Legal and tax pitfalls for start-ups:

Startups are born from big visions and innovative ideas. Founders often focus on product development, customer acquisition, and finding investors. However, they must not overlook the legal and tax aspects of doing business, which can be just as crucial to success. This article describes the most common legal and tax issues faced by Czech (and foreign) startups, from company formation to international expansion. We offer specific examples from practice, highlight risks and provide a practical checklist to ensure that your startup doesn't overlook anything important. The aim is to help start-up founders and managers (especially in the B2B segment) navigate the legal and tax challenges and, at the same time, strengthen their confidence that these pitfalls can be overcome with professional help. If you are unsure, do not hesitate to contact a law firm – early consultation can prevent much more costly problems later on.

Author of the article: ARROWS advokátní kancelář (Mgr. Jáchym Petřík, office@arws.cz, +420 245 007 740)

Mistakes when setting up a start-up (shares, contracts and IP)

The early stages of a start-up are hectic and full of euphoria, which sometimes leads to the legal foundations of a newly established company being underestimated. The most common mistakes include poorly defined shares between co-founders, missing founding (shareholder) agreements and unresolved intellectual property issues.

Unclear co-founder shares and vesting

Founders often divide shares ‘by eye’ (e.g., 50/50 between two founders) regardless of the actual contribution of work or capital. This can lead to injustices and disputes, especially if one of the co-founders leaves the start-up early but still owns a significant share. The ideal solution is to contractually regulate the distribution of shares – set milestones or use the concept of vesting.

Vesting means that co-founders acquire their shares gradually, for example over 4 years, with a so-called cliff after 1 year. If someone leaves earlier, they do not receive their full share, which protects the company from a ‘dead equity’ situation. In practice, investors often require vesting directly, with four years and a one-year cliff being the standard – so it is good to keep this in mind from the outset.

Missing founding or partnership agreement

Every start-up with multiple founders should have an agreement governing the relationships between the partners – often referred to as a Founders' Agreement or partnership agreement. This document specifies who has what share, what the rights and obligations of the founders are, how fundamental issues will be decided, what happens when one of them leaves, non-competition clauses, etc. If these matters are not clarified in advance by contract, serious disputes may arise later. As legal experts point out: ‘If a company has multiple partners, the partners should ensure that their relationships and responsibilities within the company are clarified in a contract.’ Without such an agreement, even a minor conflict can disrupt the entire project.

For example, we encountered a case where one of the founders left just before the investment was secured – the company had to go through a complicated process to buy back his share because they had not agreed in advance on the conditions under which the departing partner could transfer his share back.

Unresolved intellectual property (IP) issues when starting a business

Intellectual property is often the most valuable asset a start-up has – it can be source code, an algorithm, a design, a trademark or know-how. A common mistake is to fail to legally protect IP at the outset.

If the founders develop a product before establishing the company or with the help of external contractors, they must ensure that the results belong to the company. All key outputs (code, texts, graphics, etc.) should be transferred to the company, usually through a copyright transfer agreement or licence agreement. Similarly, employees and contractors must have a clear provision in their contracts stating that all IP created belongs to the employer. Failure to regulate IP can lead to one of the creators (e.g. a programmer) retaining the copyright and the start-up then being unable to fully use or sell its product.

It is equally important to check that the start-up is not infringing on the rights of others – e.g. that the project name or logo does not already belong to someone else.

Our client, Mr. Marek, for example, invested heavily in marketing and logos, only to discover that another company was already using almost the same name. The solution is to conduct thorough trademark research and register your own trademark for your key brand.

Registering a trademark gives you stronger protection than simply registering a business name. A trademark should be registered in the countries (or regions) where you plan to operate – for example, within the EU, you can obtain uniform protection in all member states. There is nothing sadder than when your competition registers your brand just as your business is taking off. That's why you should think about IP from day one – secure your domains, register your name and logo, and patent key technology if relevant.

Choosing a legal form and basic documentation

It is also important to choose the right legal form for your business. In the Czech Republic, start-ups most often choose a limited liability company (s.r.o.) because it is relatively easy to set up and manage. Sometimes founders start out as sole traders (OSVČ) – this may be sufficient for a while, but it is not suitable for bringing in investors or dividing ownership among several people.

On the other hand, setting up a joint-stock company right away to give the impression of a ‘big company’ can be unnecessarily expensive and complicated if you are just starting out. Also, think about what documents you need right from the start: in addition to the memorandum of association/articles of association (mandatory for limited liability companies), it is worth having an internal agreement between the partners, as mentioned above. In addition, you will need basic contracts with suppliers, initial terms and conditions, etc. Underestimating these basics can ‘code’ problems for your start-up in the future.

