When you’re starting something new that also happens to be huge – like your own business, you can easily fall into a trap of making up excuses that legitimize your fear of becoming an entrepreneur.
For example – the paperwork. It looks so confusing and complicated. You can barely do your own taxes, how are you supposed to handle everything around your startup? How does one write a contract? Are you a founder or a co-founder? Being a CEO sounds awesome, but what does it actually mean, in legal terms? How do you legally protect your idea? It seems there’s so little you know.
Oh, god… You’ll probably end up in prison by accident because you’ll break a law out of innocent ignorance. And then your plans to change the world with your startup will be replaced with a new goal: to convince your mother you’re not a disappointment.
Ok, stop panicking and take a deep breath. Relax.
While it’s completely normal to get stressed out when you face a combination of huge responsibility and a foreign ground, there is nothing that cannot be learned. Prepare for a long read, but a worthy one. The title does say ALL the legal stuff, doesn’t it? Treat this post as your comprehensive guide through the startup legal basics.
Of course, as an inexperienced startupper, you are not left all to yourself. There are experts who can help you with their knowledge and professional services.
But there is a certain amount of legal stuff you have to know in order to understand what you’re getting yourself into. If you’re a complete newbie, it is advisable to get a grip of the fundamental things for at least two reasons:
Startup experts such as Paul Graham believe founders shouldn’t get caught up in details. But small businesses are separate legal entities and you have to know at least the basics.
In addition, you’re the decision maker.
We don’t mean to burst your bubble, but not all legal counselors are good for your business. They might propose solutions that will cost you more for the sake of personal benefits (i.e. their personal additional profit), which is why you should know all of your options to prevent mistakes.
This doesn’t mean you shouldn’t hire a counselor at all. On the contrary, your startup will need one, but you have to be careful to choose a competent person for the job.
Startuppers are usually not very profit-oriented in the beginning and they seize every opportunity to save any penny they can. This is why you’ll frequently see them hiring lawyers who are low-budget or are friends/cousins of the company’s employees. Make sure your lawyer (or a law firm you’re thinking of hiring) has relevant experience in the following fields:
Sometimes, it’s not a bad idea to have several legal counselors who will cover different legal areas. Try to assess how much can you handle yourself and by all means – interview several lawyers before making a decision. While most startuppers are used to handling things on the go, this is the part where you have to become serious. You can also check low-cost or even free legal advice offered online by those who are bringing it back to the startup community. But as your business grows, you’ll need a legal counselor within the company.
As the lecturers from the University of Stanford cleverly stated, execution is what has value, not the idea itself. Too often it happens that the team agrees to give the biggest credit to the person who is responsible for the idea and so, naturally – a lot of company’s equity goes to him or her. But of course, if not all members contribute equally, the share should be split accordingly, with different percentage values.
Although everything within a startup is a matter of agreement, if the stock allocations end up being divided too disproportionately, it’s definitely a red flag.
Founders’ agreement ensures the following:
To sum it up: in the founders’ document – you define every possible scenario that may occur and agree in advance about what is the acceptable way of behavior and the right way to handle them. It includes answers to questions such as: what is to be done if some of the founders doesn’t follow the rules; what is the startup’s mission and goal and how it is carried by each party; what salaries are we talking about, etc.
Even though it’s likely you’re plunging into the world of startups side by side with your friends or even family – keep in mind that things can get pretty ugly in the business world. Having the founders’ agreement is a cornerstone of your legal documentation. It’s not about trust, but about safeguarding your future, both personal and professional. Kinda like a having a prenup in your marriage.
You can’t. It is impossible to actually prevent your idea from getting stolen.
However, it is possible to legally protect yourself and tackle the bastard who was daring enough to try to make serious money out of your efforts. But there’s another side to this problem.
Get this: there are around 7.4 billion people on the planet. And even though you might think your idea is revolutionary and so out of this world, chances are – somebody already thought of it. The only difference lies in the agility, how far does one carry his idea, and how fast he starts working on it. Taking care of the issue of intellectual property saves you the trouble of claiming your idea without any valid proof of documentation. Even though you might have came up with the idea first, the only thing that matters is who called a dibs on it first.
When it comes to intellectual property, you should understand several different notions: patents, copyrights, trademarks, and confidentiality agreements.
By registering a patent, you provide the best possible legal protection of your product. Usually, you hire a specialized lawyer who assists you in filling the application and, if you fulfill all the requirements – your product (or idea) is legally protected.
Copyrights are the exclusive rights to copy and reuse already made original works. This includes all types of media and content, such as books, photographs, articles, software, etc.
