Startups: Plan ahead to avoid costly legal disputes (part III)
So your idea seems credible and you think it's got legs. Awesome. Well, now is a good time to incorporate a company, which will most likely be a company limited by shares (there are other types, although that is a discussion for another day!). Setting up a company to deal with your business should help:
limit your personal liability
- Give other people a simple way to take a stake in the business
- Provide a vehicle for growing the value of your offering
- There will be issues to consider though when you have set it up, such as making sure the idea and its value belong to the company and that everyone involved is on the same page.
Prior to incorporating the company, you and maybe some of the other Co-Founders own all of the IP (assuming you have followed my guidance at Part II and got appropriate IP assignments from third party contractors). Once the company is incorporated and becomes a legal person, all of the relevant IP should be transferred to the company.
In my experience, I have seen many Co-Founders fall out. It can be over big matters such as choosing funding options or defining the strategy of the business, smaller, seemingly less important, matters such as who gets to do the Demo or pitch, or that they simply stop getting along. Much like any other relationship really, save that it is a business relationship and should be treated as such from the outset. That means planning ahead if things do go wrong. Therefore, Founders should sign up to arrangements which restrict them from using IP, confidential information and client lists for their own benefit and which stop them setting up a competing businesses within a certain period of time if they leave.
Founders who are also directors of the company should be aware of their duties as a statutory director (essentially to act in the interests of the company) and their fiduciary duties (in short, to put the company's interests before their own). I will expand on these in another post soon.
3 Key Tips to avoid legal battles at this stage
1. IP Assignment Deed
You can use an IP Assignment Deed to transfer relevant IP from yourself or anyone else involved to your new company. I can provide a suitable template free of charge!
2. Shareholders' Agreement
A shareholders' agreement is recommended where you have two or more shareholders and they will each have a say in the running of the business. A shareholders' agreement usually sets out terms governing issue and transfer of shares, rights for the shareholders to be or nominate directors, provides for certain decisions to require majority shareholder approval and contains provisions governing the relationship between the shareholders and the company, including non-compete clauses. If you need to put such an agreement in place, I can help with that for a low cost fixed fee depending on what you need.
3. Director's Service Agreement
A director's service agreement is basically an employment contract for executive directors. I'll go into more detail tomorrow about what is usually found in such agreements, although for now it's sufficient to say that they should contain the usual IP, confidentiality, conduct and non-competition provisions. So you know, non-executive directors are not employees and so they would need a separate form of letter. I can help with both of those and you can download my firm's Startup Toolkit which provides useful information about our fixed fees for template agreements for executive and non-executive directors.
Catch you tomorrow for my fourth instalment - Stage 4: Developing and launching your product.
The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.