We know the startup struggle. You want to focus on your product and getting it out there, but those pesky startup laws keep getting in the way.
Between employment contracts, shares, terms and conditions, and who knows what else, it can get pretty overwhelming. So how do you make sure everything’s above board for your startup?
It doesn’t have to be that hard. In fact, with the right advice, it’s all pretty smooth sailing. That’s why we’ve brought together these 15 essential startup legal tips from experts to help you get started.
1. Get professional startup legal helpIn a misguided effort to save on expenses, start-ups hire inexperienced lawyers. Click To Tweet
“In a misguided effort to save on expenses, start-up businesses often hire inexperienced legal counsel. Rather than spending the money necessary to hire competent legal counsel, founders will often hire lawyers who are friends, relatives or others who offer steep fee discounts. In doing so, the founders deny themselves the advice of experienced legal counsel who can help the founders avoid many legal problems. Founders should consider interviewing several lawyers or law firms and determine if the lawyers or the law firms have expertise in some, if not all, of the following legal areas:
- Corporation, commercial, and securities law
- Contract law
- Employment law
- Intellectual property laws
- Real estate laws
- Tax laws
- Franchise laws
Although it is not necessary that the lawyer or law firm retained by the founder have experience in all of the foregoing areas because certain problems can be “farmed out” to different lawyers or firms, it is often best that the founders retain a firm that can handle some, if not many, of the areas of startup law expertise listed above, so as to provide continuity between the founders and their lawyers.”
– “10 Big Legal Mistakes Made By Startups” – Richard Harroch, Managing Director and Global Head of M&A for VantagePoint Capital Partners
2. Get a founder’s agreementA founder's agreement ensures your friendship remains intact when disagreements arise. Click To Tweet
“When launching a venture, there is nothing more important than establishing a clear founders’ agreement that defines the roles and responsibilities of the founding team, outlines equity and vesting ownership, and assigns IP ownership. Defining these key issues is critical if you wish to secure the future viability of your new venture. Oftentimes, Zagury explains, entrepreneurs overlook this agreement when starting a venture with friends. ‘They think they don’t need it’, he says, when in reality, the opposite is true. Drafting an agreement ensures that your friendship remains in tact when disagreements arise or your venture comes to a dissolution. ‘If everything goes smoothly, you won’t ever need to look at the founders’ agreement’, says Zagury. ‘But in the case that things get rocky, you need the agreement to make sure that you stay friends even if the journey comes to an end’.”
– “7 legal tips for the budding startup or young entrepreneur” – Coral Braun, Mindspace
3. Choose your business structureChoose your business structure. This is one of the most important decisions. Click To Tweet
“Choose your business structure. This is one of the most important decisions you’ll make and it can have some major legal ramifications in the future. If you’re serious about your Startup then it’s advisable you register the business as either a Limited Company or a Corporation. Most businesses start out as a sole proprietorship but in the case of a Startup, this just isn’t a good idea.
Registering your Startup as a Limited Company or a Corporation gives you protection over your personal assets and gives you greater legal protection in case of any disputes with consumers.”
– “10 Legal Tips for Starting Your Startup” – Linkilaw
4. Make sure you have the right licencesNo corner's worth cutting if it ruins your brand or puts you behind bars. Click To Tweet
“Make sure you are covered and not breaking the law. The consequences for not having your legal house in order can be expensive. Square, the mobile commerce startup, was recently fined more than half a million dollars in Florida for operating without a money transmission license. Worse than fines, however, is the damage you suffer by squandering your reputation with customers. The need to keep up with competitors and expand into new markets can seem pressing, but no corner is worth cutting if it ends up ruining your brand or putting you behind bars. Work with a trusted legal advisor early on to ensure you’re operating within the letter of the law.”
– “5 Legal Tips for Small Businesses and Startups” – Eyal Lifshitz, CEO and Founder of BlueVine
5. Be careful with your term sheetWhatever terms you have in your first round, you'll have to give away more the next round. Click To Tweet
“Make sure that you are not giving away the store in the first round. Whatever terms you have in your first round, assume you will have to give away even more the next round. People want more and more each round because they are getting less return. If you start out by giving people great terms because they are your friends (and most early investors tend to be friends and family), that will end up biting you later. You need to separate what’s right for the company from what’s right for investors and have a structure for what is fair and a reasonable return.”
