Developing a new idea, creating a website and customers are all the exciting things about building a startup but dealing legal issues will never be on a founder’s top ten list. Unfortunately, a strong legal foundation is necessary in order to build a growth company and not taking care of these important issues can keep you from getting investment or expanding down the line.
Here are five things all founders should pay attention to within the first six months of starting their business to ensure it’s off to the right start.
Key Takeaway: Be sure to draft a founders’ agreement early on and without emotion.
Allocation of company ownership is important. It is also vital to address what happens if one founder departs. It is not uncommon for pre-incorporation founders to fall off the map before the startup becomes profitable. Deadbeat co-founders may also show up to claim profits if the startup takes off. You therefore need a clear strategy on how to handle this.
Founders should also clarify what their duties are to current and former employers. If the idea for a startup was developed or worked on while an entrepreneur was employed by another business, there may be specific legal issues to consider.
Key Takeaway: Retain appropriate legal counsel as soon as possible or utilize open sourced legal documents for the early stages.
Focusing on legal issues early is key, and is especially helpful for new entrepreneurs. However, do not give your lawyers equity and do not use your investors’ lawyers. Also, remember that violation of privacy, securities or tax laws can lead to criminal liability so it is imperative that startups have proper policies in place and carefully adhere to them.
Don’t have the funds to hire a full time lawyer? Check out the Founder Institute’s open source agreements that can serve as a good start for standard legal agreements.
Key Takeaway: Founders should implement an intellectual property strategy to monitor the use and disclosure of their intellectual property.
Protect your startup’s name. It could be one of the company’s most valuable assets. Many startups operate under the mistaken assumption that a corporate name reservation is the only thing they need to protect their business name. Remember that you also have to register the name globally as a trademark.
One of the most common pitfalls that entrepreneurs fall into is the exposure of their intellectual property by communicating confidential information to various people without non-disclosure agreements and other safeguards, or the use of inadequate non-disclosure agreements. Non-disclosure agreements should be drafted with the particular circumstances of the disclosure in mind and ought not to be treated as a basic boiler-plate document.
Key Takeaway: Draft formal agreements for all consultants and employees so the terms of service and confidentiality requirements are clear.
It is vital to enter into a written consulting agreement with such contractors. Intellectual property developed by an independent contractor will typically belong to the independent contractor in the absence of a clause in a contract to the contrary.
It is also important to familiarise yourself with the employee laws of the city, state or country in which you setup. The most common employment law violations are misclassifying an employee as an independent contractor and/or failing to pay an employee appropriately.
Licensing and Incorporation
Key Takeaway: Know what the important license conditions are for your city and country and ensure that they are are not being violated in the course of your business.
Set up a corporation or LLC for everything but a short-term business whose existence will be numbered in months rather than in years. Only raise funds from “accredited investors” and do not pay commissions for fundraising unless it is to a registered broker-dealer.
Additionally, in most countries, running any kind of business requires several licenses, some of which might be simple tax registrations or trade licenses. Failure to comply with licensing norms leads to fines, costly legal suits and even business shutdown.