When starting a business, founders focus almost entirely on getting their product or service out to the market. Of course, getting your business up and running is a priority, but it’s also important to be mindful of the legal implications of your business strategy. Consulting a startup lawyer sooner rather than later helps you avoid adverse legal consequences.
We’ve compiled a list of the top ten legal issues for which you might need a lawyer. While this list is by no means exhaustive, it does cover the typical legal needs of a startup company.
A Startup Lawyer Can Help With:
Incorporating your business creates a legal separation between the individual entrepreneur(s) and the business itself, possibly shielding you from personal liability for the business’s debts and other liabilities. Think of your entity as an independent vessel that conducts business: it holds IP, employs talent, pays taxes and enters into contracts. The primary party to any transaction relating to the business is the entity, and not the founders themselves.
There are several forms of business organizations, including a Sole Proprietorship, a Partnership, a Limited Liability Corporation (LLC) or a Corporation. Your startup lawyer can help you decide on a structure based on your business, finances, plans and goals.
2. Partnership agreements
Where there is more than one founder, a Partnership Agreement (operating agreement or corporate bylaws, depending on your entity's form) is essential to resolve future conflicts and avoid expensive litigation. Some of the issues you might want to think about are profit sharing, equity splits, decision-making, and division of responsibilities, amongst others. A common mistake entrepreneurs make is to wait too long to enter into these agreements. It is difficult to predict when or how your vision might differ with a co-founder, and you want to have a strategy in place to deal with the issue. A seasoned startup lawyer can help you navigate potential landmines and agree on mutual solutions.
3. Employment Issues
As your business grows, you’ll start hiring employees and contractors.
Before hiring your first employee, you might have to acquire an Employer Identification Number from the Internal Revenue Service (IRS). It is also important to conduct due diligence to ensure that the employee has legal work authorization to work in the US, and isn’t bound by a non-compete agreement with a former employer. While running due diligence and background checks, however, you may want to consult an attorney to be mindful of privacy issues.
For every new employee, you’ll want to draft an employment agreement. The employment agreement contains the terms and conditions of your employees employment with the company. A few important considerations in employee agreements include: assignment of any intellectual property created by the employee, confidentiality obligations and non-compete clauses.
Keep in mind that there are strict compensation requirements, such as minimum wage laws, with which you must comply. These extend even to unpaid internships. A startup lawyer can help you with the do’s, don’ts, restrictions and conditions of employee contracts.
Finally, it’s important to be clear whether a new hire is an employee or a contractor, as many businesses confusing the two and get themselves into expensive hot water. When entering into arrangements with independent contractors, you will likely not be subject to traditional labor laws that govern employer-employee relationships. For example, you won’t have to pay benefits or overtime compensation to the independent contractor. However, the IRS has heavy penalties for companies that misclassify employees as independent contractors, making it important to seek counsel when hiring a new employee or contractor.
4. Protecting your Idea
At the core of many new startups is an innovative idea or invention. Needless to say, protecting the heart of your business is essential. If the invention is patentable, an IP lawyer can help you file relevant patent applications. Make sure you deal with this early in the process, since publicly disclosed inventions will lose their patentability in the U.S. in one year, and immediately upon disclosure in other parts of the world. It also helps secure an earlier filing date if your competitors also file an application for a similar invention. For similar reasons, it may be advisable to enter into confidentiality agreements with any individual or organization that you reveal your idea to. This includes co-founders, employees, business advisors or business partners.
5. Protecting your Brand’s Identity
You may have also spent a significant amount of time, energy and resources in building and gaining recognition of your brand name. A great way to protect your brand name or logo is by registering it as a trademark. A distinctive word, phrase, symbol or design qualifies a trademark that you can register with the U.S. Patent and Trademark Office.
Although registration isn’t necessary to protect a trademark, it operates as first hand proof of ownership and permits you to bring a suit in Federal Court. Succeeding in an application for a trademark depends on several factors, which your trademark attorney will work with you to satisfy.
For example, your application may be rejected if there is a likelihood of confusion with another brand, or if the mark is descriptive. It’s advisable to consult with an attorney before you name your business to come up a brand name that you can easily protect and register. When registering a trademark with the USPTO, you can register it as a wordmark (standard characters) or logo (specialized form). It is often more cost-effective to register the name of your brand as a wordmark, since this covers the use of the word regardless of the font, size, color, or configuration of the words. On the other hand, registering your logo limits trademark protection to the words in that specific style or design. A lawyer can advise you based on your particular situation.
6. Navigating the Regulatory Environment
Depending on the nature of your startup, you might be subject to any number of regulations that affect your business. It is important to understand the FDA, environmental, zoning, pharmaceutical and the gamut of other regulations that may affect your businesses. An experienced startup lawyer can advise you on which regulations you need to comply, and how you can avoid fines for non-compliance.
7. Generating Website Documents and Dealing with Data Privacy Issues
8. Issuing Stock to Co-Founders
Once you incorporate, you might want to issue stock to co-founders and/or stock options to employees. Where there is a team of co-founders, it is in the company’s interest to ensure that all members contribute materially to the business. An attorney can help you come up with an appropriate vesting schedule, which means that stock will vest in co-founders only after a pre-determined period of time or after meeting certain parameters of contribution to the business. This ensures that stock will vest only in people that remain in the business and contribute to its growth. Any stock that doesn’t vest can be re-assigned to later additions to the team.
9. Complying with SEC Regulations
When issuing stock of your company, complying with State and Federal Securities Regulations is of paramount importance. Typically, any issuance of an equity instruments, whether to founders, seed investors, to venture capitalists or as stock options, must be registered with the relevant securities authority. To avoid registration, the issuance must fall within one of several exemptions from registration, based on a variety of factors including the value of the securities offered, and sophistication of the investor. Securities laws are complex and understanding your obligations will require a seasoned attorney. The repercussions of non-compliance are grave and could include rescission of your deal, an expensive and potentially devastating consequence for your company.
10. Financing your Business
If you ever decide to bring in outside investors, you want to make sure you get the best possible deal on the best possible terms. Your financing options could include personal savings, seed investors, venture capitalists or crowd funding. Each method of finance could raise specific legal issues, often dependent on the level of sophistication of the investor.
When raising funds for your company, issues to consider are whether to structure the investment as equity or debt, the vesting schedule, what valuation to use, and price adjustments at closing. It is also important to negotiate the degree of control your investors will have in the company by detailing the board structure, voting rights, whether the investor can approve certain transactions and whether they have the first right to any future rounds of funding. A corporate lawyer, particularly in the start-up space, will have significant investor-side experience and will help you anticipate all the issues you might have in closing a deal.
Priori Legal can help you find the right attorney for all your startup’s needs. Again, start thinking about the legalities of your business early! It will save you a lot of time, money and stress in the long run.
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