– “Legal Tips for Startups” – Eric Leander, Attorney at The Wagoner Firm PLLC
6. Don’t rely on ‘standard agreements’ found onlineEnsure employment agreements fit your business’ needs; they are not one size fits all. Click To Tweet
“One very common way to cut costs in the startup phase is to rely on documents found online, or through the founders’ own previous engagements. However anyone proceeding down this route should do so with great caution. The internet can be a great resource for background research, such as to see what sort of terms and conditions other businesses are publishing for similar online services. However these have generally been tailored to the specific website or business, and just replacing a name and address can lead to problems where you inadvertently adopt language that’s inapplicable, or miss something critical to your own business.
It is very important to ensure that employment and consulting agreements actually fit your business’ needs, and while most are necessarily similar, they are not one size fits all. One great example is the company that uses a “standard” employment agreement found online. A problem arises when they terminate the employee, only to realise that the “at will” provision they used in the agreement taken from a California company is ineffective in Canada, and rather than 0 day notice they anticipated, or the 2 week notice that may have been applicable if they had limited notice to Employment Standards Act minimums, they could be on the hook for several months’ notice under the common law.”
– “Top Ten Legal Tips for Startups” – McMillan LLP
7. Keep your co-founders onboardCliffs and vesting periods help align interest for a definite period of time. Click To Tweet
“Co-founders most likely will have a ‘vesting period’ for their shares — shares are supposed to belong to them but they don’t actually get them (or Co-founders do get them but the company has a right to recall them until certain milestones or timelines are met). Typically, it involves a one year cliff, and four year vesting period.
A cliff means the Co-founder does not get any shares until they reach a first major milestone (in the above case, 25 per cent of the shares).
Vesting period means the rest (75%) will be apportioned for the rest of the three years (four years minus one cliff year).
Cliffs and vesting periods help align interest for a definite period of time. By the time vesting is up you will likely know where the company is heading. Sometimes some equity is tied to specific milestones like reaching a goal. Companies may also consider giving ‘refresher’ shares as a valued employee reaches the end of his vesting period to incentivise him or her to stay on.”
– “Singapore lawyer Samuel Ng gives practical legal tips for startups” – Danon Gabriel, Co-founder at AsiaLawNetwork.com
8. Get intellectual property locked downIf you want to secure funding, or sell your company, IPR is crucial. Click To Tweet
“It’s important for founders and investors to be confident that a company owns the intellectual property rights (IPR) needed for its operations. IPR is often the basis of a company’s valuation. If you want to secure funding, or sell your company, IPR is crucial.
If employees (on well-considered terms) develop IPR, then ensuring the company owns them is fairly simple. However, if founders or others develop key technology ahead of the company’s formation, or IPR is created by contractors or consultants who don’t have the correct terms of engagement, then IPR can be in question, putting the company’s value at risk.
It’s vital that anyone who is involved in developing IPR on behalf of the company should be required to transfer the relevant IPR to the company. There are documents that can do this, such as a deed of assignment, or something similar. This issue is also important when it comes to trademarks and patents and wider IPR consideration.”
– “Legal advice for business: four considerations for start-ups” – Angus Miln, Partner at Taylor Wessing
9. Register and trademark the company name and logoOnce a trademark is registered, it prevents others copying the mark. Click To Tweet
“A trademark is defined as a word, phrase, logo, or other graphic symbol used by a company to distinguish its product or service from those of others. A word does not have to be unique to receive a trademark. It simply must be identifiable for the purpose in which it is being trademarked. Once a trademark is registered, it prevents others copying the mark.
A trademark can be registered before it is actually being used, and it is beneficial to do this to: 1) prevent someone else from registering the trademark; 2) prevent the company from accidentally infringing on another entity’s trademark; and 3) give yourself a stronger position in the event a trademark infringement issue arises.”
– “Five Legal Tips for Startups” – Matthew Horn, Esq., President and Co-Founder of Legal Services Link
10. Keep up with housekeepingPotential investors will expect all such records and filings be in order. Click To Tweet
“Making Companies House filings, updating the company registers, keeping minutes of board meetings and ensuring that your bookkeeping is accurate and up to date may rank low on your list of priorities. However, carrying out these tasks will ensure that you adhere to your statutory obligations and potential investors will expect all such records and filings be in order.”
