Getting a startup off the ground is often full of hurdles. You have to develop a sound product or service, deal with picky customers, make sure your back-end technology is working right and keep promoting yourself to find new business. You also need to make sure any employees you have are doing their jobs right at all times. Despite all these things, running your own startup is still fantastic! You’re your own boss, you make your own rules and you’ve finally taken some serious control of your professional life so that you too can become one of those few people who get their first good taste of entrepreneurship and suddenly become nearly unemployable in a regular job.
However, there is that one important aspect of startup success that can be easy to forget before you get creative and build your business. That’s the legal part of it all, the regulatory goop that can make or break even the most successful business if it doesn’t arrange its legal strategy well and plan ahead on at least a few key issues.
Here are a few common legal challenges that your company will probably have to deal with at some point in its existence. Handle these well, and your company will grow a lot easier.
Keep Your Patent Use and Protection Clear
Take a good hard look at your patent situation. One of the most common legal problems many tech startups face comes from exactly this area, particularly patent issues. Let’s take Twitter as an example: From its founding in 2006 to mid-2009, Twitters user base grew enormously, and by mid-year of 2009 the company had over 37 million followers. Things were looking good, and a future user base of hundreds of millions seemed on the horizon. However, in August of 2008, they suddenly got slapped with three different lawsuits by another company claiming that Twitter was using their patented mass wireless notification technology without permission. The Tech Radium lawsuit was later settled out of court, but the cost incurred is something most startups can’t afford.
Hire a good patent attorney to anticipate and deal with issues over your own patents, and make sure that any third party patented technology you’re using is subject to very clear licensing agreements.
Register and Protect Your Trademarks
As soon as you’ve got a logo, phrase or design for your business on your hands, make sure you trademark it as quickly as possible under full legal protection. This can be done by submitting an application to the U.S Patent and Trademark Office and any pending trademarks you’re using in the meantime should be marked by a TM or SM logo until your application is successful.
The importance of this step can’t be understated, especially if your logos, brands names and catchphrases are already known to your customers. The legal headache of submitting a trademark application too late and finding out that others have already beaten you to the punch can be more costly than you can afford.
To use Twitter as an example again, the company’s signature word “tweet” had already become popular by 2009 amongst its 37 million users as a classic part of the twitter “brand”, but when they finally got around to sending in a trademark application that same year, it turned out that three different players had beaten them to it. Again, they settled the matter out of court, but it cost them a lot more than a much earlier effort to trademark would have.
Make Clear Agreements with VC Partners and Angel Investors
It’s easy to get excited when a VC or Angel investor decides they like your little business and offers you a large amount of money to prop it up. However, with money comes control; you’re effectively making them partners in your business and won’t be calling all the shots anymore. VC’s are no dummies and they’ll be demanding a certain amount of decision making authority in all your major future plans, especially those relating to sales, equity raises, debt financing and hiring at the executive level.
Unless you’ve made a clearly defined advance agreement on what and how your Angels and VC’s are going to participate in the future of your startup, you can easily end up falling into heavy legal wrangling. This could turn into a total disaster if you’ve already grown your company with their money and become dependent on it.
Also, if you’re shopping for VC’s and Angels, make sure you actually shop around and not hop on the first or best offer you get. Some VC’s might offer your startup a very high valuation to get you excited about their offer, but this may not be the best choice for you. Look at their own reputation with other small companies. How have they treated them, how did the relationships pan out? It doesn’t just have to be the VC that makes all the choices.
Timing Your Incorporation Right
A lot of startups start so small and with so little funds that the owners don’t think there is a point in going through the trouble of incorporation. This can be a mistake. If you’re planning on growing big or looking for VC funding, the best time to get your company incorporated is when it has hardly any value. Do this quickly and you create both legal and tax protections that will keep you from being bitten bloody later on.
Furthermore, if you have incorporated early, you can issue vested shares to all the founders and avoid the problem of one founder leaving the company, coming back later and demanding an inflated share of value for his or her participation; they will have already had to hand over their shares upon leaving (vesting). Being able to issue shares through incorporation also makes for a much more streamlined means of distributing value amongst all the founders, avoiding potential arguments down the road when (with luck) you become the next Facebook.
[The article has been written by Chris Bryant. Chris Bryant covers small business lawyers inChicago, including reviews, write-ups, and recommendations.]