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Legal advice for startups: what to know from the get go

29 Aug 2017

This article was originally published on the CreativeHQ blog here.

Law firm Chapman Tripp has been enthusiastically supporting Creative HQ and its programmes’ participants since 2014.

Lawyers Tony Davis and Tom Jemson spoke to Creative HQ about some key legal steps for a startup to take from the initial business idea right through to investment.

All early stage startups have to consider these steps to ensure their business is in good shape when it comes time to seek venture capital.

Chapman Tripp provided a quick breakdown of the three major legal topics that were most vital to startups: founder agreements, intellectual property, and contracts.

Founder agreements

The most common ownership structure for early-stage startups is a company.

The initial founders of the startup will often be directors and shareholders of the company.

When there are two or more shareholding founders, the founders should consider whether they should enter into a “founders’ agreement”.

Founders agreements will generally seek to provide solutions to issues that may arise between the founders in the future such as:

What decision-making rights do the founders have? What if the founders do not agree? Should certain key decisions require the unanimous consent of the founders?

What do the founders expect of each other as co-founders of the startup (i.e. roles, hours etc)? If a founder was unable to continue to commit to the startup on the basis agreed, should they be required to transfer their shares (all or part) to the remaining co-founders?

By articulating and agreeing on such expectations and “ground rules” at the outset, it is much easier for co-founders to navigate issues as they arise in the future.

Intellectual property

The best strategy for an early-stage startup is to identify the IP important to the business, invest time and money in protecting what is important, and don’t sweat the rest.

Some tips and tricks include:

  • IP ownership: A company is a separate legal entity, distinct from its founders, which can own property just like a natural person. Accordingly, it is important to ensure that the company – not the individual founders – has exclusive ownership of any IP associated with the business. Otherwise, future investors will be investing in an entity that does not actually own the IP, which is usually the most valuable asset of the business. It is common for each founder of the startup to enter into a “deed of assignment of IP” which “transfers” any IP interests the founder may in the business to the company.  
  • Contractors and employees: Founders should ensure that all employees and contractors engaged by the company agree that all intellectual property created while working for the company is owned by the company.  
  • Protecting your name: Before settling on a name for the business, founders should make sure it is not already being used by someone else. It can be a real setback for an early-stage company to build goodwill around a trading name only to later find out it must change its name as the company is breaching someone else’s trademark. It is, therefore, best to do your research before settling on a trading name. (OneCheck is a helpful tool to search company names, domain names and trademarks.)

Furthermore, once the business is up and running, founders should consider obtaining a registered trademark for the businesses trading name or logo – as this is the best way to protect their brand.

Key contracts

Things to consider when entering into agreements with key suppliers or key customers:

  • Ideally, key customer and supply contracts should be in writing, signed and dated;  
  • Be realistic – it can be tempting to over promise to big new clients, but ultimately under deliver;  
  • Be wary of exclusivity and restraint of trade clauses (you do not want to restrict your business when you’re trying to grow).

This article was originally published on the CreativeHQ blog here

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