When you register your trademark, you protect your company’s name and recognizable symbols, for example – logo and slogans, that not only differentiate you from others – but are exactly what make your startup what it is. Technically, just by using the trademark publicly while doing business is enough. However, there are additional perks when you register. For example, if you happen to become the victim of cybersquatting, you can easily file a suit and solve the problem.
One of the most important legal documents is the non-disclosure agreement. It basically forbids you and your partners of publicly sharing certain information that are stated in the document. Those who sign it are obligated to fully respect the provisions of the contract and in many cases, we’re talking about a business idea or a product that’s not yet on the market. These are to be strictly respected.
Now, this is where you should definitely call up a legal counselor. As every startup is very specific (i.e. type of product/service it offers, number of founders, amount of money at stake, geographical area within which it is doing business, business model and size, market it’s aiming at, etc.), legal advice is needed in order to find the best suitable business form.
Most U.S. startups choose to start as corporations or LLCs, and it’s with a very good reason. In the U.S., C corporations and S corporations are formed under the state law and they are the most frequent choice for venture backed businesses and they have a reasonable tax treatment. In case of LLC (limited liability company), you have a combination of pass-through taxation of a defined type of partnership and limited liability of a corporation. Depending on what part of the globe you live in, there are different business structures you can decide on.
Here are the two most common options:
Choosing your business structure should not be a hasty decision. Take your time to evaluate what your startup actually needs and explore different options. Don’t be afraid to ask as many questions as you’d like to your legal advisor: it is in his job description.
The consequences of not paying taxes can be various: from light cases of paying a penalty fee to more serious ones such as having your property seized or even ending up in jail.
There’s no need to panic, though: you just need to have everything legally covered so you can do your taxes according to law. The amount of taxes you’ll pay depends on several factors and it is predominantly defined by your chosen business structure. Here are some of the legal documents you need to get straight in order to ensure your business is running smoothly with respect to the legal regulations:
There are also U.S. specific documents that are crucial for proper tax handling, such as the famous Section 83(b). As Kevin Criddle, associate at the DLA Piper said:
One of the more important tax decisions founders of early-stage companies will face is whether or not to make an election under Section 83(b) of the Internal Revenue Code for stock awards or other acquisitions of shares subject to vesting. By making this decision promptly upon acquiring the shares, founders can avoid missing the 83(b) filing deadline and protect themselves from significant tax consequences down the line.
Basically, it enables founders to speed up the process of determining taxable income on any purchase that is subjected to vesting or on restricted stock awards.
In any case, you should definitely hire an experienced accountant or a specialized tax lawyer to help you out with taxes. It’s not something you should joke around with by following DIY approach.
We always seem to get back to the topic of importance of choosing a proper company name, but this time – we’ll talk about it from the legal perspective. It is mandatory to check if someone else has already built their brand around the name you came up with. Only this way will you prevent trademark infringement and unpleasant legal issues. Here’s what you can do:
Back in 2015, a determined fellow named Alex Hern decided to read all the fine print online nobody ever does. He found out these legal documents are vastly out of date or simply copy-paste template documents you can find online. So, has an actual legal dispute ever happened because of the terms and conditions? Here’s what Mr. Hern noted:
In 2006, video game developers Blizzard sued MDY, a company which made software that let users cheat in World of Warcraft, Blizzard’s bestselling massively-multiplayer online game. The case alleged that using the software, called Glider, violated Blizzard’s terms of service.
So there’s that… It’s obviously definitely better to be safe than sorry.
Bonus advice: This is perhaps needless to say, but because we aim to give you a thorough overview of the legal basics for your startup – we’ll just underline it: prepared contract forms are crucial for great businesses to operate as they should.
Huh, are you feeling a bit overwhelmed? Yes, this might be a lot to handle. But all things seem much more complicated and scarier until you actually start doing them. You don’t have to be an expert but understanding the basic legal stuff will certainly make you a more competent businessman. There are incredibly useful resources online you can use.
Take thedrawingboard.me as a great example: Carlos Eduardo Espinal is a partner and co-manager of Seedcamp, Europe’s premier micro seed investment and mentoring program for young entrepreneurs. On the mentioned website, Espinal publishes an amazing podcast and a serie of different blog posts that are all startup-oriented.
And don’t forget Domain.me as a supporting friend of startups! This article is part of our startup series, so if you have an amazing idea on your mind – check our blog and find all the information you need! Are you looking for a perfect online home for your website? Check out the availability with .ME!
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