This article is part of the 8-part series of evergreen topics that all startup founders are confronted with. It is based on what the mentors actually teach startups during the StepFWD pre-accelerator.
Having to think about the legal aspects when starting a startup is one of the last things people worry about. Why worry about it when we only have an idea and we’re not sure yet if it’s worth pursuing? We’re just a bunch of friends trying to have a good time while changing the world, so if we start dealing with this legal mumbo-jumbo, then this will ruin it for us, right?
Well if you want your startup to one day to become a real business (and deep down you probably do), then it’s better to have the following things in mind and start working on them as early as possible. As Tudor mentioned in the AMA session “you need to understand that when you’re running a startup you’re basically building a company!”.
We know that this might seem like a burden at the beginning (we are not saying that it should be your main focus), but if you delay or overlook them, the legal ‘stuff’ will definitely come back to bite you in your startup’s hopes and dreams.
Dealing with shareholders
The founders are the first shareholders of any future venture. Putting in place a (pre-)shareholders’ agreement will not only help you when things get real, but it will also give the structure and focus needed to get there faster.
The shareholders’ agreement should be tailor-made (so don’t blindly use a template you found online) and it typically includes:
- A clear set of objectives
- Timeframes when things should happen
- Responsibilities and roles for each person
- What happens to proceeds, IP, transfer of ‘shares’ or power of representation
- When it’s time to set up a company
Stock option plan
The first employees usually become shareholders in the company for various reasons: you want them to be committed to the startup for the long run, or you don’t have enough money for a fat salary so you compensate them with shares in the future company, or it might come as a request from an investor.
No matter the reason, the process of setting aside shares is achieved through a stock option plan, which is a promise made that if certain conditions are met then someone gets a right to shares. These conditions usually are:
- Vesting – number of years you have to stay with the company; this is the most common one and it may involve a cliff period;
- Individual objectives of that employee
- Company’s revenue
- Financial indicators
- Buy-back at a discount if the employee leaves the company
You don’t know what will happen in business. Put in place a thorough shareholders’ agreement.
Intellectual Property usually refers to copyright, trademarks, patents, geographical indications, and industrial design and models. In tech startups, the most common types of IP found are the first two.
The rule is that copyright belongs to the person who created the work. The source code or object code, the visual elements, the pieces of audio you may create – all are protected via copyright from the moment they’re stored in a medium, whether physical or virtual.
However, ideas, procedures, methods of functioning, mathematical concepts, principles, or concepts cannot be protected.
The easiest way to obtain proof that you are the owner of the copyright for software at a specific date is to register it within ORDA (the Romanian Copyright Office).
Trademarks are used to identify the goods and/or services with a certain name or graphic representation within the minds of the users/clients. Trademarks help you be distinctive in the eyes of your users or customers.
The principle for obtaining a trademark is on a ‘first come first served’ basis, so you should do it as soon as you are set on a final name/logo for your startup. There are several things to consider here:
- The territory you want to register it with (national, European, or international)
- Duration of the protection, which is usually 10 years from the filing date
- The classification and appearance of the trademark, which must be as precise as possible to avoid opposition
IP protection is paramount from the very early beginning.
You can’t build a business without having to deal with several types of contracts. Now in order to not get ‘burned’ along the way, there are several aspects you need to consider when creating, reviewing, and signing contracts.
- Why are you signing the agreement? (object of the agreement)
- Price (when, method of payment, penalties)
- Intellectual property clauses
- The most important: LIABILITY
- Termination of the contract (termination due to breach v. termination without any fault)
- Working procedure (for services agreements)
- Ability/inability to subcontract (especially when working with collaborators)
- Obligation to information (what you need from them to get your job done) / contact person
- Right to promote you working with them/keeping assets in your portfolio
Contractual deals – focus on the essentials and who owns what.
By default, only personal data which are necessary for each specific purpose of the processing are processed. Now, what do all these things mean?
- Personal data = any information relating to an identified or identifiable natural person: name, nickname, email, phone number, etc.
- Processing = any operation or set of operations that are performed on personal data: collection, consultation, storage, use, etc.
- Controller = person (natural or legal) establishing the scope (the Why?) and means of the processing (the How?)
- Processor = person (natural or legal) which processes the personal data on behalf of a controller
You should get professional assistance (either from lawyers or specialized solutions) when creating your data handling procedures, because just like contracts, if you don’t do them properly from the start, then the consequences can be very painful for your business.
Map the data you are processing and have data protection in mind.