We know that lawyers often get a bad rap, and that many entrepreneurs are fearful of engaging with them. We also know that, because of this, lawyers make a lot of money fixing problems that should not have emerged in the first place. Entrepreneurs can be so focused on the development and growth of their startups, and so sure of their product or service, that they tend to address the more immediate issues such as funding or talent acquisition, while overlooking the legal risks that their organization may face down the track.
With early legal decisions having a significant impact on the safeguarding of a business as it scales, the overcoming of “lawyerphobia” early on in a company’s development can prove crucial to a startup or SME’s success. Here is how to tackle a number of key legal issues at the start to avoid them causing problems for founders later in the growth cycle:
Clear conversations and agreements between founders
At the initial stages of your business, it is normal to believe nothing could possibly go wrong and you and your fellow founders will be friends forever. This is precisely when co-founders must ask themselves those tough questions, imagining worst-case scenarios. It is much easier to discuss hard issues now while the going is good than being unprepared if the relationship between co-founders sours. Discussions between co-founders must be both objective and honest and consider the current situation and future scenarios for the business and its founders. What are the roles and responsibilities of each of the founders? What happens if one of the founders wants to leave? Once the air has been cleared and these difficult discussions have been had, it is vital for them to be written down.
2. Intellectual Property (IP)
It is important to make sure that your company obtains all the legal rights to own or license the intellectual property its founders have created and which are vital to running the business. It is relatively easy and inexpensive to assign this IP to the company at the time it is incorporated. Depending on your company’s jurisdiction of incorporation, the assignment process can then be built-in to your employment agreements as you move forward, allowing employees to transfer the ownership of any IP they create during their employment, to the company.
Intellectual property rights will be a key area of focus for any investor doing due diligence on your company, so it is important to get it right from the start.
3. Legal entity
An early decision founders must make is what legal entity they should use to operate the business and where to incorporate it. With so many alternatives, and without seeking legal advice, the choice can be overwhelming and the temptation strong to choose the cheapest or fastest form and location.
Setting up the right legal entity the first time and in the right place is critical to the success of your business. It can be extremely costly - both in terms of money and time - if you make the wrong choice and need to rearrange your company structuring. Your lawyer must understand that different companies deliver different outcomes, and that what works for one may not work for the other.
Keeping track of your paperwork and getting organized from the start can help avoid delays later when potential investors need to review your legal documentation. The more organized and efficient you are the more confidence an investor will have in your ability to execute. Make sure you get the full suite of incorporation, establishment, registration and licensing documentation for your company from your lawyers as soon as these processes are complete.
Focusing on legal issues early in the journey can prove crucial to a company’s success. Face any fears head-on: actively seek out a good lawyer who knows what is best practice for a startup or SME and can protect and help propel your business.
Patrick Rogers is the Co-Founder and Principal at Support Legal