Legal pitfalls of investment rounds (term sheet, cap table, preference)

Securing investment is essential for many start-ups to grow quickly. However, the investment process involves a whole range of legal documents and terms that founders need to understand. Term sheets, cap tables, liquidation preferences, anti-dilution clauses, shareholder agreements – these are all tools that protect investors but can catch less informed founders off guard. Let's take a look at the key areas where the biggest risks lie:

Term sheet (non-binding investment agreement)

A term sheet is a document that outlines the basic terms of an investment between an investor and a start-up. In itself, it is usually not legally binding in its entirety, but it is very important – it sets the boundaries for subsequent contracts. Mistakes arise when founders sign a term sheet without fully understanding all the provisions. It is necessary to pay attention to the company valuation – whether it is determined before or after the investment (pre-money vs. post-money), as this will affect the investor's share percentage.

Also note whether the valuation includes an employee stock option plan (ESOP), as this effectively dilutes the founders' shares, and if it is included, the founders should know this in advance. The term sheet will also typically specify what type of shares the investor will receive and what rights they will have. In start-up investing, it is common for investors to have preferred shares with advantages over the founders' ordinary shares. These advantages are then detailed in the investment or shareholder agreement, but should be outlined in the term sheet.

Recommendation: Never take a term sheet lightly just because it is ‘non-binding.’ Key parameters (valuation, shares, type of shares, main preferences) should be reviewed by a lawyer familiar with venture capital before you commit to them.

Cap table (ownership structure) and equity management

A cap table, or capital structure table, shows who owns what share of the company (founders, investors, employees, etc.). It is a mistake not to pay attention to the cap table from the outset and keep it ‘clean’.

For example, repeated minor adjustments – allocating small shares to mentors, acquaintances or small investors – can lead to a fragmented ownership structure that will later discourage serious investors.

Before agreeing to an investment, take a look at what the ownership structure will look like afterwards: you will often find that your percentage will drop significantly. This is to be expected, of course – the investor gets a share for their money – but founders should retain enough of a stake to stay motivated and to show other investors their strong commitment. If, after several rounds of financing, the founders' share falls below 20%, for example, this may be a warning sign that the ‘cap table is broken’ and the founders have lost control and motivation.

The solution is to plan ahead: calculate how much of the shares will be allocated to employee options, know the maximum amount to be issued to investors in each round, and always consider the implications for the ownership structure. Professional investors carefully analyse the cap table – if it contains ambiguities (e.g. unpaid shares, dormant shareholders with large shares, non-transfer of shares from former team members, etc.), this may jeopardise the conclusion of the investment. Therefore, always keep your cap table up to date, accurate and ready for inspection.

Liquidation preference (preferential payment upon exit)

The term liquidation preference refers to the right of an investor to receive a certain amount of money preferentially upon the sale or liquidation of a company. Typically, it is stated as a multiple of the amount invested – for example, 1× liquidation preference means that the investor first receives their entire investment back upon exit; 2× preference guarantees them double.

There is also a participatory preference, where the investor not only receives their amount, but also shares in the remaining proceeds along with the other shareholders. This can be disadvantageous for founders, as they may walk away with little or no reward if the company is sold for a small amount, while the investor receives a guaranteed amount.

Example: if an investor has invested £1 million with 2× participating preference and the start-up is sold for £2 million, the investor could receive the entire amount and the founders nothing.

It is therefore essential to negotiate the most acceptable terms – e.g. only 1× preference (i.e. return of investment, nothing extra) and ideally non-participating (after the investor has been paid, the remainder is distributed proportionally among all shareholders). In any case, always pay attention to the provisions on liquidation preferences in the shareholders' agreement. They can decide how much the founders will actually receive upon exit.

Anti-dilution

Investors sometimes negotiate a clause that protects them in the event that the value of the company later declines and new shares are issued at a lower price (a so-called down round). The anti-dilution provision then regulates how their share is recalculated.

There are two main variants:

1. Full ratchet (the investor retains their original percentage regardless of the decline in valuation – or receives additional shares for free)
2. Weighted average (recalculation using a weighted average, a milder variant).

For a start-up, the milder method is obviously more advantageous, or ideally no anti-dilution clause at all. When negotiating an investment, keep in mind that too much investor protection may discourage other investors in the future (as the earlier investor would have a disproportionate advantage). Look for a reasonable balance – the investor has the right to protect themselves, but you need room for further growth.

