The path to startup success is paved with legal pitfalls. A startup's ability to successfully navigate these roadblocks is dependent upon the foresight instituted by founders and management teams. Have they taken the necessary precautions to "stay ahead" of the industry's most complex legal issues?
"Legal issues are often at the back of an entrepreneur's mind in the excitement of launching a startup. But just because you are small doesn't mean that people are going to let things slide when you infringe upon their trademark or don't tell the full truth to investors," says AJ Agrawal, CEO at Alumnify.
Today, industry-leading startup founders can utilize free resources — Rocket Lawyer, LegalZoom, Nolo — to tackle legal hurdles. However, partnering with an experienced attorney is always the best solution for growth-oriented tech startups and scale-ups. With the right legal support in place, tech startup founders can solve the following legal issues:
The Startup Legal Checklist: 5 Must-Solve Issues
Defining your business structure is the first legal challenge that you must solve. This decision will impact tax requirements, liabilities, and may even influence your ability to acquire funding. There are several business classifications including: General Partnerships, Limited Partnerships, S-Corporations, and more.
Most high-growth tech startups will register as a C-Corporation. This classification minimizes owners' responsibilities for debt and other liabilities. Additionally, a C-Corporation is the preferred entity of investors. However, C-Corporations present budget-strapped founders with a few disadvantages, including double taxation. For this reason, many early-stage startups register as a Limited Liability Corporation (LLC). After raising funds, startups can then convert the LLC into a corporation.
The cost of incorporating ranges from $100 to $250 depending on the filing state. Additional filing and fee information can be found online. Many startup founders will incorporate their businesses in Delaware to take advantage of unique tax incentives.
Are you struggling to find the right business structure for your tech startup? Learn from the tech startup founders who have "been there, done that" in the Power of Ecosystem.
Intellectual Property Protections
Secondly, you must initiate appropriate patents, copyrights, trademarks, and trade secrets to protect intellectual property including inventions, logos, and softwares. Without intellectual property protections in place, your startup may be at risk for costly legal battles with companies trying to claim preemptive rights. Additionally, these protections will enhance the commercial value of your startup for investors, suppliers, and partners. Most investors will conduct a thorough intellectual property check before a funding agreement is made. Does your startup have these mission-critical protections in place?
Unfortunately, many early-stage startups will not secure intellectual property protections due to financial constraints. However, in 2013, the United States Patent and Trademark Service moved from a first-to-invent to a first-to-file system. The law no longer favors those who develop the product first; instead, the law cares about who filed the patent. As such, if you wait too long to file a patent for a new piece of technology, competitors may sweep your idea out from under you!
Another legal barrier that you must hurdle is issuing non-disclosure agreements. These agreements protect business strategy, trade secrets, algorithms, client information, and more. A solid non-disclosure will address the following:
- What constitutes confidential information.
- How confidential information should be handled.
- Who owns the confidential information.
- How long the confidential information should be maintained.
Be sure to issue non-disclosure agreements to employees, contractors, and other third-parties. However, be aware that most investors will not agree to a non-disclosure. "Should they choose not to invest (and most won't), they would be stuck with the liability of a legal contract with you that prevents them from finding more deals," says Wil Schroter, contributor at Forbes.
Most early-stage startups issue employee contracts. These legally-binding documents protect both employee and company rights. In this instance, some startups will hire an attorney to draft offer letters, separation agreements, stock option grants, and more. Make it a point to hire legal counsel when drafting contracts for executives, as these stakeholders will carry the most risk. In these documents, even the smallest modifications in phrasing or structure can cause significant legal ramifications.
As such, Richard Harroch, Forbes contributor and startup advisor, recommends the following:
- Try to get a hold of sample contracts to get a better idea of how these documents are structured.
- Have an experienced business lawyer check over the final draft.
- Make the document simple and actionable. Limit the amount of legalese used.
Give your tech startup the extra boost it needs to hurdle the industry's biggest roadblocks. Find out how in the Power of Ecosystem.
"Startups that fail to follow data privacy and security laws can face serious ramifications," says Alexander J Davie, attorney at Riggs Davie PLC. "Small businesses in particular have a difficult time recovering after they are hacked and a startup company attempting to earn the trust of existing and potential customers or investors will be significantly affected by failing to safeguard its private data or respond properly to a breach."
Unfortunately, the legal framework for data privacy isn't clearly defined. Unlike other western countries, the United States has not adopted comprehensive regulations to dictate activities that the government deems permissible. Instead, the U.S. law has relied mostly on private litigation and government enforcement actions under laws like the Federal Trade Commission Act.
Safeguard Your Startup
These are just a few of the legal issues startup founders must solve. It might be tempting to avoid some of the items on this list until you have established a minimum viable product. However, enlisting the help of trusted legal counsel early on will help lay a strong legal foundation.
Do you need assistance finding an experienced attorney to help navigate intellectual property protections, non-disclosure agreements, employee contracts, and more? RocketSpace's curated tech community is a trustworthy place to find referrals to industry-leading lawyers. Additionally, RocketSpace's tech campuses provide Seed to Series C funded startups with flexible co-working space, warm introductions to top investors, and resources designed to accelerate startup growth.