Four Important Considerations When Launching a Startup
Today’s post highlights some of the key considerations that founders of any startup company should have in mind as they begin the process of turning an idea into a business. The action items we discuss in this post are simple things to address early on in the company and can have immediate and lasting positive impacts for the company and its founders.
Forming a Corporation or LLC to Limit Personal Liability
One of the first steps the initial partners should take is to form a limited liability entity (either corporation or LLC in most cases) in order to limit the owners’ personal liability. Forming the entity will also open the door to discussing the initial ownership percentages, vesting provisions, and management rights. This is often the point when it makes sense to connect with an attorney who can help make sure the company is set up in a way that enables it to grow according to the owners’ objectives. It’s also important at this stage to find a tax adviser to assist with navigating the various tax considerations when deciding on the right ownership structure for the startup.
Protecting the Startup’s Intellectual Property
For many early stage companies, the most valuable asset the company owns is its intellectual property. Protecting that IP is important. Founders should take steps to understand what IP rights they have and how they can protect their IP. Startups commonly protect intellectual property through IP assignments, non-disclosure agreements, licensing agreements, and by registering trademarks and copyrights.
Getting Agreements in Writing
Founders often transition from discussions straight to handshake agreements with contractors, employees, vendors, manufacturers, and suppliers. There are two main problems with moving forward without a written agreement.
First, having a written agreement can help prevent disputes. People tend to hear what they want to hear, and our memory is not terribly reliable. By putting an agreement in writing, people can refer back to the agreement, making it easier to follow the actual terms.
Second, if there’s no written agreement, it can be more difficult to resolve any dispute that does arise. Without having clear written terms to look to when resolving a dispute between the two sides, it can become a more time-consuming, expensive process to parse through both sides’ understanding of the agreement and the evidence that substantiates each story. We always recommend getting the terms of any important agreement in writing.
Complying with Securities Regulations When Raising Funds
Depending on how the owners intend to fund the new company, there may be securities regulations that the company needs to comply with. In general, a security is a contract or transaction where a person invests money in an enterprise and is led to expect profits from the efforts of a third party—even certain loans are considered “securities.” As we’ve discussed in previous posts, securities regulations are complex and failing to comply with them can result in serious consequences for the company and the individuals managing the company. We always recommend talking with a securities attorney before taking on any investment of capital into your company.
Of course, the considerations above are just a few of the various legal hurdles you’ll come across while launching a startup. There are almost always specific considerations that are unique to each business. Keeping in mind the four considerations highlighted above can help reduce some of the risks associated with launching a startup.
If you’d like to more about legal considerations when launching your startup, please feel free to contact us today.