5 Legal Issues that Start-ups often Overlook

Do you remember the scene from Silicon Valley, where the founder gets his first investor cheque? That’s a big deal and a huge cause for celebration. But, what happens after that? When the founder goes to the bank and tries to deposit the cheque, the bank coolly informs him that he has no company.

Few entrepreneurs starting a new business try to have a basic understanding of legal aspects, but many overlook the legal implications of starting a company like company registration and incorporation. Setting up an entity seems like a basic thing to do, right? However, research shows that company incorporation is often left out; because the founder is unsure about what business structure to choose. Apart from incorporation, let’s look at a few more legal issues.

Founder’s Stock                        

It’s essential that founders assign stocks to themselves. When the company is started, the business in itself is worth nothing. Therefore, the stocks and shares will also be worth nothing. This makes stocks easy to assign to the founder and co-founders. Stocks are also critical in dividing equity between co-founders or partners. Once investors value a business, stocks start having a price tag. If you issue shares to yourself after investor valuation, you’ll have to pay taxes on the valuation. Can you afford that? That’s why it’s a good idea to assign stock well in advance.

Similarly, don’t wait to incorporate your company until after you have investors. Once you receive investment, your founder shares will have significant value, and the IRS will want to collect taxes, which you would not be able to afford. Therefore, make sure you incorporate / register your company well in advance and secure an 83(b) election soon after.

When to Trademark, When to Patent

There is no formula for this and it hugely depends on the business. When it comes to trademark registration, most start-ups first start by registering their name and logo. However, they often forget to conduct a trademark search. It’s important to find other brands / companies doing business under the same name as yours, as it will heavily affect the eligibility to trademark, and might also lead to infringement cases.

If you think that your business has come up with a unique invention / idea that can potentially be patented, it’s important to get the ball rolling by talking to a lawyer. While patenting, lawyers take into account a lot of factors, which can affect the outcome.

Contracts for Employees and Consultants

Formal agreements are important when dealing with employees and consultants. Such contracts must have specific clauses for confidentiality and terms of service. This ensures that clarity and understanding exists between the concerned parties.

Have an employee handbook in place, which defines the limits of sexual harassment, leave sanctions, conflict of interest, etc. It’s also a good idea to familiarise yourself with the employment laws of your respective state or country. A lawyer will help you with customised contracts, which can be tailor-made to suit your requirements. Make sure that these contacts have Force Majeure and arbitration clauses. Arbitration clauses ensure that there is a mechanism for settlement before going to court.

Business Compliance

Compliance is an essential aspect of business management and affects multiple (almost all) types of companies. It’s important to understand what documents and records your business must maintain to manage your company.  The relevant laws vary based on the type of company, and other factors like size and turnover. An attorney might help you understand what State and Federal Laws you need to satisfy on a monthly, quarterly and annual basis.

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