Lawyers. Wait, don’t stop reading yet! The legal stuff seems opaque and boring, but it’s make or break for your company. Avoiding legal troubles when you’re starting up is all about being proactive and preventing issues before they occur. Here’s six things to think about on the legal side of life.
Note: We’re obviously not lawyers, and this does not constitute binding legal advice. Consult your own qualified lawyers before making decisions!
Determine your Business Structure
Most startups will incorporate as an LLC or a Corporation. You should not be operating as a sole proprietorship – it puts your own personal assets at risk. Becoming incorporated gives you more legal protection. We’ll talk more about the deciding between different business structures in another Academy article.
Just like a marriage, you would never start a business with someone you intend to break up with later on (hopefully). But things do happen, and having clear guidelines will help prevent a mess later on. Founder’s Agreements contain information about the ownership of the company, the stated company mission and a few other decisions that should be made early on.
Right from the beginning of your business, you want to protect your intellectual property (IP). This is the idea behind the company and any proprietary information or technology built for it. A Founders Agreement assigns any developed IP to the company.
Your agreement should also include the role and responsibilities of each founder. You may want to include specifics deadlines and targets in order to hold every founder accountable to the business.
Finally, confirm who needs to agree (and in what form) to any equity or investment opportunities. This might also include a buy-sell agreement to determine what happens if one partner wants to leave and sell their share.
Startup Hiring Agreements
Once you start bringing people on board, you’ll want to hire them within your states legal guidelines. We have three legal agreements we use when hiring:
- The Offer Letter – this states the role and responsibilities, compensation, start date and other information relevant to their new job. Equity arrangements would also be included in the offer letter.
- Proprietary and Confidential Information, Developments and Non-Solicitation Agreement – this document addresses information leaks, non-compete agreements if they leave, and what happens in the case of termination.
- Consulting Agreement – used for non-employees, the consulting agreement essentially contains an NDA and outlines compensation for any work done.
You can read more about these hiring agreements and download templates in our blog.
You’ve formed your business, you’ve made agreements internally – hopefully you’re about ready to start selling. There’s a couple legal documents to prepare first.
Terms of Service – a TOS needs to be posted on your website and be easily accessible by customers. It contains many important statements about the conditions for doing business with you, and what your company is liable for. There’s many standard TOS outlines available online. Make sure yours includes the following:
- Limits of Use
- Disclaimers on Warranties and Refunds
- Limits on liabilities of site owners
- How any disputes will be resolved.
Contracts – Especially important in enterprise sales, contracts include the terms of sale, payment agreements and responsibilities of each party. Negotiating big, multi year contracts can take a lot of time. Make sure to get every change looked over by a lawyer who specializes in contract law to ensure you aren’t giving away the farm!
Depending on what industry you’re operating in, you might need different licenses to do business. For example, Square was recently fined $500,000 for operating in Florida without a money transmission license.
Find yourself a lawyer
This is all a lot to think about right? It’s worth finding legal advice that you trust early on. Look for someone who specializing in technology or at least has some experience working with startups and investment. You don’t have to hire one full time – just have someone on retainer who can look over contracts for you, and advise on any changes.
We have a pretty great lawyer, if you’re looking for recommendations.
Don’t wait until the first time (yes, it’s likely to happen) you have a run in with the law to seek legal help. Start early and you can avoid expensive legal fees and long battles. Being proactive is the key!