Other key provisions of investment agreements

In addition to the above, founders should also understand other conditions that investors often require. These include exit rights – e.g. a drag-along right, which allows majority shareholders (often the investor) to force minority (typically the founders) to sell the company on the same terms. This is advantageous when an investor wants to sell 100% of the shares to a strategic buyer – the minority cannot block the sale. For the founders, however, this means that they may be forced to sell even if they themselves are not enthusiastic about the price or the buyer.

This also includes the investor's veto right on fundamental decisions (e.g. issuing new shares, selling significant assets, budget, etc.), rights to information (regular reports to the investor on the company's financial performance), or competition clauses and the obligation of key persons to work for the company on a full-time basis.

For example, you may encounter a condition that the founders sign a non-competition clause – for a certain period after their departure, they will not establish a competing project. These requirements are fairly standard, but it is always important to ensure that they are reasonable (duration of the non-competition clause, reasonable exceptions, etc.).

Summary: The investment round is a time when a start-up should definitely have an experienced lawyer on hand. Documents may contain seemingly ‘standard’ provisions that have a significant impact on the future of the company. Understand your term sheet and contracts – and negotiate fair terms that protect not only the investor but also you.

Contact our experts:

Employing people and working with ESOPs (employee share ownership plans)

Team building is crucial for the growth of a start-up – talented employees often determine success. However, this comes with legal and tax challenges in the areas of employment law and employee motivation. The two main areas where start-ups make mistakes are (1) hiring people incorrectly without complying with legal obligations and (2) attempting to introduce employee share ownership (ESOP) in the Czech environment, which is not ready for it.

Employment contracts and legal employment

Young companies sometimes take a casual approach to hiring people. For example, they may employ someone ‘on trust’ without a proper contract, or circumvent employment by hiring them as self-employed contractors (the so-called ‘švarcsystém’).

Warning! The Czech Labour Code requires that the employment relationship be agreed in writing and that the employer pay social security and health insurance for the employee. If a start-up employs people as pseudo-contractors, it exposes itself to the risk of labour inspections and high fines.

Poorly established relationships with employees can result in a loss of know-how, legal disputes or sanctions from the labour inspectorate. Therefore, always conclude a proper employment contract or agreement on work activity/agreement on the performance of work according to the actual nature of the cooperation. Also, keep in mind the obligation to register employees with the Social Security Administration and health insurance company and to pay contributions properly – this is often overlooked until the first inspection comes. Another common oversight of start-ups is ignorance of the correct procedures for terminating employment. There are rules for dismissing employees (reasons for termination, notice periods, severance pay), and you cannot just fire someone ‘overnight’ without consequences.

Tip: Get your HR in order right from the start. This will help you avoid both legal problems and the departure of dissatisfied people who feel cheated.

ESOP and employee shares

In the world of start-ups, it is common practice to motivate key employees with a share in the company – a so-called Employee Stock Option Plan (ESOP). In the Czech Republic, however, ESOP is still problematic from a legislative point of view. The Czech legal system does not recognise this concept and does not contain any specific provisions for it.

What does this mean in practice?

If you give an employee a direct share or stock in the company, they are immediately obliged to pay income tax and social security contributions on the value of that share. Even if the employee has not actually received any money (only a share in a start-up that may not yet be generating a profit), Czech law treats this as taxable income, which can be financially devastating for the employee.

That is why start-ups are looking for alternative solutions: virtual ESOPs (VSOPs) are very common, where the employee does not receive actual shares now, but a promise of remuneration equivalent to the value of a certain share in the future. Everything is dealt with contractually – for example, the employee gains the right to a bonus corresponding to X% of the company's value upon exit. This defers taxation until the company generates money (upon sale or dividend). Other creative methods include setting up employee cooperatives or so-called drawer contracts, which are activated only when certain conditions are met.

However, none of these are ideal – there is a lack of uniform practice and legal certainty. Unfortunately, legislative attempts to introduce employee shares in the Czech Republic have not yet been successful (as recently as 2025, a start-up association criticised a new draft law for failing to address tax obstacles, meaning that ESOPs remain ‘nowhere in sight’.

What does this mean for start-ups?

If you want to reward your employees with a share in the company, be sure to seek advice from a lawyer and tax expert. A poorly designed ESOP can lead to employee disappointment (if they find out that most of the hypothetical profit would go to taxes) or legal disputes. There are solutions to motivate employees without ruining them – whether it's the aforementioned VSOPs, issuing share certificates for limited liability companies (a new type of security), or using foreign structures (some startups set up a holding company in a country where ESOPs are common and give shares through it).

