Starting and running a start-up comes with its own challenges - starting with nurturing the seed of idea, identifying the market need for the services or products on offer, raising funding and capital, having a infrastructure and a team and of course get going with your first client. Amidst so many persistent issues, one critical aspect of a start-up that needs foremost consideration - Legal issues pertaining to the start-up. Usually Entrepreneurs think that legal issues are to be handled and paid heed to when the venture becomes sustainable and grows big. But ignoring and not handling legal issues since the inception of the start-up can be a tricky and costly affair for the latter days. Issues can be in the form of a dispute between the founders, employee related, relating to funding or pertaining to critical regulatory approvals and also IP issues in terms of trademarks, patents and copyrights.
We are herein drawing a checklist of the basic legal issues, which the start-ups should keep in mind while venturing out.
1. Incorporation of the Entity. Structure of the company is a critical aspect, which needs attention since the start of the venture. Structure of the company decides the liabilities of the directors, tax implications, benefits, and statutory compliances required under the said structure and also the ability to raise funds. In India, one can register a company as a private limited, proprietorship, partnership or as LLP. Every structure has its own pro and cons. Like in a sole proprietorship, the sole owner is personally liable for all the risks the company takes. Registering a sole proprietorship is a quicker and inexpensive process. Whereas, in a private limited company, the process can take a time period of upto six weeks and also costs a higher amount for incorporation of the same. To avoid incorporation hassles of a private limited company, many start-ups in the beginning go for a sole proprietorship structure and later change to a private limited entity. While deciding the structure of the entity one has to also look into the target market and the nature of product and services offered. Many entities go for a US incorporation depending upon their needs.
2. Legal Support. Start-ups have their own challenges and needs, similarly have peculiar legal needs as well. Therefore, identifying and choosing the right lawyer for a start-up is very critical to the success of the start-up, a lawyer not adapt and having experience working with entrepreneurs and start-ups would concentrate on the wrong things and is likely to miss on the critical and important issues pertaining to start-ups. It’s important to have all the agreements in place and work under the same. Get all the documents and agreements in order with employees, vendors, and clients for all the deals and transactions. One should have all the agreements related to employment with all the employees to avoid any legal hassles in case an employee quits the company. Agreements with employee should incorporate clauses related to IP, non-compete business, early exit from the company, confidentiality and non-disclosure.
3. Creation and protection of IPR. For any venture like tangible assets, intangible assets are also highly valuable and hold a lot of value in the venture. Therefore, maintaining and protecting the IP of the company is very important and needs to be done since the inception of the company. Owners usually neglect the value of IP thinking that IP can be protected in the later stages when the venture passes a certain stage and becomes sustainable. Its very critical and important to secure all the IP rights since the beginning only as for many cases getting the IP rights in the latter stages is not possible and also in some cases protection is not granted as well. For example, if a start-up does not secure the trademark rights of their name in the beginning and meanwhile someone else secures the same name for their company, then it would be difficult for the start-up to have right over the said trade-name and can also become difficult to work under the said name. Also in case of patents, disclosing the same in the public domain without first securing the rights for the same would restrain one for having protection for the invention in the later stage. Right IP management can create a lot of value for the company. Good IP is also a basis for attracting funding, gives competitive advantage in the marketplace through precluding others from utilizing the IP and also generates interest by other companies. Few of the considerations to be taken into account are registration of trademarks, patents and copyright, identifying the market for the products and services offered and appropriately securing protection in the said jurisdictions. In case the product has an international market, securing IP rights in that jurisdiction becomes important. It’s always good to have a watch on others and competitors IP to ensure their IP do not prevent your company from carrying out its business objectives and also restraining them from using your IP.
4. While developing a product, always ensure to use external products or technology after acquiring proper and rightful license and rights for the same. Using a product without procuring a proper license and right can be a costly affair and can end up in litigation. For example, while using open source software, companies should be clear about the licensing restrictions and comply with the same. Open source doesn’t mean it’s free software to do anything with it; it is the freedom to use and modify.
5. Many founders of the company ignore the initial paperwork because the founders were friends in the beginning. Despite starting with friends it’s always advisable to put everything on paper, legally. In case one of the founders quit at a later stage, it becomes difficult to resolve issues unless all the things have been documented regarding the same. Issues also arise when the start-up goes big and gets funding. Therefore, it’s always better to have all the understanding and terms of the business documented regarding ownership, stakes involved, equity and capital structure and the position if a founder quits the company.
6. Choosing the right name. Having a proper due diligence done regarding the selection of proper and appropriate name for the company is very important. Many entities choose a name for their entity and later realize that the same or a similar name is already in existence. If the same occurs it can later lead to ownership issues regarding the name and can also result in legal hassles. Therefore, before selecting a name for the entity its advisable to have a proper due diligence done by searching various available databases.
7. While working for a company, one cannot operate a competing business. Entrepreneurs before starting with their venture should first resign from their company or tell the current employer about the same. Also ensure to check your agreements signed with the current company. Some agreements might restrict from operating a competitive business for a certain period of time or within a certain territory. If someone is working on some invention check to see what assignments of inventions might have been signed. Before hiring any employee from a company check their existing agreements with the current company. Some employees might be having an agreement wherein they are not allowed to work with a competing venture or might hold some trade secrets, which might prevent them working for your company. A careful analysis of all the existing agreements is very important in order to avoid any legal claims by the said company.
8. Protection of trade secrets, ideas and inventions are critical for a company. If a company hasn’t obtained patent protection or in case patent protection is not available, make sure to maintain trade secrets. Before disclosing any trade secret or confidential information to any other entity, potential venture capitalists or a prospect client, make sure to get the non-disclosure agreement (NDA) signed. Business plans should expressly state that they are confidential and proprietary.
9. While outsourcing any part of the work or services offered by your company always ensure to secure and retain IP rights with you. Always sign a master services agreement covering clauses related to IP ownership, confidentiality, relationship between the parties and the tax issues.
10. Every business and industry has different compliances to be followed. Make sure to comply with all the statutory and legal compliances and keep it documented. For example, some businesses might require international licenses to be complied with. Make a checklist of all the applicable licenses required for and comply with the same.
By keeping in mind the above-mentioned checks and points, a start-up can avoid legal issues in the future. It’s also important that the owners of the company also remain personally involved in the legal matters since the beginning. Therefore, it becomes important to keep your venture legally safe and compliant since the beginning of the start-up.