Tech Startup Company? Face These Legal Questions Head-on
July 26, 2016
Being a tech startup company is a heady experience. You know your product or service has the potential to be hugely profitable, you believe in your ability to build the business and you’re beyond excited to dive in.
But before you get ahead of yourself with Mark Zuckerberg-sized goals, it’s important to lay the foundation for a successful, sustainable business. That often begins with legal considerations. Here are seven questions you’ll want to ask yourself before you start building the dream.
Do I Need a Lawyer?
In a word: Yes. Every entrepreneur needs a great lawyer, but especially start-ups in the tech industry, which is rife with lawsuits concerning copyright and intellectual property infringements. You’ll want to hire a lawyer to help you form a business entity and, if you’re going into business with others, establish the rights and expectations of each of the founders.
A great lawyer will also make sure your products and services are protected from interlopers and help ensure your business complies with government legislation, tax and employment law, contracts with suppliers and much more. As your business grows, you may need to consult your lawyer regularly on issues such as raising capital, establishing terms of service and drawing up license agreements for software and other products.
What Should I Look for in a Lawyer?
Just like with any relationship, it’s important that you find the right fit. A good lawyer will become a trusted member of your team and you want to feel comfortable reaching out to ask for legal advice and confident that you’ll get a response in a reasonable amount of time. Look for legal counsel who has experience with startups and the issues they face, ideally in the tech industry. The best way to find a great lawyer is to ask around in the industry. Someone who specializes in tech startups will understand how your business works and be able to advise you on some of the pitfalls typical of a new tech business.
What Are Some Legal Considerations When Running a Startup Company?
From the moment you decide to run a business, you’ll need to make some important legal decisions. A good lawyer who gets the tech industry will help you determine exactly the steps to get started, but here are some general considerations:
- What type of business entity do I want to be? A corporation, limited liability company (LLC) or sole proprietorship
- (If you have multiple founders), how is ownership divided?How do I make sure our intellectual property is protected?
- What are my responsibilities associated with taxes?
To Incorporate or Not to Incorporate?
One of the biggest legal decisions you’ll ever make happens right off the bat: what form will your business take? A knowledgeable attorney will know the right questions to ask to help you decide and advise on the best option based on your vision for the company. There are three main entities to choose from:
Incorporation: While the incorporation process may incur legal fees to accomplish, it instantly absolves you have any personal liability associated with your business. It also signals to your investors that you’re serious (and shields them from liability as well) and offers tax savings in the long-run.
Limited Liability Company (LLC): This corporate structure is a hybrid of a corporation and a sole proprietorship. Like a corporation, owners of an LLC will not be held personally responsible for liabilities, but the company will not live on if an owner dies or the business declares bankruptcy. There are some tax advantages and it’s a popular option for small companies with multiple partners.
Sole Proprietorship: When you’re a sole proprietor, you are your business and vice versa. Income and losses will be taxed on your personal income tax return. It’s the simplest way to start a business and typically suffices for one-person operations that aren’t expected to build an empire.
What’s Our Name?
It may not seem like a legal issue, but the name of your business will be (figuratively) set in stone when you select your structure and register your company’s name. Before you do that, you’ll need to consider more than just how catchy it sounds. You’ll need to be sure it’s not already in use by other companies—and that it’s not too similar to other business names. Another great thing to check is whether there’s a domain name available for the name you choose.
Who’s in On This—And Who Does What?
If you’re in a partnership with friends or associates, you’ll have some extra legal considerations to manage. An expert lawyer will advise you how to protect your relationship by establishing a very clear understanding about the business terms of your arrangement. A shareholders’ agreement is critical to helping define the management and operation of the company and determining the shareholders’ rights and restrictions when it comes to shares. It will likely include dispute resolution details so all parties know what to expect in the event of a disagreement.
A founder vesting agreement is another document that helps founders manage their shares. It will define the mechanism by which shares are disbursed and allows the company to buy back the shares of a founder should she decide to leave, sell or dies.
Other legal questions to bat around with your co-founders include:
- What is our mandate? Mission? Vision?
- Who gets what percentage of the company?
- Who does what with respect to business management?
- Will we draw salaries? How will we decide the amount in the beginning—and as we grow?
- Who makes critical decisions and the daily management decisions? (Options include: majority vote, unanimous decision or CEO-only discretion.)
- How do we resolve disputes?
Who Owns Our Intellectual Property (IP)?
Are you starting a business while working a day job in technology? Watch out, your technology’s IP may be the property of your employer. When establishing a business, it’s critical to get legal advice on who owns the IP—most legal counsel will suggest that it should belong to the company itself, not you or any co-founders. This arrangement protects the value of your company by keeping the IP where it belongs. It’s often something your investors will insist upon. Establishing IP ownership often goes hand in hand with confidentiality agreements among founders of a company. They will protect your proprietary information, including your accounting processes, marketing plans and other confidential information.
Taxes, employee agreements, human resources and so much more are involved with starting a business. Though it might be exhausting, it’s imperative. Engaging a lawyer is key to help you get off the ground with a strong foundation.