In any case, communicate transparently with your employees about what you are offering them, under what conditions and what rights they have. A well-designed ESOP/VSOP can increase a company's performance by 4-5% and help attract talent, which is definitely worth it – just make sure it's not a ‘ticking legal time bomb’ from the outset.

Tax errors and optimisation (including cross-border structures)

Taxes and accounting are often boring and complicated topics for start-ups.

Many founders put them off until later, saying that they have ‘more important things to do right now.’ However, this can lead to serious problems – failure to meet tax obligations or poor company structure can jeopardise a start-up or unnecessarily cost it money. We will look at common tax errors and ways to legally optimise taxes, including situations with an international element.

Underestimating tax obligations and accounting

The basic obligations of an entrepreneur include keeping accounts or tax records, filing tax returns (VAT, income tax, road tax, etc.) on time and paying taxes. In their enthusiasm for innovation, start-ups sometimes forget that even if they are initially making a loss, they must still submit a zero tax return or VAT control statement (if they are VAT payers).

A common mistake is not keeping track of the VAT registration threshold – from 2023, if a company's turnover exceeds CZK 2 million in the last 12 months, it is mandatory to become a VAT payer in the Czech Republic. Start-ups grow quickly and can easily exceed this threshold – but if they do not notice this in time and do not register for VAT, they risk additional tax assessments and fines.

Also, keep an eye on salaries and contributions: if you start paying salaries (or remuneration to partners), you must pay income tax and insurance contributions on time. We recommend working with a good accountant or accounting firm from the outset to ensure monthly closings, monitoring of contributions and everything else you need.

Chaos in accounting can come back to haunt you, for example when dealing with investors (due diligence will reveal financial disorder) or when selling the company at a later date, when tax irregularities can delay or even scupper the transaction.

Failure to take advantage of tax benefits and relief

On the other hand, many start-ups pay more tax than they need to because they are unaware of the tax options available to small innovative companies. For example, Czech law allows deduction of research and development expenses – if you register a new product development project, you can retroactively deduct eligible R&D costs from your tax base (effectively receiving a relief of 19% of these costs).

There are also investment incentives and subsidy programmes that can provide tax relief or direct support (e.g. Technology, Innovation from CzechInvest, etc.). Of course, it is not a good idea to be tempted by the prospect of relief alone – business always comes first – but keeping tax optimisation in mind is part of responsible business management.

A good tax strategy can extend your runway (the period during which the company can survive with its current cash) by several months. Therefore, consider consulting a tax advisor, especially once you start generating more revenue or investing in costly development projects.

Cross-border business and permanent establishment

Many Czech start-ups target global markets from the outset and face the question of where to formally establish their business. Some establish a parent company abroad (in the US, Estonia, the UK, etc.) for easier access to investors or more flexible legislation. This is not a problem in itself and can be advantageous, but it is necessary to establish a good relationship between the Czech part and the foreign entity.

If the development team remains in the Czech Republic, a so-called permanent establishment of a foreign company may be created here, which would be required to pay income tax in the Czech Republic on the income it generates. Young companies are often unfamiliar with this area and can get into trouble if the tax office determines that the foreign company is actually operating in the Czech Republic without registration.

Recommendation: If you decide on an international structure, do so with care. Take advantage of double taxation – i.e. make sure that income is not taxed twice in two countries (this is done through double taxation agreements, which the Czech Republic has with many countries).

Deal with transfer pricing – if a Czech branch provides services to a parent company abroad, the prices must correspond to the usual prices. And if you are transferring assets or IP abroad, check whether this is subject to exit tax (tax on the transfer of assets abroad). These issues are complex, but they can be managed with professional help. On the other hand, a poorly set up structure can lead to unexpected tax assessments or legal uncertainty about where things actually belong.

Selling abroad and VAT/customs

If your startup starts selling goods or services abroad, don't forget about the tax aspects. For physical goods outside the EU, you have to deal with customs duties and customs declarations. For digital services within the EU, above a certain limit, you must register for a special regime (OSS – One Stop Shop) and pay VAT according to the customer's country.

For example, if you sell software or applications to customers in the EU for hundreds of thousands of EUR per year, you are obliged to pay VAT at the rate of the user's country – OSS makes this easier, but you must register for it.

Foreign income must also be included in your Czech tax return if the company is still a tax resident of the Czech Republic (which it usually is if it is based here). Avoid the temptation to ‘hide’ foreign income – thanks to the open exchange of information between countries, tax authorities are now able to detect undeclared foreign profits relatively easily.

Overall, tax transparency and proper structuring of international business will protect you from future problems. Taxes saved at the cost of breaking the law never pay off – penalties and reputational risk are much worse.

