Opening a startup is the dream of countless entrepreneurs, but things are a little more complicated than having an idea. Things can go awry quickly, and we see a lot of the same issues with lots of new companies. Here are 8 of issues our attorneys see over and over again.
Forming a company as a legal entity is usually the first encounter an entrepreneur or business has with the law. In today’s world, the most common entity choices are the LLC and corporation. The right entity choice is dependent on a number of factors, including tax considerations, whether the startup will need to raise money from angel investors or a venture capital firm, and whether the company wants to incentivize key employees with equity compensation, among other factors.
Another decision to be made as part of the formation process is where to form your company. For most companies, the right answer is North Carolina (or the state where you conduct your business). However, for some companies, in particular those that anticipate needing to raise money from venture capital firms down the road, Delaware is usually the right choice. While the formation with the state is a fairly simple process, it’s important to make sure that you do it properly, and that your name is available and protectable. Lastly, operating a business without forming a legal entity with the state means that the owners are personally liable for anything that goes wrong with the company. And since limited liability is one of the main perks of owning a business, it’s important to make sure that it has been established before your company starts operating
2. Agreement Among the Founders
While formation establishes a legal entity with the state in which the business is formed, it’s also important to have agreements among the founders. These agreements are important because they establish how much ownership each of the founders receives, who has what responsibilities, who has the power to make certain decisions, and the process for handling a scenario when one of the founders needs to exit the company. For an LLC this primarily comes in the form of operating agreements and buy-sell agreements. For a corporation, founders agreements come in the form of the company bylaws, restricted stock purchase agreements, shareholder agreements, etc. While some entrepreneurs try to put off these decisions, it’s much easier to take care of these types of documents at the beginning when everybody is in the honeymoon phase rather than when meaningful money is at stake or emotions are running hot because of a disagreement.
If you’re a typical startup that isn’t meeting with clients at the office, co-working spaces can be a great option because they are short-term leases that may not require consulting with a lawyer. But if you own the type of business that requires dedicated space, like a restaurant or doctor’s office, you will need to engage longer term commercial lease. This is one of the contracts most likely to lead to a dispute for a startup, or any small business, because commercial leases tend to be landlord-friendly. An attorney can help a startup evaluate whether lease terms are fair for the market in which you operate and ensure that your company is better protected than would be the case if you negotiated the lease.
4. Protecting the Company Brand
As your company grows you will want to make sure that your name and brand are protected. Trademark protection makes sure that competitors cannot legally use your name or logo or even similar names or logos that are likely to cause confusion for consumers.
5. Hiring workers
Whether you hire employees or bring on independent contractors, it’s important to have a contract that spells out the details of the relationship with your business. Detailing the job duties, compensation and benefits, and reasons for termination are just some of the important contract terms that should be defined in these contracts. One key misconception among business owners is that they get to choose whether to hire employees or independent contractors, but like many rules defined by the IRS, it’s not that simple. The IRS has a complex test to determine whether a worker qualifies as an independent contractor. This matters because improper classification and can lead to difficulties from a tax, financial, and legal perspectives.
The key contracts for any business depend heavily on the industry, but all startups have key relationships that should be properly documented by a contract. If you are a website developer, your key contracts are going to be your development contracts with your clients – such an agreement will lay out the scope of work, specify that the developer is an independent contractor, the amount of compensation that is going to change hands, and the frequency of that compensation. For a restaurant, key contracts could include supplier contracts or catering agreements. For SaaS companies, the terms of service and/or licensing agreements are often the most important.
Depending on the nature of the business, confidentiality agreements (i.e., NDAs), non-compete agreements, and non-solicitation agreements may be standard contracts needed by the company.
8. Raising Capital
For some startups, it’s necessary to raise capital to scale the business. On a basic level, you can raise capital in one of two ways: debt or equity. Regardless, it’s important that the capital raise is properly documented. Debt fund raising is usually in the form of a loan from a bank or from family and friends. Alternatively, you can raise money in the form of equity, which is selling ownership in your company in return for additional capital that will be used to grow the company. If you decide to go the equity route there are a number of really important restrictions on how you raise money and the sorts of disclosures you give to different types of investors. The process can be difficult to navigate and it’s important to make sure that raise money properly because there can be severe consequences for not following the securities laws that govern such transactions.
Startups Need Legal Help
If your startup needs help with formating, agreements, document reviews, and other legal issues, contact our attorneys below. Spengler & Agans offers a flat-rate legal checkup for startups and business needing a broad, overall legal review of their business and business practices.