A “startup” is a type of venture intended to look into and create a business model that can be easily replicated, and test for potential markets with those business models. Google, Facebook, and Microsoft are three famous examples of startups. These types of companies tend to develop and validate new ideas and inventions, and then seek to either grow large enough to become publicly traded or to be sold to a larger company.
Startups generally need to form partnerships with established companies or venture capital firms in order to grow. However, with the help of crowd funding through websites such as Kickstarter, many startups are able to find funding in exchange for goods or other benefits to initial investors.
While there is clearly no magic formula, below are five overriding factors to keep in mind when starting a startup.
The Idea – Contrary to popular belief, you do not necessarily need to have a groundbreaking idea as the foundation of your startup. In fact, an improvement upon an existing technology or invention may be your million-dollar ticket.
The Crew – Starting a business with your high school or college buddy sounds well and good, but it may not be the best idea for the business. Before bringing someone on board, think long and hard about these three things:
- How hard will this person work?
- How well does this person understand the direction of the business?
- Can I stand to be around and work closely with this person?
The last factor may seem extreme, but a simple truth about startups is they require long hours, with everyone involved working very closely together.
The Customer – Knowing who your customer is will be essential for a successful startup. For example, if Google targeted developing their search engine for engineers and not for the general public, we may not have the website we do today.
The Money – It may go without saying, but knowing where your money will be coming from will be one of the overriding factors; from hiring to day-to-day research and development, to ultimately how successful a startup will be. Thus, this should be considered while making hiring decisions as well. Asking ‘can this person help negotiate the deals we need’ or ‘who can we reach out to and how can this individual help do that’ are important thoughts to keep in mind.
The Right Personality – Even if you have the idea, have a strong team, know your customer base, and have the money to back your project, if you personally do not have the right personality for a high risk business environment, spearheading a startup may not be the best idea. Alternatively, consider hiring a consultant or someone who may be better suited for the high stress levels that come with these ventures.
Taking into account the considerations above, below is a basic list that may help avoid legal pitfalls when starting a startup.
1) Be Clear in Contracts
Having a clear understanding between co-founders, investors, and any other party you can imagine, is essential to success. Startups will generally be limited in their bargaining power with investors, but when crafting a deal between the initial team, the following things should be made absolutely clear:
- Vesting of Stock
- Voting Requirements
- Removing a Founder
Moreover, as a startup grows, it is necessary to have strong standard contracts for hiring and forming partnerships that protect the company.
2) Incorporate Quickly and Correctly
Picking the right legal form of the business will be crucial when things like liability and tax come into the picture. While it is possible to operate as one type of partnership and later file as some type of corporation, liability and costs can be complicated. It is better to get it right from the start.
3) Comply with Federal Law
While this may sound like a no-brainer, often companies will inadvertently violate federal securities laws. Securities laws may require making disclosures, filing, and certain forms mandatory. Failure to abide by these laws can result in very steep fines and even criminal liability.
4) Classify and Document Everything Correctly
As the startup grows, so may the number of employees, and perhaps the number of shareholders, and therefore corporate responsibility grows too. The following are some things companies may overlook until it becomes a legal issue or lawsuit:
- Stock options
- Bylaws and articles of incorporation
- Non-disclosures and non-competes
- At-will employment letters
- Benefits forms, including benefits available to the family members of employees
5) Choose Wisely with Intellectual Property
Intellectual property is an entirely different topic itself, with a myriad of complicated doctrines and considerations. In terms of startups, it is only important to know that the core of your startup is your work, and therefore ensuring it is protected to the fullest extent possible is paramount. One of the biggest mistakes a startup can make is make a quick glance at intellectual property terms and then just decide they have one or another.
6) Learn Tax Considerations
Similar to intellectual property issues, tax is a complex subject worthy of its own article. And, also similar to intellectual property, it is an area that if a startup neglects to do thoroughly, they will pay for it down the line. Perhaps one reason tax issues are not addressed is because they touch nearly every part of the business. The following are just a few examples of when tax law affects a startup:
- Deciding which corporate form the startup files under
- Sales and payroll taxes
- Complying with IRS guidelines with stock options
- Deciding when to elect to pay taxes on the stock as “income”
- Taking advantage of any tax incentives such as renewable energy
As you can tell, startups come with many complex legal issues. Picking the right business attorney who is familiar with the laws of your jurisdiction is one way to ensure your business is protected and you are able to enjoy the full fruits of your labor.