Top 6 Legal Issues for Startups
Turning your idea into a reality is exciting, and dealing with legal issues at the outset of your journey may not be the highest priority on your list. It may be tempting to put legal concerns on the backburner until things are up and running. However, there are some things that should not be left until later. By the time your MVP is showing promise, you’ve assembled a great team, and funding is getting close, these issues could threaten your operation.
Let’s look at the top 6 legal issues all startups should consider from day 1. Having these sorted out will put you in the best position for long term success.
1. Business Structure
The type of business structure you decide on for your startup impacts your funding opportunities, tax responsibilities and personal liability. Although you can change the business structure as the startup develops, setting it up appropriately from the beginning based on the business type and your future goals will give your startup a strong foundation. Here are the four main business structures to consider:
- Sole trader: A sole trader is an individual who owns and runs the business. They are entirely responsible for the business’ losses.
- Partnership: A partnership is a group of 2 or more people sharing the operation, income and losses of a business.
- Company: A company is a separate legal entity operated by directors and owned by shareholders. This means that the company owns the business’ money, incurs the losses and can be sued. A company has increased funding options to raise capital.
- Trust: A trust is a legal instrument operated by a trustee for the benefit of its beneficiaries.
2. Founders/Shareholders Agreement
Whether you’re setting up your startup with your sibling or best mate, you should have a Founders Agreement in place. A Founders Agreement sets out founders’ roles, responsibilities, liabilities, salary, shares in the company (equity), restrictions placed on their ability to work elsewhere and dispute resolution mechanisms. These agreements help keep your personal and professional relationships intact!
Make sure you have employment contracts in place, ensure confidentiality and IP is protected, consider what benefits you can viably offer your employees and have workplace policies in place to avoid any grey areas.
Will you offer an Employee Share Scheme (ESS)? These can be very enticing for employees financially and can improve performance. Again, these have to be drafted clearly. See our article about ESS’ here for more detail.
Oral agreements are fast but can lead to headaches down the line. Make sure all arrangements with suppliers, customers, any third parties providing goods or services are documented in well drafted contracts.
Online businesses should develop well worded Terms and Conditions. These act as a contract between you and the people on your platform, detailing your rights and the acceptable uses of the website or app. Without clearly defined contracts your business opens itself to possible risks and disputes.
5. Shares & Equity
If you are issuing, or promising, equity to angel or other investors it is important that these arrangements are formally documented. This can be done in the form of issuing stock – which must comply with ASIC’s formalities and documentation. Alternatively, it may be in the form of loans. These too should be documented.
Startups can create problems by diluting ownership too far through issuing multiple rounds of shares. This can lower finances as well as control. When capital is needed, consider whether finances can be sought in a manner other than equity / share giveaways, and never discount the possibility of bootstrapping your operation if possible.
6. Intellectual Property
A significant portion of a business’ value lies in its intellectual property. With many startups any value lies in the value of their ideas.
It is vital for businesses to ensure they clearly own all their intellectual property. This could include:
- Website code
- App code
- Any custom software applications / code
- Logos, brand identity, artwork
- Product design
- A large number of other things, such as recipes, fonts, unique scents, and so on.
Talk with a legal professional about what in your operation actually constitutes IP, and what / how can be protected.
Your name is your brand! Make sure to trademark your business name, logo, and key product names.
These are just some of the key legal concerns for your startup to consider from day one. Addressing these issues from the beginning puts your startup in a healthy legal position so that it can continue to grow and succeed.
If you need assistance with the legal concerns of your startup, get in touch with our startup team via the contact form or by calling 1300 337 997.