Intellectual property (IP) protection in a start-up

We already mentioned intellectual property in connection with setting up a company. However, as a start-up grows, there are other moments when your IP (intellectual property) may be at risk. A successful start-up should have a strategy for protecting, managing and defending its intellectual property against misuse.

Here are the main areas to focus on:

Trademarks and branding

Once you have a product or service name that you use on the market, register a trademark. In the Czech Republic, this is done by the Industrial Property Office, and for the entire EU, there is the EUIPO, which issues trademarks valid in all member states.

Registering a trademark gives you the exclusive right to use it for the products/services in question – no one else may offer similarly labelled services, otherwise you can take legal action.

Many start-ups underestimate this and operate under an unregistered brand name; then a competitor or even an investor may register that brand name and you will lose it. Don't forget domains – key internet domains (.cz, .com, or local domains of the countries you are targeting) should be owned by you, not by an external party.

Patents, utility models and technologies

If your innovation is a technical solution (e.g. new hardware, chemical formula, manufacturing process), consider patenting or registering a utility model.

A patent can give you a monopoly on your invention for up to 20 years, significantly increasing the value of your company in the eyes of investors. The patenting process is demanding – you have to disclose in detail how the thing works and wait for approval. Not every innovation is patentable (software is difficult to patent in Europe), but it is worth discussing with a patent attorney whether any of your IP can be protected in this way.

On the other hand, it would be a mistake to disclose key know-how (e.g. at a conference or in marketing) and only then discover that it could have been patented – at that point, it is too late, because a patent requires novelty (what is publicly known cannot be patented).

Start-ups should have internal IP management – keep records of who invented what and monitor what is being disclosed.

Copyright and software

In the case of software and creative start-ups, copyright is a key issue. Program code, application design, texts, databases – these are all copyrighted works. In the Czech Republic, copyright to works created by employees is automatically transferred to the employer (so-called employee works), but it is advisable to have this confirmed in a contract.

For external collaborators, it is necessary to contractually agree on a licence agreement or transfer of rights, otherwise you will only have a so-called non-exclusive licence to the results of the contractor's work.

Make sure that your software/app does not have a ‘leaky’ legal basis – i.e. that all code was either written by employees as part of their work or that you have written consent/transfer from contractors.

Also, be careful with open-source software: using open-source libraries is common, but you must comply with their licence terms. Some licences (e.g. GPL) require you to release your code when you use the code – this may conflict with your business interests. Therefore, keep track of which open source components you use and consult a lawyer about licences if you are developing something commercial on them.

Protection of know-how and trade secrets

Not everything can (or should) be formally registered. Trade secrets, algorithms, customer databases, etc. are mainly protected by controlling access and imposing non-disclosure agreements (NDAs).

Every employee, supplier and potential business partner who comes into contact with sensitive information should have a signed NDA. This prevents important information from being leaked to competitors. Start-ups sometimes, in their initial euphoria, tell everyone about their technology – but remember that ‘know-how that is leaked cannot be taken back’.

Set internal rules on what is confidential and prepare a simple NDA template that you can use at any time. If someone refuses to sign an NDA, this is a warning sign.

Enforcing rights and resolving disputes

Having registered and contractually protected IP is the first step. The second is knowing how to defend your rights. Monitor the market for anyone copying your name, product or using your know-how. If you discover something like this, consult a lawyer and consider legal action – often, a pre-action letter to the infringer asking them to refrain from the unlawful conduct will help. Conversely, if someone accuses you of infringing their IP, don't underestimate it. Ignoring a warning can lead to preliminary measures or a lawsuit that can seriously disrupt your business (e.g., a ban on selling a product due to patent infringement).

Resolve disputes actively and, ideally, amicably – sometimes a licence agreement or financial settlement can save you a long court case. In any case, it is cheaper to prevent conflicts – through careful checks, research and contracts – than to deal with them later in court.

Regulatory challenges in specific sectors (FinTech, AI, Biotech, etc.)

Some start-ups operate in sectors that are strictly regulated by the state or supranational regulations. These typically include financial technology (FinTech), artificial intelligence (AI), and healthcare or biotechnology (BioTech), but also energy, transport, and others. If you do business in a regulated sector, you must expect that, in addition to general laws, special requirements will apply to you – often from the early stages of your project. The most common challenges in these areas are:

FinTech and financial services

The financial market is one of the most regulated. As soon as your start-up handles other people's money (payments, investments, loans, crypto assets, etc.), find out what licences or registrations you need. For example, operating a payment app usually requires a payment institution or electronic money institution licence from the CNB (Czech National Bank) if the transaction volume exceeds a certain limit. Brokerage of investments or provision of loans may require a securities dealer or consumer credit provider licence.

