At some point, all startups need legal help. You will need to form a company, protect your intellectual property, divide ownership, and more.
For a first-time founder, it can become overwhelming to think of all these things when you’re still developing your product and pulling together your team. But don’t avoid it. You will want to tackle the legal issues right away before they come back to haunt you.
So, where do you start? What issues are urgent and need your attention now? We brought these questions and more to Todd Reece, a partner with the national law firm of Ballard Spahr that assists startups in Salt Lake City and throughout the nation.
Below are some of the key takeaways from our conversation. Use them to prepare for the legal work you’ll need to complete to grow a successful company.
1. You Need Legal Help Sooner than You Think
You might think you don’t need legal help when you’re just starting out. Wrong. “If you think some of the legal aspects of starting your venture are a mile down the road, we need to talk,” Reece said. Often, entrepreneurs get far developing their idea before starting to think about the legal aspects of their business. You want to get ahead of these considerations by doing some legal research, at the least, and involving an attorney, like Reece, as early as possible.
Many things can catch you off guard. Two areas that can become complicated quickly are so-called “volunteer” contributions and co-founder ownership. Often, these arrangements are not clear and can do a lot of damage to the company if the legal documents don’t exist and are not drafted appropriately.
“There is no such thing as a volunteer,” Reece said. “When someone says they are a volunteer you need to clarify whether they expect compensation in a form other than a salary or an hourly wage, such as compensation in the form of equity or an option to purchase equity. In any event, the arrangement with all service providers must be properly documented and agreed upon in writing.”
2. Take Advantage of Free Legal Services
Being an entrepreneur can be challenging when you don’t have the financial resources. Legal services might be something you push off until later. But it might be cheaper if you work on this sooner than later, when you have access to free and discounted services available to entrepreneurs.
Student entrepreneurs are a special group that can often get free or cheap access to advice. Students at the University of Utah can get free legal advice from mentors available at the Lassonde Entrepreneur Institute. The University of Utah’s Marriott Library has librarians that specialize in intellectual property research. And partner law firms, like Ballard Spahr, offer free or steeply discounted services to student entrepreneurs, and you can contact Todd Reece for more information on Ballard’s offerings.
Make sure to do research in your community to find out what organizations and law firms provide legal resources for entrepreneurs. Eventually, you’ll want to talk to an attorney, and Reece recommended you talk to an attorney and not incur the risk of using so-called “legal templates” or forms or taking time away from growing your business to become a “legal expert” yourself. The ability to raise funds from investors will be negatively impacted if your entity’s key documents are not in order.
3. Form an Entity
One of the first things a startup will need is to form an entity or a company. “Forming an entity is one of the very first things you should do to protect the venture’s assets and to reduce personal liability to the founder entrepreneur,” Reece said.
More than likely, you will form one of three types of entities – an LLC (or limited liability company) a corporation, or an S-corporation. Most founder entrepreneurs do not choose to use other entity types, such as a limited partnership, sole proprietor, or another form of entity.
The types of paperwork vary depending on the type of entity you form. If you form an LLC, for example, you will want an operating agreement that outlines, among other things, equity ownership, management duties, and member voting rights. “Having an operating agreement is a ‘must-have’ and is one of an LLC’s most important documents,” Reece said.
4. Don’t Forget about Your Taxes
Taxes might not be on your priority list when starting a company, but it should be. You will want to make sure all of your taxes are in order from the beginning. Otherwise, you might be setting yourself up for failure down the road. “Tax matters become tax issues if you haven’t dealt with them upfront,” Reece said.
Eventually, most startups will want to raise money. This is an area where taxes are important. Having tax problems will be a red flag to those who might want to invest in your company.
Not managing your taxes properly upfront can create problems that are very difficult to cure as tax years begin to add up. Imagine not working hard, or even cheating in high school, and in essence not learning to study and then getting to college and finding that your ability to succeed in college is much harder because you never learned to work hard to get good grades earlier in your life. Managing tax risk is very similar to this education analogy in that you should properly address any tax risks as they come up and when possible proactively manage such risks.
5. Choose between a Patent and a Trade Secret
You will want to do everything you can to protect your idea. If it’s a good idea (and it probably is, or you wouldn’t be pursuing it), someone else will likely be interested and maybe want to steal it or at least part of it.
One tool you have to protect your idea is an issued patent. In thinking about what is patentable, the US Supreme Court stated that “Anything under the sun that is made by man” is patentable. Two types of patents are a utility patent to protect how an invention is made and works and a design patent to protect the ornamentation.
Or you might choose to skip the patent route and protect your intellectual property by treating it as a trade secret. This is how Coca Cola protects its recipes, Reece explained. They don’t have patent protection on them because that would require them to disclose the recipes to the public, and patents expire, opening the door to knock-offs.
Consult a lawyer to find out the best way to protect your idea, Reece said.
6. Further Protect Your Intellectual Property
Patents and trade secrets are not the only way to protect your intellectual property. You can also look at trademarks, copyright, and tools like nondisclosure agreements.
You will likely want to use a combination of all these things. Intellectual property will become more important as your business grows. When you start to raise money, sell your company, or anything like this, you will be asked about your assets, and your intellectual property is a big part of that.
Trademarks can be secured for brands (like the Nike swoosh) and packaging (like the Coca Cola bottle). Know that anyone can file a trademark, so make sure to register your trademark before a competitor does, or you might have a lot of trouble doing business in key markets in the country.
Copyright can be useful for some companies. Common law copyrights apply as soon as you put your idea on paper or some other format. But “registered” copyright registration provides useful additional protections, Reece said.
To further protect yourself, consider a nondisclosure agreement (or NDA) that you have people sign before discussing your business with them. This will help prevent them from stealing your idea. “If you don’t trust someone, then don’t talk to them about your business ideas as they may not comply with the NDA and that can negatively impact your ability business,” Reece said. “If you feel pretty good about them, then be sure to use an NDA before discussing your ideas.”