Start-up Legal Basics

We have listed out the 5 most important legal basics for startups.
Either you are just starting out with your company or your startup already has some traction, be sure to check if you have already thought about these topics.

Be sure to make a founders’ agreement
If you’re planning to run your business with co-founders, then a founders’ agreement is the perfect place to start. There might arise many questions, for example: what role does each founder play? What happens if someone decides to leave the company? How will the ownership of the business be split? Who gets what percentage of the company?

A simple founders’ agreement is the key tool to answer these questions and solve any later confrontations. Establishing the general obligations and a reverse vesting clause will enable other founders to take action in case one of the venture partners stops contributing.

Think about your brand
There can be a ton of registered trademarks that might be similar or even identical to your brand. This may pose a risk that your product or services will be banned until you change your brand. To avoid such a situation, check first the trademark registries, whether there are any trademarks similar to your brand in your field of business.

A potential lawsuit or legal problem will scare off potential investors and can lead to financial havoc if you’re a small startup. Planning ahead will help you avoid legal hassles so you can focus on growing your business.

Motivate key employees
You can motivate your employees, mentors, or service providers by granting them the one thing that the early-stage start-ups have – equity. Granting equity has shown to integrate employees better with the company, add additional motivation, and, at the same time, enable to use of the available funds for other burning needs.

All this can be achieved via option agreements, which establish that an employee (or other) will become a shareholder of the company if he or she continues to contribute to the development of the company for a period of 3 years or more.

Simplify negotiations with investors
Signing a term sheet in course of investment negotiations is nearly always the smart option. A term sheet sets forth, in a simple form, the key conditions between founders and investors under which the investment shall be made, such as the investment amount, company valuation, a reverse vesting clause, decisions that require prior approval of investors, etc.

While the term sheet is non-binding, the investment negotiations can be a long process and the term sheet provides a clear frame upon which any further discussions regarding more specific conditions can be based on.

Make sure the intellectual property is owned by the company
Intellectual property rights protect the core value of all technology-based companies. Transferring the ownership of the intellectual property to the company at an early stage as possible can save very significant problems down the line because, by default, each founder owns the software and other copyrighted works he or she creates as well as the patents the founder files on his or her behalf.

Therefore, for any start-up company, we strongly suggest creating intellectual property agreements, which guarantee that the intellectual property already created as well as the IP developed in the future would be owned by the company, rather than the founders themselves.

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