Some entrepreneurs, when launching a business, become so focused on the immediate needs of the enterprise that they forget to think about everything they need for long-term success.
That’s why smart startups seek out legal counsel. A corporate attorney will stand by their side, make sure they are not exposed to liability and help them protect their key innovation or technology.
Here are five areas where wise legal counsel can be essential.
Business Entities and Asset Protection
Do not expose your personal assets to the liabilities of the venture. Create a separate entity for your company. Your legal counsel should help you select the best legal form for your organization, whether that’s as a C corporation (with an S election), a limited liability company or a limited liability partnership.
Often we find that an LLC provides the startup the greatest flexibility for business and financial growth while, at the same time, protecting your personal assets. You can be taxed like a partnership (avoiding double taxation) and receive the protection from liability enjoyed by a corporation. You are not stuck with being an LLC forever; it can be changed if circumstances so require.
The tax treatment of the organizational forms may vary, but most importantly, do not allow assets you have set aside for retirement or future needs to be depleted due to the liabilities of your startup.
Exit Strategies
Plan for your divorce—from your partners, not your spouse! Very few founders actually see a startup through to becoming an established company. Some are visionaries who do not manage well, some find it impossible to actually sell their product, and some do not like going out and asking for funding.
Founders can make it easier to go their separate ways later by agreeing in advance to a process and valuation methods that can be used upon exit. This doesn’t need to be overly complicated, and it can pave the way for options as the company grows and different forms of financing and expertise are required.
Navigating the Rules of Funding
Startups and emerging companies need funding. This can come in the form of the founders’ capital investment, loans from financial institutions or other sources, or the sale of equity to accredited investors. This can be tricky territory, and you need sound advice from your legal counsel. The Securities and Exchange Commission, for example, recently proposed revised rules on general solicitations.
Think beyond your immediate concerns, and structure your enterprise and financial plan to address funding needs as the company meets with success.
Protecting Your Reputation
Your company needs workers, but you don’t want them to run off with its secrets or bad-mouth your business. The best protection, of course, is a loyal and dedicated workforce. Even so, whether you use employees or independent contractors, you also should put in place written agreements precluding them from soliciting your customers, suppliers or other employees to abandon what you have built. Also include a prohibition against disparagement of you or your company before and after relationships are severed.
Defending Your IP
Safeguard your intellectual property and trade secrets—your “secret sauce.” Technologies or innovations that are driving your company need to be protected from being misappropriated. Your first lines of defense are confidentiality and nondisclosure agreements with employees, contractors, suppliers and third parties, which contractually prevent them from making unauthorized disclosures.
Your IP can be further protected through common law trademarks, registered trademarks, patents and copyrights, but this should be done with a strategic plan in place for doing so. For example, be careful not to file a provisional patent, only to see your concepts lost if the provisional patent is not followed within one year by the filing of a patent application.
Envision what your startup will look like in five years. Then think of these five legal hurdles you can cross to keep it on the path to success.
