Steps to Launch: 4 Legal Tasks Every Startup Should Tackle
Meet Kristin Kenney, technology and startup attorney at Polsinelli and co-founder of the Athena League. As part of a national law firm that focuses on entrepreneurs not only in Kansas City, but also St. Louis, Chicago, and Denver, she serves a range of clients, from startups to Fortune 500 companies. She provides legal counsel to clients on a variety of matters, including startup formation, venture financing, intellectual property protection, data privacy and technology development and licensing.
Starting a business is one of the most exciting things you’ll ever do. But it’s also really scary. However, the way you manage risk early on prevents you from spending your time (and money) putting out future fires.
Here are four legal tasks that every startup should tackle early so they’re not slammed by them later.
#1 Get organized.
Think about forming an entity—especially if there are other people involved in the business.
Perhaps you already have an idea, some pieces falling into place, maybe even some investment interest. That’s great! You may not need to form an entity to get the ball rolling. But it is important if you want to grow your business and protect the company (and yourself).
First, determine what type of entity is right for your business.
Generally, startups are formed as limited liability companies (LLCs) or corporations, both of which limit members’ liability. Determining the type of entity that is right for your business depends on what you’re selling and how you plan to grow the business. Be careful about S corporations—failing to comply with the (many) requirements can stunt a startup’s growth and result in some nasty tax consequences.
Second, make sure you have the right organizational documents in place.
Startups have different needs and goals than more traditional businesses, so you need to make sure your organizational documents reflect your business and growth goals. Effective organizational documents help provide management structure and can make it easier to add investors, advisors and employees as you grow.
#2 Don’t get Winklevossed.
Whether you’re bringing in investment, hiring a new employee or hiring a developer, it’s important that you have a written agreement in place at the outset that clarifies your rights and responsibilities. Although you might be on the same page today, things change over time and handshake deals don’t cut it.
If you’ve seen the movie The Social Network, you know what naiveté cost the Winklevoss twins with Facebook. Unfortunately, this happens in startups all the time. And it could happen to you if you’re too casual in your approach.
#3 Own your contracts.
It doesn’t matter what type of agreement it is—privacy policies, IP assignments or license agreements—you’re legally responsible for your contractual obligations, so know what you’re getting into! I know—nothing ruins a good wedding like talking about divorce. But accepting somebody else’s terms or buying a form online can have significant long-term implications for your business. Make sure you understand what you’re agreeing to before signing (or posting online) and—if possible—work with a lawyer to draft an agreement that’s in your best interest and tailored for your business.
#4 Protect your property.
In today’s market, a company’s intellectual property (IP) is one of its most valuable assets—especially for startups. In fact, we’ve seen investment and M&A deals fall apart because companies failed to maintain their IP chain of title.
In addition to applying for patent, trademark, and copyright registrations, it’s important that you get assignments for any IP/work product that is developed for you by others. You should require all employees (including founders and advisors), consultants and contractors to formally assign any IP/work product they create so they can’t claim ownership of the IP in the future before allowing them to start working.
It’s also important to ensure you’re not violating others’ IP rights. Even if you’re not working with patentable products, you run the risk of infringement by failing to exercise due diligence when choosing a company/product name, so make sure to consult with a startup/IP lawyer as you develop your business’s identity and product or service line.
Best practices? Find a startup lawyer you trust who can help you determine what’s right for your business and is committed to your growth. Image by Flicker user Steven Depolo.