Startup Law 101 – Five Issues Entrepreneurs Should Know

To succeed as an entrepreneur, you have to find ways to maintain legal compliance and use the law to protect your business, all while finding ways to navigate through the law without letting it become a distraction.

Here are five startup law topics that you need to know about, at least at a high level.

1. Business Types & Formation

There are a million reasons you should form a business entity for your startup. The most popular choices are LLCs and Corporations – both can own property, have different types of owners (common v. preferred), sue and be sued, and both protect the owners from corporate liability.

It is important to form your company early (usually in the state in which you live/operate or Delaware) and to document the formation, the ownership, and the agreement among the owners (the Operating Agreement or Bylaws). You can do this yourself, but if you want to make sure you do it right, speak to a startup lawyer.

2. Intellectual Property & NDAs

As a startup, your most valuable asset will likely be your intellectual property. Copyrights protect creative works including computer code, trademarks protect your name and branding, trade secrets protect your confidential business information, and patents protect your inventions.

It is critical that you have written agreements in place with your owners, employees, and contractors, that make it expressly clear that the startup owns all IP and not the individual creating the IP. Additionally, you should have a standard NDA for third parties to sign that prohibits them from disclosing and/or using your confidential information.

3. Employment/Contractor Law

The IRS and the law treat employees and contractors differently. And don’t assume that just because you call someone a contractor, that the IRS and courts will agree.

Before engaging individuals and/or vendors to perform services for your company, you need to speak to a startup lawyer about what they are going to do, who is responsible for what, how they will be paid and, most importantly, who will own the IP they are creating. You can then work with your startup lawyer to create a formal agreement to govern the relationship.

4. Contract Law

Speaking of formal agreements, you should use written contracts whenever you work with a third party. Oral agreements are enforceable (in most situations) but proving their terms can be complicated.

If you are moving fast and don’t have the time or resources to prepare a formal written contract, you should at least follow up with all the parties via email to document the key terms of your agreement. That way, if a dispute arises, you’ll have something to fall back on.

5. Securities Law

The Securities & Exchange Commission (SEC) requires that you register your equity securities and go through an Initial Public Offering (IPO) in order to raise money through selling equity in your company. However, they have a lot of exceptions to that general rule that allow private startups to raise money without using an IPO.

But, you should know that the most popular and useful exceptions require you to only raise money from accredited investors (a narrowly defined group of individuals). That’s why you should always speak to a startup lawyer before raising money for your startup, even if you are just raising money from family and friends.

*Bonus Startup Law Tip

Don’t forget about taxes! If you screw up taxes, you can end up in a lot of trouble. So you should always rely on your startup lawyer and accountant to help you maintain compliance with tax laws.

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Image: Adobe/peshkov

*This article is very general in nature and does not constitute legal advice.

2018-01-13T21:01:17+00:00By |Startups|