Ten Business Law Tips for Startups
October 27, 2010
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There are lots of collections of tips for startups that have excellent business advice on building your team, hitting product milestones and pitching to VCs; but not that many that give a corporate lawyer’s perspective. So here’s mine:*
- You May be a Genius, but You Are Not a Lawyer
- Your idea is brilliant and you have what it takes to be a CEO, but you are still not a lawyer (or an accountant).
- Hire professionals and use them to help you figure out what you need and when.
- This doesn’t have to be expensive. Figuring out priorities isn’t billable work – executing them is.
- Even Though You’re Not a Lawyer, It’s Still Your Job to Read Everything
- When it comes to your business the buck stops with you
- You need to read and understand everything you sign
- Your lawyers’ and accountants’ job includes explaining things you don’t understand
- If You Don’t Incorporate, You’re Personally Liable
- Unless you’ve incorporated (or formed an LP , LLP, S.a.r.l, etc.), you’re personally liable for everything done in the name of the company or by any of your partners
- One you have a corporate entity, issue shares (or units, etc.) to yourself and your partners – they are the legal basis for corporate power
- A Shareholders Agreement is Cheaper than a Lawsuit
- Unless you’re the only founder, you need to align everyone’s expectations
- Drafting a shareholders agreement will help you address key controversies in advance
- Waiting until there’s a dispute is too late
- Be Greedy With Your Equity
- Once you have a shareholder, they are hard to get rid of
- It’s tempting to use shares for compensation, advisory boards, etc.
- Try to use non-dilutive cash or options instead
- Make sure when you do issue equity that it doesn’t constrain your next steps
- Pay Your Taxes
- There are lots of taxes that apply at early stages
- Payroll taxes, HST, VAT, sales taxes, etc.
- You can be personally liable if your company doesn’t pay
- Ignoring taxes only makes it worse
- Protect Your IP
- Get assignments from your inventors or institutions
- Get signed development agreements before the work starts
- Talk to an IP lawyer about appropriate patent filings and permissible disclosures
- Separate your current job from your startup. If you use time, facilities or equipment that belong to your current employer, they could end up owning your new company’s IP.
- An NDA May Ruin First Impressions
- Don’t drive away potential partners or investors with premature or paranoid NDAs
- Give potential investors and partners enough non-proprietary information to generate interest
- If in doubt, run planned disclosures by your lawyers and existing investors
- Be Honest With Your Customers
- If you’re collecting personal information, you need to comply with privacy law
- Talk to Your Investors
- Let them know about progress and challenges
- Give them advance notice of future financing rounds
* This is not legal advice (duh, it’s a blog), just my thoughts (not my firm’s – see previous) on how to use legal services efficiently when your business is new. I presented a version of these as part of Ogilvy’s How to Draft a Patent seminar at MaRS yesterday.