– “Top tips for startups – getting to grips with legal issues” – Roberta Draper, Associate at Kingsley Napley
11. Budget more for legal spend than you think you needIt's best to budget more for attorney fees than you initially anticipate. Click To Tweet
“Be sure to include ample room in your budget for legal costs. As a startup company, your legal expenses will most likely meet or exceed your legal budget. When this happens, it usually occurs as a result of the owners underestimating their legal needs or the complexity of their business. Hence, if you don’t want to be caught off guard, it’s best to budget more for attorney fees than you initially anticipate.
In addition to budgeting for the cost of hiring an attorney, you’ll also need to bear in mind the cost of obtaining the appropriate insurance, licensing, and bonds. While on the surface this might seem like an insignificant matter, you’d be surprised how many businesses run into trouble as a result of not planning for these types of costs.”
– “Legal Tips for Early Stage Entrepreneurs” – Nataliya Stefanus, Editor of marketingbag.co.uk
12. Be careful hiring independent contractorsOnly those who meet stringent legal tests can be hired + paid as Independent Contractors. Click To Tweet
“Most people who perform work for a company have to be classified as employees. Only those who meet stringent legal tests can be hired and paid as Independent Contractors. Generally, the person must have an independently established business, do work for others, be paid on other than a salary or hourly basis, be free from direction and control of the employer, provide their own tools and workspace, etc. If these tests are not met, the contractor will be considered legally to be an employee and be eligible for benefits, overtime, worker’s comp, etc. This can be a very costly error for a company to make.”
– “Top Ten Employment Law Tips for Startups” – Chrys A. Martin, Partner at Davis Wright Tremaine
13. Draw up employment contractsDraw up clear employment contracts and offer letters when hiring new employees. Click To Tweet
“Startup CEOs and founders should draw up clear employment contracts and offer letters when hiring new employees. These legal documents are key to ensure employees understand what’s expected of them. They should clearly state the following.
- Terms of employment (e.g., compensation, role responsibilities, working hours and grounds for termination)
- Reporting structure
- IP ownership of work
- Required commitments
- Share vesting
- Company policies (e.g., vacation days, paid time off structure, dress code)”
– “The Top 7 Legal Documents for Every Startup” – Matthew Faustman, CEO and Co-founder at UpCounsel
14. Be careful with user-generated contentUser-generated content can enhance a website or app, but poses a number of risks. Click To Tweet
“If you use third party copyright material, such as music, video or text, you risk being liable for copyright infringement unless you have a licence to use it. User-generated content can enhance a website or app, but poses a number of risks. The content could contain third party copyright material, be defamatory or illegal, and as operator of the website or app you can be liable for content even though you were not responsible for posting it. If you do allow user-generated content to be posted, you should have terms and conditions which prohibit uploading infringing, illegal or defamatory content, and you should make clear that you reserve the right to remove content at your discretion. There should also be a properly handled notice and take-down procedure in place, whereby anyone who objects to content can request that it is removed.”
– “Key Legal Issues for Tech Startups” – Tom Lingard, Partner at Stevens & Bolton
15. Draw up clear terms and conditionsWell-drafted terms should act like a recipe book for doing business. Click To Tweet
“According to Tall, well-drafted terms should act like a manual or recipe book for doing business and having absolute clarity on what should happen in a given situation. ‘They should set out what the agreed terms are between parties and more importantly what happens if things go wrong or one party wants to leave or is unable to continue,’ she explains. ‘Terms and conditions can also save a lot of money by addressing all issues at the outset. This in turn avoids disputes later on about what might or might not have been agreed.’
The exact elements to include depends on the individual business but you should consider including:
• A clear definition of what products or services will be provided
• Setting out the payment terms – when is payment due
• Any guarantees or warranties offered
• Timelines for delivery and any queries
• Specifying what happens if either party doesn’t deliver or pay or wants to end the relationship
• The term of the agreement and what notice is required to get out of it
• Which law shall govern the contract.”
– “Setting out good terms and conditions for your small business” – Tina Nielsen, journalist and Joanna Tall, Commercial Lawyer and Founder of Off To See My Lawyer.
Need help bringing it all together for investors? Read our guide on startup due diligence.