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Starting a business: How to not get sued

It can be tempting to skip the solicitor, particularly when starting a business. You can’t ignore the law though. Here’s how to deal with two of the more common problems when starting: Co-founder Difficulties and Intellectual Property Issues.

The main point here is to address as many potential problems before they become actual ones. While this blog will be of use, consider it the same way you’d self-diagnose on the internet: if you think your business’ symptoms may reflect what’s here, seek advice from a professional.

Co-Founder Difficulties

One of the hardest things about starting a business is finding someone who shares your vision. But let’s say you’ve found that perfect person. His tech skills complement your social media savviness; her business brain enhances your creative ways. Before the love-in begins, all co-founders should sit down and work out how the company will be managed, what position each founder will hold and who will be on the Board of Directors.  These should all be reflected in a written agreement, usually known as a shareholders’ agreement or voting agreement. This should also address other significant issues including: rights of first refusal of the sale of any shares by a founder and whether any founders will have veto rights with respect to certain extraordinary company actions (such as the sale of the company or borrowing in excess of a certain amount).

If a founder leaves, you can ease difficulties by having a ‘vesting schedule’ in place. Access Legal’s blog explains this succinctly:

A typical schedule might provide for four years of vesting with a one year ‘cliff’ and monthly vesting thereafter until the founders reach 100% . A one year cliff means that the founders do not get vested with any stock at all until the first year has passed. After that, the founders get allocated some stock of the their total common stock every month.

Never issue stock to co-founders without imposing vesting restrictions. While you may all be on the same page now, you’ll regret it if one of the founders pulls out after a few months and keeps all of their equity.  Make sure you and your co-founder(s) have a restricted stock purchase agreement with a reasonable vesting schedule (typically four years as mentioned above) upon issuing the company’s stock.

Intellectual Property Issues

Let’s talk IP. When starting a business (particularly tech companies), intellectual property (IP) is your most valuable asset.  While you may just assume it to be the case, certain steps have to be taken to ensure that the IP is actually owened by the company.

You need to confirm that none of the founders’ prior employers have any rights to your company’s IP because they were “moonlighting” while previously employed. This is a particular concern if the startup is in the same sector as a founder’s prior employer. If you started building a technology product while working for another company, make sure you read all the agreements that you have signed with them. In many large companies, the IP will reside with the employer if they can show that you worked on it while still in their employment.  This is an issue that can get overlooked in the excitement of going out on your own. If the code isn’t written from scratch when both founders are out of their employment, you need to have something in writing from your employer.

Carefully review all employment-related agreements (such as offer letters, non-disclosure and inventions assignment agreements, etc.) and the employee handbook to determine if there are any provisions that may give the prior employer rights to your startup’s IP. If there is a problem, some employers will agree to execute a waiver.

This isn’t to say that you can’t continue to work. Y’all need to eat. Have a look at moonlighting’s pros and cons here.

Any IP created or acquired by a founder (such as code, a logo, domain names) prior to incorporation must be assigned to the company. Similar to the vesting issue above, a huge problem arises if one of the founders leaves the company prior to incorporation and takes his rights to the IP along with them; or if the assignment of IP is not properly made and the founder leaves before this issue is cleaned up. In both cases, the company is once again in the difficult position of trying to negotiate with a departed founder.

If you’re not a techie yourself, you need to make sure that any IP created by external developers (i.e. non-founders) is assigned to the company. This issue comes up all the time.

This is particularly a problem prior to incorporation. The IP created by the developers often never gets assigned to the company, either because there was no written agreement or because the company was not a party to the agreement (because it didn’t exist at the time). Then when it’s time to fix the problem, the company needs to chase down the developers and start negotiating with them. This is a common stumbling block for companies when seeking investment, so it’s a good idea to get that sorted early.

Finally, once the company has been formed, protect the ownership of the technology/IP by requiring all of the company’s employees and independent contractors to sign confidentiality and IP/invention assignment agreements.

We hope that this is of some use. Starting a business is something we’re passionate about, and of course welcome any questions or comments.

Disclaimer: While this article is intended to provide guidance, it does not constitute legal advice. While caution has been taken to provide readers with accurate information and honest analysis, please use your discretion before taking any decisions based on the information in this blog. Neither Bullet nor the author will  compensate you for  loss/inconvenience/damage because of  misuse of information in this blog. Treat it the same way as you would take directions on Google maps. Don’t walk down that dual carriageway just because the internet tells you to.

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2 Responses to Starting a business: How to not get sued

  1. Christina F. Haze September 4, 2012 at 2:07 pm #

    Good article! 🙂

    • Ben Butler September 6, 2012 at 2:04 pm #

      Thanks Christina! Really appreciate feedback.

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