Managing a startup can be very exciting when you focus on all the possibilities of success, but many obstacles lie in between now and then, especially regarding legal issues. Entrepreneurs, young and old, have to protect themselves from a legal standpoint or else their amazing startup ideas will end up being stolen or lost in lawsuits. Securing your startup can be very tricky, in some cases very expensive, but with a few tips to clarify what you need to do, you can arm yourself with knowledge. Here are seven legal bases you should be sure to cover. (Note: I am not a licensed attorney and if you want legal advice, seek a licensed legal professional.)
1. Do you even need legal advice?
Most young startups don’t yet encounter situations that require you to hire legal counsel. Attorneys can be very expensive, but with some research, you can actually answer some of your own legal questions and save yourself some money. However, as your startup picks up speed, there are a few issues you’ll want to have a lawyer for. According to Josh King for Geekwire, an experienced lawyer that has worked for many technology companies, startups really only need to hire a lawyer when it comes to corporate formation, financing, website and customer agreements, and day-to-day legal. When it comes time for you to sort out the legal structure of your business and partnerships or draft those user agreements we typically never read and hit ‘Agree’ on, your company would most likely be at that stage where a lawyer is most needed. But not just any lawyer, as King goes on to elaborate, but one that basically specializes in startup legal, seed stage/VC financing, and one who is familiar with the industry. The more that the lawyer specializes in the industry of your startup, the better and cheaper their services tend to be, so don’t settle for anything less than the best.
2. Hammer out partnership and equity arrangements.
Structuring who is involved with your startup and who owns what is not an easy task, but it has to be done if you don’t want an early-Facebook type fiasco on your hands. Attorney Alicia Philip Gibson for YFS offers tips to entrepreneurs who find themselves in this process.
First, an agreement with partners must start with a business description of what your startup actually does. The agreement has to specify the duration of the partnership, where it begins at signing and how it ends- include under what circumstances the partnership may be terminated or altered. Along with your partners, you have to discuss any and all foreseeable conflicts and disagreements, come up with resolutions to them, and put it on paper. Then you hash out and detail monetary contributions, which is a talk about investments, salary, and shares; this formalized agreement includes all individuals who were involved in the conception of the startup and details all possible dividends that go to the partners. Next is the decision on accounting methods for your company, or how it will manage its money (an accountant may be best for this). Lastly, you detail what circumstances dissolve the partnership, which would include points ranging from buy and sell agreements to the possible death of a partner.
One last point to include about equity is that you don’t want to give too much away or have it all tied up between partners and vendors who provided service in exchange for equity, especially if you have yet to seek investors. At the end of the day, your company pie will be all gone and investors won’t have any interest to work with you.
It’s not uncommon for a new startup to face the dilemma that someone else already picked your name. U.S. law recognizes common law trademark rights, which means that legal action can still be taken for a trademark that is in use but not registered. When picking a startup name, you can hire a company to find a name for you or you can research yourself on names, domain names, and social media tags. To get registered, which increases legal protection, check out the U.S. Patent and Trademark Office. The material that you want trademarked can have that little ‘TM’ that follows after, or ‘SM’ for services, but once you are legally registered, you have a registered trademark and you get to use the ‘R’ in the little circle after your mark.
4. Protecting Your IP (Intellectual Property)
The movie Inception showed us how important one idea can be. While in the real world we don’t have to worry about people invading our dreams (or do we?), we do have to protect our most precious ideas. The first way to do this is not to excitedly blabber on about our ideas to every living person. In a post by the Post Law Group, they detailed a few tips on how we can legally protect our IP. First, prepare a Non-Disclosure Agreements for your startup. A well crafted NDA offers some protection against idea-theft, but it’s never iron clad. It’s the same deal with patents; technology today advances so rapidly that patents end up becoming obsolete and a waste of money. Post Law Group suggests that a strong NDA is best for your close group of well-rounded and trusted advisors especially when you are out looking for feedback, but not good for just anyone you want to show your idea to.
Within your startup, you can also have your ideas copyrighted for extra protection. At the U.S. Copyright Office, your work can be legally protected, whether its a manual or publicity material, by submitting an application and paying a fee. In the cases where you didn’t create the material but you feel it should belong to your company, make sure you define ownership rights for any hired associates who create material for your company so they can’t claim ownership of the work later and it stays with the company.
5. Get Your Company Registered
No new company wants to get a notice from a government department that their business is illegal because it wasn’t registered correctly. Depending on the industry your startup belongs to, you may require a few or many licenses for your business to operate. Avoid fees and lawsuits by complying with state and federal laws and register for a business license, a.k.a. tax registration certificate, federal and state employer identification numbers if you have employees, a sellers permit if you are selling products, and any specialized permits you might need depending on the nature of your business.
While you are registering for your company, you will have to decide what structure you will register your company as, for example, sole proprietorship, limited liability company, or corporation; each structure has different legal and tax implications and you will have to research which one fits your startup best. Where you register is also a factor. Many startups register in Delaware or Nevada for their generally flexible and favorable business laws for startups- though initially registered in Florida, Facebook re-registered in Delaware because of this exactly, though your startup may still require a foreign certificate of state if you aren’t operating out of Massachusetts or Nevada. For more info on business registration and structure, the U.S. Small Business Administration outlines everything you need to know.
6. Get Your Papers in Order
An entrepreneur who aims to be a shark knows the importance of business contracts. A contract should be in place for every business relationship you enter, handshake deals just don’t cut it anymore. Get everything in writing and have contracts at the ready for your business deals, simple as that. And while you are learning the importance of having your own documentation, don’t forget to read the fine print when it’s in front of you as you don’t want to violate or misuse something yourself and end up getting sued- that’s never cool.
7. “Should’ve got that insured, Geico for your money” – Kanye West
Understand that in our society you can get sued for anything. The one way to protect yourself against lawsuits is insurance. Sure, we hate paying our insurance bills when we are healthy and good drivers but when it comes to protecting yourself and your business, YFS shares that there are a lot of shields to choose from. You can start by registering your company as a limited liability entity with small business insurance, that way if you ever get sued and lose, everything will come out of the company and not your personal finances or assets. Natural disaster damage and theft of your assets are protected under commercial property insurance. If someone slips and breaks their neck at your place of business, you can be protected by business liability insurance. There is also business interruption insurance, a.k.a. business continuation coverage, which insures your business’s finances when you can’t be there for whatever reason. If you are selling products, you need product liability coverage to protect you against lawsuits in the marketplace. There are a ton more coverage plans that an insurance agent would probably be more than happy to put your business on, but just be aware of the scenarios your company might face, hope for the best but prepare for the worst.