5 Legal Aspects You Should Consider Before Creating A Startup
You have finally decided to turn your idea into action. After a long time of thinking, planning and organising you have decided to stop procrastinating and immerse yourself in your idea by bringing a new business to life. Whilst you have been thinking about every aspect of your new and exciting business, you may have inadvertently forgotten about (or maybe you did not even think about) the legalities of your startup. Without the proper legal protections in place, you may not only lose your advantage, but someone may actually pinch your idea and beat you to the punch. In fact, without the proper legal documents, you may find yourself in a position whereby you are spending most of your time fighting a legal battle instead of working on and perfecting your new startup venture.
So, what are some of the main things you should think about when starting a new business?
Protecting your idea
No doubt, when you are looking at creating a startup, much of your advantage depends on the novelty and uniqueness of your idea. If you think you have the next great idea in your locker, you ought to make sure that you protect this idea. This means not only being selective with whom you share your idea, but making sure that they in turn are also selective with whom they share your idea.
This is where a Confidentiality Deed or a Non-Disclosure Agreement becomes important. This agreement essentially prevents a disclosee (the party you intend to disclose information to) from sharing your idea with anyone and simply limits their disclosure to what is necessary to aid you in the service you are engaging them in.
Before actually embarking on establishing your new startup, you should carefully consider your business structure. Will you operate as a sole trader (and save costs) or will you choose to run your business as a company (and limit your liability)? Perhaps a partnership or a joint venture is a good middle ground.
“Your business structure should be carefully determined, and this will largely depend on how or if responsibilities are to be shared and who will be in control. If you are working on the startup with someone, you will need to carefully discuss your business structure and make sure your interests are protected.”
If you are creating a startup with the assistance of partner, it becomes extremely important to document how your relationship will be managed. An agreement between all partners (whether this is shareholders agreement or other agreement to document the start of the relationship) is highly recommended. This prevents any issues down the road and dictates how the business will be run (i.e who calls the shots, procedure for buying each other out in case things go pear shaped, first rights of refusal etc).
If your startup relies on Intellectual Property, this should be protected prior to official launch. If you have not patented/copyrighted your Intellectual Property as of yet, you should be very careful as to who you discuss your idea with.
If you already own intellectual property which you intend to utilise in your new startup, you should carefully think about what is to happen to such property. Is it the case that the intellectual property will become part of the business structure that you have decided on above (i.e. will it belong to the company) or will you continue to own the intellectual property and merely licence this to the business structure? This should be clearly and unequivocally documented in your agreement with the other partners.
You may engage different entities whilst your startup is kicking off. You may be liaising with a lot of different people who will be providing you a variety of services. In addition to making sure that your idea is protected and that such parties execute the right confidentiality agreements, you will need to clearly set out how your relationship with such parties will be governed.
For example, if you are engaging someone (or a company) to design and develop a website for you, you may need a contractor agreement which clearly sets out the work to be performed and how this party will be paid for their services.
If you are engaging staff, appropriate employment agreements will need to be put in place. You should consider clearly setting out that some people ought not to be considered to be partners in your new startup but that they are simply providing a service. This limits the potential for an ex-employee/contractor claiming that they co-founded your startup (a familiar scenario in successful startups).
Without the above documents, you may find yourself in a situation where work has not been performed (or has been performed below standard) and you may not have a clear leg to stand on in your attempts to force the other party to finish their work or to redo their work to an acceptable standard.
Whilst the above may seem costly and time consuming (or you may not consider it worthwhile to think about it at this time), rest assured that having the appropriate legal documents in place is a lot less expensive and time consuming than dealing with issues if/when issues do inevitably arise.
Just like you wouldn’t start a business without a business plan, we strongly recommend you don’t jump into a startup without thinking about the appropriate legal protections. Having the above-mentioned documents in place prior to launching (or even discussing) your idea, may be the difference between you being the next Steve Jobs or the next John Doe.
At Rostron Carlyle Rojas Lawyers, we can assist with all legal aspects of your startup. We work with multiple startup clients in ensuring that they have the right legal foundations before kicking their idea off the ground.
Contact James Hatzopoulos or Klevis Kllogjri on 02 9307 8900 for a confidential discussion regarding your new business idea and to check that you have all the relevant legal documents in place to ensure your new startup does not fail before it kicks off and to ensure that you avoid/minimise the potential for any disputes.