Good legal advice is key to the success of your venture and makes for good business. In this article you will find examples for some aspects that you and your start-up must think about, not only when getting started, but also further down the road.
At the start of your journey, the first thoughts that probably come to mind as the founder of your start-up are: what is my idea and how do I develop it? How do I get my product to the general public? The odds are that you are not thinking about getting a lawyer. However, you should be, and the reason is simple – good legal advice makes for good business. According to research done by CBINSIGHTS, 8% of start-ups fail due to legal challenges. Seeking legal advice early on ensures that you have a strong legal foundation, meaning that you are in compliance with the relevant legal framework and able to protect your intellectual property, minimize future disputes, increase your chances of raising capital and continue to grow.
While it’s nice to fantasize that a good idea, talented people, and investments or sales are enough to succeed, the reality is far from it. According to a recent study conducted by “Small Biz Trends”, 90% of start-ups fail, one of the reasons being legal challenges, as mentioned above. So, what do lawyers and legal advice have to do with any of this? Firstly, legal advice may be of assistance if your venture has more than one founder, as it is highly advisable to sign a founder’s agreement. A founder’s agreement outlines, among numerous other things, the responsibilities of each founder, the decision making process, the ownership of the intellectual property, what happens if a founder leaves, and many other crucial issues, thus reducing the chance of the business being negatively affected should anything happen between the founders. According to CBINSIGHTS, the third most common reason stated by founders for their startup’s failure, is that they didn’t have the right team – a polite way of blaming the other founders. In an interview with Globes, Eldad Postan-Koren, 1 of the 6 founders of ScaleME, a start-up that came to a halt, shared that “one of the biggest problems was that our expectations were not aligned, and at some point, it created a lot of anger and frustration…. We had disagreements about the distribution of responsibility and the level of commitment put in by each one of the founders. One of our biggest mistakes was not drafting a founders’ agreement. When you sit down to draft the agreement, you are forced to ask yourself difficult questions such as who is responsible for what, what happens if someone leaves and how to handle misunderstandings.” The bottom line is: any legal counsel would make sure that you have a founder’s agreement in place.
Another issue that should be taken into account is the fact that some of the founders might simultaneously be working as employees elsewhere, or more importantly, the fact that they have employment agreements, which often state that the intellectual property rights of any work done by such founder will be owned by the founder’s employer – and not the founder. Meaning, even if the founder worked on his ‘private’ business in his own time, and even if it isn’t a competing business to the one he currently works at, his employers still might have ownership claims to what he has created ‘on the side’. An experienced lawyer will be able to review the employment contracts alongside the relevant labor laws and shed light on this issue. The review of these contracts is crucial in order to help you minimize and solve the risk of not owning your own intellectual property – inter alia through the drafting of waivers and assignment agreements.
This brings us to our next point – your intellectual property is THE most valuable element your start-up owns. It is the beating heart of your venture and you must protect it. When you ask a trusted friend for help in developing a certain aspect of your start-up, for example some small part of the code that you’re stuck with, or perhaps even your business model, you may be putting your intellectual property at risk. Without the necessary legal advice to protect your intellectual property rights, that same friend could potentially, and perhaps rightfully, claim ownership rights for part of your intellectual property and get “a slice of the pie”. A lawyer will advise you which terms of engagement should be put in place when collaborating with various parties such as contractors, consultants, designers, programmers etc. An experienced startup lawyer will draft waivers and intellectual property rights assignment agreements. In this context, it is important to note that intellectual property protection immensely affects the ability to raise investments. Investors will always conduct due diligence, meaning that they will scrutinize and check every aspect of the venture to see that all your business, and legal, ‘ducks’ are in a row – especially with regards to the ownership of the intellectual property and will expect no complications. If investors believe that the intellectual property rights are not fully owned by the venture, they may not invest, or at the very least, delay the investment until the issue has been resolved.
In addition, when sharing the specifics of your idea for the purpose of business collaborations, you frequently reveal substantial information regarding your intellectual property to different parties, who may attempt to claim it is as their own, or to use it. For example, in the case of Kearns v. Ford, it was shown that Ford Motors stole the concept of the intermittent windshield wipers from Mr. Kearns after he had shown them a demo version of it. We won’t tell you want happened in order to not spoil the movie for you (“Flash of Genius”), but suffice it to say, had Mr. Kearns had a lawyer, his lawyer would have advised him to have Ford sign a confidentiality agreement (also known as a non-disclosure agreement, or NDA) before pitching his idea to the company. This is yet another one of many legal solutions aimed to prevent others from sharing or using your idea. A lawyer is there to identify any potential issues and draft the necessary agreements according to those issues, in this case, an NDA agreement.
While there may be a lot of legal information online, and some of it might even be correct, you should not rely on this information to make your legal decisions. Starting a business without consulting a lawyer who will examine and analyze your specific needs is like doing your own medical checkup and prescribing your own medication – only except for harming your own health, you’ll be harming the health of your business. A lawyer will advise you regarding your specific circumstances, while considering your business structure and long-term needs.
Good legal advice is key to the success of your venture and makes for good business. The abovementioned examples are only some aspects you and your start-up must think about, not only when getting started, but also further down the road, and your lawyer is there to help you do just that.