New European regulation on crypto assets (MiCA) will be introduced in 2024/2025 – if your project works with cryptocurrencies, NFTs, etc., you will be subject to special rules (e.g. obligation to publish a white paper for tokens, registration with the regulator, etc.).

AML (anti-money laundering) is a matter of course in FinTech – the obligation to verify clients (KYC – Know Your Customer) and prevent money laundering. A common mistake: a startup launches a beta version of a financial service without a licence, thinking that ‘it doesn't matter yet’. However, the regulator may intervene as early as the pilot phase and impose a fine or ban the activity.

Solution: Find out exactly what permits you need and start the licensing process in good time – sometimes it can take many months. If it makes sense, work with an already licensed partner (a white-label solution) until you obtain your own authorisation.

In any case, bring a lawyer specialising in financial law onto your team to help you set everything up in accordance with the regulations. FinTech opportunities are huge, but penalties for breaking the rules can be devastating (often a percentage of the company's turnover in the case of EU regulations).

Artificial intelligence and data

AI start-ups face particular regulations in the area of privacy and data protection. If you train models on user data or provide AI analysis of client data, you will definitely have to deal with the GDPR – the General Data Protection Regulation. The GDPR applies throughout the EU and requires, for example, that you have a legal reason for processing data, that you secure it, inform users and enable them to exercise their rights (access, erasure, etc.).

Failure to comply with GDPR can result in fines of up to tens of millions of euros, so even startups must strive to be compliant (e.g., have basic documentation: processing records, data processing agreements with providers, privacy policy on the website, etc.).

In addition, new EU-wide AI regulation is on the horizon – the so-called AI Act, which is likely to come into force in the coming years. This will divide AI systems into categories according to risk and set strict requirements for high-risk systems (e.g. AI in healthcare, autonomous driving, HR for employee recruitment, etc.), such as the obligation to demonstrate safety, eliminate bias and register the system with the authorities. AI start-ups should already be monitoring which category they may fall into and preparing to comply with new obligations (e.g. keeping documentation on data sets, tests and model explainability).

Specific legal questions are also emerging: if your AI system generates content (images, text), who is liable for any copyright infringement or damage caused by incorrect output? This is not yet fully addressed by the law, but this may change soon.

Advice for AI projects: Implement privacy by design and AI ethics principles from the outset. Have a lawyer who understands IT law to review your contracts with suppliers and user terms and conditions, and monitor legislative developments so you are not caught off guard.

Healthcare, biotech and other regulated industries

If you are developing a medical device, drug, diagnostic tool or even a food supplement, you will face a complex path of certification and approval.

Medical devices in the EU are subject to the MDR/IVDR Regulation – you must meet technical standards, conduct clinical evaluations and obtain a CE certificate (CE mark) from a notified body before you can place your product on the market.

For medicines, the process is even more demanding – clinical trial phases, registration with the SÚKL/EMA, pharmacovigilance. These processes are expensive and lengthy, so start-ups often choose to partner with a larger company or first develop an MVP, which falls into a less stringent category of regulation.

For example, a mobile health app can be presented as a wellness tool (unregulated), but as soon as it starts giving medical advice, it could fall under the category of a medical device.

It is crucial to define exactly what your product is from a legal standpoint and proceed accordingly. In addition, consider the ethical aspects – in biotech, this may involve working with genetic data, human material, etc., where you must obtain consent and comply with ethical standards. Similarly, in energy or transport, a startup developing drones must comply with aviation regulations and obtain the appropriate permits, while a startup in the food industry must comply with hygiene standards and certifications.

The rule is: ‘Do not enter a highly regulated industry without professional training.’ Have someone on your team or as a mentor who is familiar with the relevant regulations. Engage in dialogue with the regulator from the outset (many authorities offer consultations for innovators, e.g. SÚKL has an innovation section, ČNB organises workshops for FinTech, etc.).

Regulation does not have to be a hindrance – if you can manage it, it will become your competitive advantage (few people know how to do it well).

The most common mistakes when expanding a start-up abroad

Success in the domestic market often motivates start-ups to expand abroad. However, expansion is not just a matter of translating your website into English – it is a complex process of entering new markets where legal and cultural pitfalls lurk.

Many Czech start-ups have made mistakes during expansion that have cost them a lot of money and sometimes even their reputation. What should you watch out for when taking your product ‘global’?

