Let’s briefly chat about how important it is to use protection in business. I get it, you’re a business owner and legal is probably one of the last things on your mind. But protecting your business, like protecting anything else in life, saves you a headache down the road. Simply put, getting your legal ducks in a row will help you reach the success you envision for yourself as a business owner.
Fortunately, in the next 7-minutes you will learn how to solve your top 7 legal issues. These topics were selected by two trusted attorneys, Nait Patel and Tej Prakash, co-founders of Should I Sign, an online legal marketplace that connects startups and small businesses with pre-vetted attorneys who provide upfront quotes for your legal needs.
Their years of legal experience will help you identify issues where legal expertise is necessary and help you avoid unnecessary pains and costs. Here’s what they had to say in my interview with them about the issues you might dealing with right now:
1) Formation Issues
Most business owners struggle with knowing what type of entity is right for their business. The choice for most business owners really boils down to a C-Corp., S-Corp. or Limited Liability Company. While every business is different, the decision usually depends on investment aspirations, tax considerations and ongoing state fees. If you are a “tech” startup seeking institutional capital, you will likely want to incorporate as a Delaware C-Corp because investments can easily be structured; and Delaware jurisprudence is well established and gives investors predictability with their obligations – for instance, when an investor obtains a board seat.
If you are a traditional small business and are not seeking institutional capital, you will likely be better off forming an LLC or corporation (with an S-Corp tax election) in your home state. This will allow you to benefit from “pass-through” taxation and save on registered agent fees.
Check out this article for more information on considerations when selecting an appropriate business entity.
2) Structuring Relationships with Founders/Partners
Regardless of the form the documentation takes (e.g., operating agreement, bylaws, founders agreement), it is important to formalize the relationship you have with your fellow founders or partners. While no one likes to think a relationship may sour, but the fact is, it might. Having a formal agreement in place that address roles & responsibilities, equity ownership, management and removal are important because it sets expectations and rights, and at worst, can be used as the basis to remedy a dispute if one arises.
One concept that often gets overlooked with founders of a “tech” startup is the vesting of equity over time. It is important that equity vests over time so that there isn’t “dead” equity on the cap table if one founder leaves prematurely.
3) Building a Team
As your business grows and you hire employees, it’s important to memorialize the relationship. This can be done through an employee offer letter or employment agreement. These agreements will address standard concepts like job title and description of role, place of work, health benefits and vacation. It also covers concepts that protect the business — like confidentiality of information, ownership of IP, non-competition and termination rights.
If you are a startup, one of the best ways to compensate your employees (or service providers) is through options. It acts as a form of retention, and saves you cash. When granting options, two important things to keep in mind: how the options vest over time and determining the size of your option pool (typically, 10%-20%).
4) Fundraising
Eager to get investments in? Founders should really make sure they understand what they are agreeing to and how it impacts ownership. Whether you are raising a seed round through a convertible note or SAFE, or setting a priced round and selling equity, take your time (with the help of a business attorney) to understand your market terms, but more importantly, understanding what those terms mean for your business.
In addition, there is a securities law overlay that needs to be followed when you’re fundraising because you’re selling securities. An attorney can help structure your fundraising efforts so you do not run afoul with these laws.
For more information on these laws on how they may impact your fundraising efforts, check out this article.
5) IP Protection
With any business, part of its value is derived from its brand. To that end, it makes sense to protect your brand and prevent others from associating themselves with it. Enter the trademark. A trademark is any word, phrase, symbol, design, or combination thereof used to identify and distinguish goods from those manufactured or sold by others. Think of Nike’s swoosh symbol or McDonald’s golden arches.
Registering a trademark helps protect your brand, but also serves as a key marketing asset. If you’ve ever gone to a drug store and purchased Tylenol over the exact same generic version right next to it, you probably associate Tylenol as a brand that you can trust as a high-quality medicine manufacturer.
6) Creating Form Agreements
One of the most inefficient uses of capital is constantly negotiating agreements that are routinely used in your business. For this reason, it makes sense to invest a little upfront and have an attorney prepare a standard set of legal documents that you will routinely use in your business; for example, NDAs (non-disclosure agreements), independent contractor agreements, service agreements, vendor agreements and employee offer letters. Having your own company favorable forms reduces the amount of back and forth with attorneys as they review each agreement on separate occasions.
7) Terms of Use and Privacy Policy
Most businesses today have an online presence, whether through a website, app or both. While a Terms of Use and Privacy Policy should be utilized for any website or app, these should be a focus when you have an interactive site, rather than just a “brochure” site. A Terms of Use will cover things like, who can use the site, how accounts are created or deleted, what information can be posted on the site, ownership of intellectual property as well as limitation of liability and indemnification. A Privacy Policy discusses how information is treated when transmitted through the site.
With these legal aspects in your foresight, your business will have the necessary foundation to grow swiftly and maintain proper legal protection throughout your early stages and beyond. The co-founders of Should I Sign, Nait & Tej encourage you to make the investment for your strategic legal needs, because they will pay off in the long run and keep you protected from unwanted liabilities.