The Legal Pitfalls for Scale-Ups – Part 2

High-growth scale-ups operate at speed: racing for market share, raising successive funding rounds, and iterating quickly. But moving fast doesn’t mean the legal foundations can be an afterthought – quite the opposite holds true.

Following on from The Legal Pitfalls for Scale Ups Part 1, our part two of the series, we explore the legal pitfalls most common in disruptive, high-growth ventures – and how to avoid them.

Pitfall 1: Failing to Formalise Founder Relationships Early
Many disruptive scale-ups begin with friends or colleagues on verbal understandings. When investment arrives or strategy diverges, lack of clarity over roles, equity, or dilution can disrupt or derail progress.
Mitigation: Secure a shareholders’ agreement and articles of association at the earliest stage. Include provisions for exits, dispute resolution, and decision-making. Service agreements can also avoid uncertainty around founder responsibilities.

Pitfall 2: Weak Intellectual Property Protection
Valuation in high-growth businesses is often tied to their IP. Failing to secure ownership of IP created by founders, employees or contractors can risk competitive advantage and damage valuation, particularly in funding rounds or an acquisition. 

Mitigation: Ensure employment and consultancy agreements include IP assignment clauses. Use standalone IP assignment deeds if necessary. Register trademarks for brands and consider patents where applicable. Keep records to prove ownership.

Pitfall 3: Employment and Incentive Challenges in Hyper-Growth
Hiring quickly to fuel growth can result in inconsistent contracts and poorly documented share option schemes. This can create disputes, issues with dismissal and risk business exposure – e.g. without appropriate non-compete clauses / restrictive covenants – further down the line, particularly if hiring employees into senior leadership roles.
Mitigation: Standardise employment documentation and policies. Ensure the business is protected in the event of future leadership changes. Work with advisers to implement compliant and tax-efficient share option schemes that retain talent while minimising risk. 

Pitfall 4: Ignoring Regulatory Requirements in New Sectors, including AI
Life sciences, fintech, and data-driven ventures in particular face strict regulation. Particularly tech-led start-ups need to consider evolving regulations around how data is used and processed—and ensure appropriate governance around AI. Non-compliance can stall funding rounds or risk fiduciary penalties.
Mitigation: Commission an early compliance review. Map out the regulatory landscape, implement policies, and embed governance into the culture. Demonstrating regulatory rigour can actually strengthen investor confidence.

Pitfall 5: Funding and Investor Relations Mismanagement
Pursuing multiple investment rounds at speed can lead to excessive dilution, loss of control, or friction between new and existing investors.
Mitigation: Develop a fundraising strategy aligned with long-term goals. Negotiate investment documents carefully to preserve founder and early shareholder interests. Maintain open, structured communication with investors to avoid misunderstandings.

Conclusion

Whether you are a traditional business scaling steadily or an aggressive start-up on a rocket trajectory, the legal pitfalls are strikingly similar: placing too much trust on existing relationships and handshakes; inadequate business protection; weak employment, customer and supplier contracts; overlooked IP; and a lack of due diligence around regulatory compliance. The difference is how these issues manifest.

The key is to get ahead of the risks. By formalising relationships, protecting assets, embedding compliance, and thinking strategically about funding, scale-ups can build the legal resilience to match their commercial ambition.

If you have any questions in respect of this article, please do not hesitate to contact me , James Macdonald, Senior Associate in the commercial and corporate team. 

The contents of this article is a general guide only at the date of publication.  It is not comprehensive, and it does not constitute legal advice.  Specific legal advice should be sought in relation to the particular facts of a given situation.