Insufficient preparation and research of the environment

One of the most unnecessary mistakes is to start expanding without a thorough plan and knowledge of the target market. Every country has its own specifics – legal, tax and cultural.

For example, labour law in France is different from that in the Czech Republic, doing business in Germany involves stricter requirements for the formality of contracts, and in the US, you have to deal with a completely different legal system and product liability.

Therefore, prepare your expansion as a project: analyse the legal forms you can choose in your target country (whether to establish a branch, a subsidiary or sell remotely), find out about tax obligations (VAT, sales tax, customs duties), protect your brand and domain in the country concerned, and check whether your product requires any local certification.

For example, an e-shop entering Germany must comply with strict consumer protection laws (different requirements for terms and conditions, withdrawal from contracts, etc.), while a software provider in the US should have well-defined terms and conditions regarding warranties and liability, otherwise it risks lawsuits for damages amounting to millions of dollars.

The key is knowledge of the local legal environment – as one business consultant says: ‘Proper preparation includes knowledge of the target market in all its aspects... The different legal environment with all its specific laws and requirements must also be taken into account.’ You often don't have this knowledge in-house, so bring in local experts. Hire a local lawyer or consultant for the market in question, or work with a partner who is already established there and can help you avoid dead ends.

Poor choice of expansion structure: Another mistake is to choose how you will operate abroad without careful consideration. Some companies immediately set up a foreign subsidiary, which makes sense if you have investors or a larger team on the ground. Others try to ‘test the waters’ without setting up an entity, for example by sending employees from the UK on permanent assignments or hiring local freelance sales representatives.

Please note that both paths have legal consequences. Establishing a company means administration (registration in the commercial register, local accounting, local taxes), but it gives you a legal entity for contracts with local clients and better protection (if something happens, the parent company in the UK is not directly liable). If you go without an entity, there is again a risk of establishing a permanent establishment – for example, if you have a person abroad who systematically concludes contracts on your behalf, a tax liability may arise there.

For employees sent abroad, you have to deal with visas, work permits (definitely outside the EU) and often the question of where they pay social security (there are social security agreements, but you have to issue forms such as A1 within the EU). Incorrect setup can result in your employee working abroad illegally, which has reputational and legal risks.

One solution is to use the services of an Employer of Record (EOR) – i.e. hire people through a company that officially employs them in the given country and ‘loans’ them to you. This is popular for rapid expansion without setting up your own entity, but you need to have a reliable partner and a contract that specifies who bears what risks.

Lack of IP and brand protection abroad: We have already discussed IP – this applies doubly when expanding. It is cheaper to register a trademark in the target country than to sue someone who starts using a similar one there.

Don't forget that trademark registration is territorially limited – if you only have a Czech trademark, it is not valid in Germany. Take advantage of the EUIPO for the entire EU or register in the international system (Madrid Protocol) for other countries.

Similarly, if you export a product, check that it does not infringe on foreign patents in the country in question. What is freely available in the Czech Republic may be patent-protected in the US. It is therefore wise to conduct a local patent search before launching a product on a foreign market, especially in fields such as pharmaceuticals, chemicals and engineering.

Failure to respect local business practices and consumer rights

The legal environment is not just a set of rules, but also case law and customs. For example, in the Anglo-American world, it is common for commercial contracts to be comprehensive and detailed – there is less reliance on general law and more on what is written in the contract. In contrast, in continental Europe, many things are regulated by law and it is not necessary to list them all.

If you are entering the US market, have your user agreements or commercial contracts reviewed by a US lawyer – your European versions may not cover key areas (e.g. disclaimers regarding liability, arbitration clauses instead of courts, etc.).

Another example is consumer rights – in the EU, customers have strong protection (e.g., a 14-day return period for online purchases, a two-year warranty, etc.). When selling to consumers in Germany, you must provide them with these rights, even if they are not mandatory in the US.

The translation and localisation of contractual documents should be done by a professional translator who is a native speaker of the language in question so that the text does not sound awkward. Minor wording can have a major impact on interpretation – for example, ‘warranty’ in English does not mean the same thing as ‘záruka’ in Czech in a legal context. Therefore, do not rely on your own translations; instead, invest in professional localisation.

And finally, proceed gradually when expanding. Expanding into multiple markets at once can fragment your efforts. It is better to master one market, create a functioning model there, and only then move on. Throughout this process, have international legal support at your disposal, whether in the form of a law firm with partners abroad or local advisors.

