Launching a product is overwhelming. Overseeing or conducting development, doing your marketing, meeting investors – there’s a lot of chores a founder needs to juggle all at once.
Legal matters are often left unattended in this merry hustle and bustle. Of course, developing your vision is way more exciting than getting through the murky legal waters. Yet, failing to establish a strong legal base for your business can cost you your company later on. The following four tips are the bare must-do for any founder launching a tech venture.
Choosing a Domain/Brand Name Without Doing Your Homework First
Just made up a cool sounding name for your venture? Awesome! Now it's time to do some digging apart from checking its eligibility on a domain registrar.
You will need to make sure that you have not picked a name that is the same or sounds similar to an existing registered name, especially a trademarked one. And failing to register a trademark can be a huge roadblock later down the road.
Think Apple. The company has been continuously suing various Chinese companies, who have been “trademark squatting” on Apple’s iPad without any legal consequences. According to the China laws, whoever registers the trademark first, owns it for good. Also, during all those squabbles it turned out the name "IPAD" was already legally copyrighted to a Taiwanese company back in 1988. Suppose that makes a good lesson on why researching and protecting your business name is so important, especially if you decide to expand to a foreign market.
That’s why it may be worse to do some preliminary digging and commission a patent and trademark search before you go all into product development.
Failing To Protect The Source Code and Other Intellectual Property
Intellectual property laws are not evolving at the same pace as the technology advances. Hence, startups now enter a somewhat sticky area with no fine line defined, especially when it comes to the product source code.
Imagine this: you are licensing some software from a 3rd party vendor to power your product, API integration for instance. What happens if that vendor goes out of business just when your product finally starts taking off? To avoid these scenarios, you may want to negotiate a software escrow agreement with that vendor through an agent. The agent will store that licensed source code and give you immediate access to it once the respective conditions apply.
Next, think about your web app design – what if it gets completely or partially ripped off by some 3rd party? While filing for utility patents (protecting the way the product is used and works) is rather common for startups; filing design patents, which protect your product looks isn’t something most companies consider to do.
The official US Patent Office stats prove this tendency: in 2015 over 9.2 million utility patents were issued, compared to just 746,000 design patents.
But think about this – obtaining a utility patent for software inventions has become significantly harder in the US after the Alice v. CLS Bank case. Design patents may be easier and faster to claim and they will still protect the essential parts of your product such as GUI, logo, screen flows and so on.
Operating Without Proper Paperwork
Hiring and legal mistakes come hand in hand just too often. You should prepare in advance all the required paperwork for the new people with clear contracts, NDA agreements and any other supplementary clauses you deem appropriate.
As a founder, formulating strong bylaws should be on top of your agenda. Your work contract should specifically list all the existing policies, how the disputes are settled, descriptions of duty, conditions, and terms of employment and the rights and powers of key shareholders. Also, you should mind the worker's compensation laws in your state (as those differ largely) and establish the procedures for claiming injury compensations, which cause not just financial, but reputational damage as well.
You will also need to have a business owner's insurance (BOP) before moving into an office space. It would have your back covered when it comes to property damage, personal property coverage (hardware, furniture, and other possessions). Some insurances also offer extended coverage for valuable documents (both paper and digital), meaning you can receive compensation of related costs if you lose access to those files.
Have a Formalized Founder’s Agreement
Also called the operating agreement, it will help you avoid certain conflicts among the founding party. This legal document should clearly define the relationships among the founders; outline how the communication is expected to happen and incorporate a conflict-resolution clause that should minimize and regulate the disputes.
Richard Harroch also suggests that a founder agreement should absolutely include your agreement on the following matters:
Who obtains what percentage of the company?
The shared and common responsibilities of each founder and their primary roles.
In case one of the founders leaves the business, can another founder or the company buy that founder’s shares? If yes, at what price?
Is the ownership percentage being subject to vesting based on continued participation in the company?
Are founders entitled to any salaries? How can the salary be changed?
How the key and the day-to-day company decisions will be made?
What are the circumstances for removing a founder as an employee from the company?
How will you decide on the sale of the business?
What kinds of assets will each founder contribute/invest in the business?
While doing the legal chores may be not the most exciting part of your job, you will have to prioritize them at the beginning to avoid paying for your mistakes later down the road.