We know that lawyers often get a bad rap and that many entrepreneurs are fearful of engaging with lawyers. But we also know that lawyers make a lot of money fixing problems that shouldn’t have arisen in the first place. Here are some of the common legal issues that come up for founders and why we think it is worth overcoming “lawyerphobia” early on in your company’s development.
Clear conversations and agreements between founders
The beginning of a business journey is an exciting time. It can often feel like the only way is up, nothing could possibly go wrong and you and your fellow founders will be friends forever. This is precisely when you and your co-founders must ask yourself those tough questions and imagine the worst-case scenarios. It is much easier to discuss the hard issues now while the going is good than to be unprepared in an emergency or if the relationship between co-founders has soured. Discussions between co-founders must be both objective and honest and consider the current situation and future scenarios for the business and its founders. The following questions will help get you started:
• What are the roles and responsibilities of each of the founders?
• What happens if one of the founders wants to leave?
• What happens if one of the founders does not want to leave? How can the other founders remove them?
• How much time will each founder be committing to the business? Both on a day-to-day basis and also looking at the long-term horizon.
• Who owns what percentage of your company?
• Will each of the founders contribute some initial seed capital to the business? If so, will these contributions be equal?
• How will you make strategic decisions about the business? Will everyday decisions be made differently?
• What is each founder’s overall ambition for the business?
Once you have cleared the air and had those difficult discussions, it is vital that you write them down. If you’d like to know more, please see We’re going into business together. Do we need an agreement? for information on writing things down.
Consider what steps you need to take to protect the intellectual property you have developed, whether it is a unique product, service, technology or design. Make sure that your company obtains all the legal rights to own or licence the intellectual property which its founders created and which are vital to running the business. It is relatively easy and inexpensive to assign this intellectual property to the company at the time it is incorporated. Going forward, the assignment process can be built in to your employment agreements so employees also transfer the ownership of any intellectual property they create during the course of their employment to the company. Intellectual property rights will be a key area of focus for any investor doing due diligence on your company: investors want to know that the company has protected its intellectual property and it avoids infringing others’ intellectual property rights.
If you’d like to know more, please see PROTECT my business for more information on intellectual property.
An early decision founders must make is what legal entity they should use to operate the business and where to incorporate or establish it. With so many alternatives available, and without seeking legal advice, the choice can be overwhelming and the temptation strong to choose the cheapest or fastest form and location. Setting up the right legal entity the first time, at the right time, and in the right place is critical to the success of your business. It can be extremely costly (both in terms of money and time) if you make the wrong choice and need to unwind or rearrange your company structuring to make it more attractive to investors. Your lawyer must understand the longer terms plans and aspirations the founders have for your business – different companies deliver different outcomes and what works for one business may not work for the other.
Keeping track of your paperwork and getting organised from the start can help avoid delays later when potential investors need to review your legal documentation. The more organised and efficient you are, the more confidence an investor will have in your ability to execute. This should lead to better valuations for you and faster investment cycles (so faster money for your company). It will also save you time that should be better spent on your business. Make sure you get the full suite of incorporation, establishment, registration and licensing documentation for your company from your lawyers as soon as these processes are complete.
If you’d like to know more, please see I have my company. Now what? for more information on your document wallet and record keeping.
If you’d like to know more, please see RUN my business for more information about using a website for your business.