The most widely recognized mistake start-up organizers make during early development is not setting up a solid lawful structure off the bat. While it's enticing to delve into the vision for your organization and begin making your thought a truth, it's significant that authors delay and spread their legitimate bases.
A common mistake start up founders make is failing to put the proper business structure in place. Setting up only a sole proprietorship can result in huge income tax bills and legal liabilities for which founders are personally responsible. By not filing with the Internal Revenue Service to form a distinct legal entity for their business, founders risk losing their personal savings and, in some extreme cases, their homes.While all options have their pros and cons, for the most part, start-ups with multiple shareholders should form a C corporation. Businesses that want fewer tax obligations and want to avoid heavier fees during early growth should consider forming a limited liability company (LLC).
An IP assignment agreement could be the key legal document that determines whether your start up can attract the investments it needs in order to grow. This is especially true for technology companies, because it’s often the value of your IP portfolio that investors and venture capital firms are evaluating.Start-up founders should have complete ownership of all IP assets in writing to avoid costly claims filed by patent trolls and companies trying to copy your business model, among others. During the formation of a new company, a best practice is to assign all relevant intellectual property to the company. There are two types of IP assignment agreements to consider: Technology Assignment Agreements assign start-ups any intellectual property created before forming the company. Developers may in certain instances retain individual IP ownership rights, or they may sell their rights in exchange for equity or cash.Invention Assignment Agreements assign the new company IP ownership of any relevant work product created by employees after the company’s formation. A confidentiality and invention assignment agreement is typically signed by founder(s) and employees. The company will own all rights to the IP portfolio.
In order to ensure that a start-up operates with as little complications as possible, founders should formulate strong bylaws off the bat. Bylaws should establish the internal rules of the company like how to settle disputes, select leadership and determine the rights and powers of shareholders. Most importantly, bylaws should institute voting thresholds for approvals to certain actions by the corporation like electing new board members or entering into debt.
To avoid any conflict among founding parties, all co-founders should sign a comprehensive operating agreement. The agreement should define the relationship of the founders, provide the expectation that all work will belong to some entity in the future and outline a basic communication and conflict-resolution clause that can help prevent disputes.
Having a non-disclosure agreement (NDA) readily available is imperative before any business conversations take place between you and an outside party. From the moment a prospective employee or investor walks through your door, you need to have an NDA agreement waiting for them to sign. NDAs protect your start-up by safeguarding your founder and employees’ ideas and your intellectual property. An NDA should specify the following:
Start-up CEOs and founders should draw up clear employment contracts and offer letters when hiring new employees. These legal documents are key to ensure employees understand what’s expected of them. They should clearly state the following.
Finally, when a start-ups is ready to take on private investments, CEOs should create a shareholder agreement that determines the rights of shareholders and defines when they can exercise those rights. Those rights can include shareholders’ right to transfer shares, right of first refusal, and redemption upon death or disability and shareholders’ power to manage and run the start-ups. It’s also important that founders document the sale of any shares to avoid huge financial penalties under state and federal laws.
While time is a precious resource for any start-ups, founders should prioritize putting these agreements into place to secure their company’s future.
