Make sure you get it right from the start – do your legal homework before your launch.
By Tricia Meyer (Managing Attorney, Meyer Law)
The news is filled with stories of lawsuits filed by ousted founders against now-successful companies — and those are just the companies that survived and thrived. It’s easy for legal mistakes and founder squabbles to cause a startup’s failure before it even has a chance to get off the ground. Risk is a part of the startup life, but with the proper legal preparation, you can maximize your company’s chances of success.
Start Right at the Beginning
Things have deteriorated so badly between the Snapchat co-founders that, in December, Evan Spiegel and Bobby Murphy filed a restraining order against Reggie Brown, who maintains that he helped create Snapchat and was shut out of the company without notice. Brown filed a lawsuit against Snapchat last year.
Snapchat didn’t have a founder’s agreement. While this may be a worst-case scenario, an all-out legal fight between co-founders is not the only way starting a business without a founder’s agreement can go bad.
A good founder’s agreement will address issues as varied as how duties are divided among the founders, compensation, and what happens in the event of a death or disability. Especially if you are founding a company with your friends, you may not want to discuss these possibilities, but it is better to prepare your company now than to be forced to address these matters during a crisis. Furthermore, a founder’s agreement can address how ownership of the company is reconfigured if one founder leaves the company.
Investors know the importance of founder’s agreements and may not consider funding startups that don’t have their documents in order.
Don’t Cut Corners
The first step is to avoid using legal documents found online. Contracts aren’t one-size-fits-all, so it’s best to consult an attorney to ensure that your contracts are tailored for your business and cover your specific needs. If you don’t set up a solid foundation from the onset, you’re likely taking on unnecessary risk. Online documents are appealing because they can be seen as a cost-saving measure, but if you consider how much you might have to pay a lawyer later to get you out of an easily avoidable mess, the advantages of doing things right in the first place become clear.
Protect Yourself and Your Business
Sound legal documents can help your startup avoid a variety of legal troubles. They can also help you guard your own finances. If you are founding a business alone, it may seem easier to form a sole proprietorship; however, depending on your future plans, a Limited Liability Company (LLC) or other corporate structure may make more sense. With an LLC or corporation, it is typically easier to secure loans and investments, and you will shield yourself from personal liability.
Your company’s greatest asset is your intellectual property, so make sure to guard it with the trademark, copyright or patent protections available. If you hire outside contractors, be sure to clarify the ownership of their work. It is equally as important to protect your confidential information and ensure you have safeguards in place.
The best thing you can do for your business, yourself and your co-founders is to make sound legal documents a priority. Set a firm foundation and your business can build upon it without fear.
DISCLAIMER: The content in this article is for informational purposes only and does not constitute legal advice. Readers should contact a qualified attorney to obtain advice with respect to any particular issue or problem.
Did you seek legal advice before launching your startup?
About the writer: Tricia is managing attorney of Meyer Law, a forward-thinking boutique law firm providing top-notch legal services to clients ranging from startups to mid-sized companies to large corporations in a variety of industries including technology, telecom, financial services, real estate, advertising, marketing, social media and healthcare.