d onboarded junior staff as

“interns”

to save on payroll costs, with no formal contracts and verbal promises of stipends or future employment.

One of those interns handled sensitive customer data. Another worked full-time hours managing dispatch. Neither had a written agreement. When business slowed, the team decided to

“let them go.”

Two months later, a demand letter arrived from a law firm. One of the interns had filed a complaint at the Employment and Labour Relations Court claiming unfair termination, underpayment and misclassification.

The startup’s defence?

“We hadn’t formalized anything. It wasn’t that serious.”

The court disagreed.

In Kenyan labour law, the label you give a worker doesn’t matter, their actual duties and working conditions do. If someone works under your control, on a regular basis and contributes to your business, the law likely considers them an employee, with rights.

That includes:

     i.         Notice before termination

   ii.         Statutory deductions (NSSF, NHIF, PAYE)

  iii.         Leave entitlements

  iv.         Protection against unfair dismissal

The startup had no written contracts, no clear HR policy and no documentation to support their decision. They settled expensively.

What felt like a harmless cost-saving move turned into reputational damage, cash outflows and an internal culture breakdown.

Casual doesn’t mean exempt.

Kenya’s employment laws are designed to protect the most vulnerable. And in court, the burden is on the employer to show structure not assumptions.

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5. Contracts You Don’t Understand or Haven’t Read

We once reviewed a startup’s main service agreement, the very contract they’d been using with all their clients. It looked polished. It had a table of contents, digital signature fields and neat formatting. But there were two problems:

i.      The contract was downloaded from a U.S. legal website, and governed by the laws of Delaware.

ii.    It had no liability clause, no dispute resolution mechanism and no mention of data protection.

They hadn’t negotiated it. They hadn’t reviewed it with counsel. They’d just… filled in the names.

The client had already signed it.

In Kenya, this kind of oversight isn’t just risky, it’s reckless.

Using a contract you don’t fully understand exposes your business in four key ways:

• Wrong jurisdiction. If a dispute arises, your contract could force you to resolve it in a foreign court or worse, leave you with no enforceable remedy at all.
• No liability caps or indemnity clauses. If something goes wrong, delayed service, system outage, data breach, you could be on the hook for losses far beyond what you were paid.
• No data protection safeguards. With Kenya’s Data Protection Act now in full force any service agreement involving customer or employee data must reflect actual processing practices. If not, the contract could violate the law by default.
• One-sided terms you didn’t catch. Many templates, especially foreign ones, favour the other party. Without review, you could be signing away rights you didn’t mean to give up.

Startups often see contract review as a luxury. But most legal disasters aren’t caused by bad people, they’re caused by bad documents.

If you don’t know what your contract protects you from, it probably doesn’t!

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6. Investors Look at Revenue and Audit Your Risk

Founders often assume that traction is enough, that if the product works and the numbers look good, investment will follow. But seasoned investors aren’t just betting on potential. They’re assessing risk.

When we support startups preparing for due diligence, the questions that come up aren’t always about the product or growth metrics. They’re legal, structural and strategic:

• Are your shares clean? Can you show exactly who owns what, with signed shareholder agreements, cap tables and no unresolved claims from ex-team members?
• Is your team legally tied in? Are there enforceable contracts with key staff, including IP clauses, NDAs and clear terms of engagement?
• Do you have a paper trail for your business operations? Tax compliance, contract records, board resolutions, licensing, data protection, if you’ve grown on verbal agreements and assumptions, it shows.

Investors aren’t looking for perfection. But they do need predictability. They want to know that once their money lands, it won’t get trapped in a legal mess, a staff dispute or a silent IP war with a former contractor.

The fastest way to raise doubt in an investor’s mind? Unclear ownership, missing contracts, and a founder who says,

“We’ll sort it later.”

Startups that scale have more than good ideas, they have good structure. And it shows before the pitch ends.

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7. What Legal Hygiene Actually Looks Like for Startups

There’s no glamour in legal hygiene but it’s what separates fundable businesses from risky bets.

You don’t need fancy structures or a full-time legal team. You need the right foundations, locked in early and aligned with how you actually operate.

Here’s what that looks like in real terms:

• Shareholding clarity. A signed shareholder agreement that spells out ownership, decision-making, exits and dilution. No guesswork, no handshake equity.
• IP that belongs to the business. Clear IP assignments from developers, designers and consultants, with supporting NDAs and enforceable transfer clauses.
• Contracts that reflect your reality. Vendor, customer and partnership agreements tailored to Kenyan law, not foreign templates with irrelevant jurisdictions and silent liability.
• Employees legally engaged. Written contracts for everyone on the team. Role clarity. Termination structures. Statutory compliance for NSSF, NHIF, PAYE and leave entitlements.
• Data privacy locked in. A real privacy policy (not a placeholder), clear consent mechanisms and a basic understanding of what you collect, where you store it and who has access.

You don’t need to fix it all at once. But you do need to start before investors force you to, or a dispute exposes the cracks.

Startups don’t get sued for being new. They get sued for being sloppy. Clean structure isn’t a bonus. It’s your base.