Practical legal and tax checklist for start-ups

Finally, we have prepared a brief checklist for start-up founders. Go through the following points and check that your start-up meets them or is working on them – this will help you avoid a number of problems:

• Agreement between founders: Do you have an agreement between the co-founders that regulates the distribution of shares (ideally with vesting), roles and responsibilities, decision-making and the resolution of any departures or disputes?
• Legal form and basic documents: Have you chosen the appropriate legal form for your startup (sole proprietorship vs. limited liability company vs. joint-stock company) with regard to your current needs and future growth? Do you have a properly drafted memorandum of association/articles of association and, if applicable, an internal partnership agreement?
• Name and brand protection: Have you checked that the name of your company or product does not infringe on any third-party trademarks? Have you registered your own trademark in the relevant countries (or an EU trademark) and do you own the necessary internet domains?
• Intellectual property and know-how: Are all key outputs (code, design, inventions) legally transferred to the company? Have you contractually secured the IP rights of your employees and suppliers? Do you use NDA agreements to protect confidential information and know-how?
• Employees and contracts: Does every team member (employee and external contractor) have an appropriate contract – an employment contract or a contract for work? Do you comply with labour law (recording working hours, holidays, occupational safety) and pay social security and health insurance for your employees? Do you avoid illegal subcontracting?
• Employee motivation (ESOP/VSOP): If you plan to give shares to employees, have you consulted with lawyers and tax advisors? Do you have a programme in place (e.g. virtual option agreements) to motivate employees without causing tax problems?
• Investments and investor terms: When negotiating with investors, do you have a lawyer with experience in start-up investments at your disposal? Do you understand the key terms in the term sheet and shareholder agreement – valuation, liquidation preference, anti-dilution, investor rights (veto, information), drag-along, etc.? Do you know what your cap table will look like after the investment and what share you will retain?
• Accounting and taxes: Have you kept proper accounting or tax records from day one? Do you have a reliable accountant who keeps track of filing and payment deadlines? Are you registered for VAT if you have exceeded a turnover of £2 million? (or foreign VAT limits in other countries)? Do you pay your taxes on time or communicate with the authorities in case of difficulties?
• Tax optimisation: Do you use available legal means of tax optimisation – deductions for research and development, investment incentives, correct allocation of costs (e.g. home office expenses, travel expenses), etc.? Have you consulted on international tax implications if you have a structure with a company abroad (transfer pricing, double taxation agreements, permanent establishment)?
• Regulatory requirements: Have you identified whether your industry is subject to special regulations (financial laws, health regulations, energy licences, GDPR, etc.)? If so, have you taken steps to obtain the necessary licences or certifications or set up internal processes for compliance?
• Expansion and foreign markets: Do you have a plan for entering foreign markets? Have you researched the legal requirements in your target country (entity formation, tax obligations, labour law, consumer protection)? Have you secured your IP (trademarks, patents) abroad? Are you working with local experts to avoid unfamiliarity with the environment?

This list is not exhaustive, but it covers the most common areas. Review it periodically as your startup grows and changes, and new challenges arise. For example, what was sufficient for 5 people may no longer be sufficient for 20 people or when a strategic investor joins.

Conclusion: Don't underestimate the law and taxes – and don't hesitate to seek advice

The world of start-ups is dynamic and full of uncertainty. However, you can be sure that a strong legal and tax foundation will support you when unexpected situations arise. Many problems that can be avoided by setting things up correctly from the outset are very difficult and expensive to resolve later on.

Therefore, do not put legal and tax issues on the back burner. On the contrary, treat them as part of your business strategy – just like your product, marketing or finances. The good news is that you do not have to do it alone.

A professional law firm with experience in the start-up environment can help you significantly, whether on a one-off basis with contract reviews, investment offer evaluations or ESOP set-up, or on a long-term basis as a partner who knows your business and oversees the legal health of your company. Similarly, a tax advisor can design a structure that will save you money and keep you safe from the authorities.

Our team of lawyers and tax experts has already helped dozens of startups go through all the stages – from setting up a garage company to international expansion and a successful exit. Don't hesitate to contact us for a no-obligation consultation or legal audit of your startup. We will be happy to help you identify any weaknesses and propose solutions before they become real problems. This will allow you to focus fully on growing your business, knowing that the legal and tax aspects are in order.

Start-ups that combine innovation with a solid legal foundation have a significantly higher chance of long-term success. Therefore, pay due attention to legal and tax matters – they are an investment in the future of your business. If you are unsure, ask the experts. As the saying goes, ‘Fortune favours the prepared’ – and this is doubly true in business.

Don't want to deal with this problem yourself? More than 2,000 clients trust us, and we have been named Law Firm of the Year 2024. Take a look HERE at our references.