Turning that once-in-a-lifetime idea into a successful business that lands you on the cover of Time Magazine is no easy task. From missed product delivery dates, to employee issues, failed beta tests, or regulatory issues, it’s clear that founders of start-ups often have their hands full. While crazy and unpredictable events are almost always a part of the start-up growth formula, the real issue that takes hold is when these small ‘fires’ end up draining all the time and resources of the founders, and prohibits entrepreneurs from focusing on their core competency in growing the business, finding financing, and raising revenue. If the founders can’t grow the business (and grow it rapidly), then the idea remains just that – an idea.
Luckily, start-up founders can mitigate – or even avoid altogether – these fires by taking steps to structure the business properly. This is where legal expertise comes in. Unfortunately, many entrepreneurs feel that verbal agreements, or templates downloaded off Google, are sufficient. If only it were that easy!
As lawyers and venture capitalists that work with start-ups all the time, we often see disputes and conflicts arise. Disputes often result from the verbal or basic Google contracts that are deficient and do not cover all the necessary bases. What follows is a list of 5 legal considerations that are vital to taking your idea and having it go viral.
#1: INCORPORATE! AND THEN PUT ALL THE AGREEMENTS WITH THE CO-FOUNDERS IN WRITING UNDER THE GUISE OF YOUR NEW COMPANY.
Aside from the tax benefits, incorporating right away is just an all-around good idea. You separate yourself from the company, and thereby avoid any potential personal liability. Subject to some exceptions, this means that you will usually not be liable personally should a certain contract or agreement go wrong. You never want to be on the hook personally
All the co-founders of the company now have their share specified. You have an entity on which to offer shares to all the owners.
The company can now assign executive roles (who is going to be the CEO? CTO?) and enter into employment arrangements or subcontractor agreements with developers.
In a sense, the idea is now an entity. If you don’t incorporate, there is nothing for companies to invest in. So it’s really a no-brainer.
#2: GET A STANDARD FORM CONTRACT THAT IS IN FAVOUR OF YOUR COMPANY.
This applies to suppliers, customers, and any party that you are relying on to make you succeed. Often the provisions that are in your favour or protect you can be recycled into different agreements.
Instead of waiting for the other side to give you their agreement (in which case you REALLY should get a lawyer to review and comment on it), try offering your agreement to the other side instead. You could save yourself a ton of money, while at the same time ensuring it’s in your favour.
#3: GET AGREEMENTS PREPARED FOR ALL OF YOUR EMPLOYEES.
This applies for the janitor or the CEO. Everyone needs to have their roles and responsibilities on paper.
Chances are someone on your team won’t end up working out. You need to have the proper termination provisions in writing, and in accordance with all applicable labour and workplace law (which is itself a whole separate area of law) in order to make sure that you won’t be coughing up money to employees that did more harm than good. The burn rate is already high – why make the burn hotter?
#4: MAKE SURE YOU COMPLY WITH ALL INTELLECTUAL PROPERTY LAWS, AND PROTECT YOUR PRODUCT AND IDEA!
Get the trademark protection on your name or brand before someone else. If someone else already has it, consider changing it so you don’t end up having to go to court over it. Worst thing is to have an embedded brand that you end up losing.
A patent is key for protecting your new product. There are plenty of copycats just waiting to reverse engineer your brilliance.
Confidentiality Agreements (also called Non-Disclosure Agreements) need to be enforceable and ready to hand out to anyone you are giving secrets to. There is a much less chance of someone stealing your ideas if this agreement is signed.
This one is no joke – even though it sounds mundane. Governments across North America and Europe are cracking down on how company’s use the data they obtain from people browsing or making purchases from their website.
The last thing a start-up needs is an investigation by privacy regulators and slapped-on fines. Make these sections clear and detailed for anyone surfing the net to protect yourself as best you can.
The wording should be tailored to your company specifically and its mission/purpose, so it’s definitely not a ‘one-size-fits-all’ section on the website.
Obviously there are MANY more issues to deal with. But this is a great starting point for founders or new entrepreneurs to keep in mind when getting started.
For more information, email us or give us a ring. We’re always happy to chat!