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A Short Legal Checklist for Innovating Startups

Tamsyn Vassallo | May 24th, 2017

When working with startups, we frequently guide them through the following foundational issues to ensure they have the best launching pad for their future business growth from a legal and financial perspective:

The Short Legal Checklist that Every Innovating Startup Needs

1. Set up the best structure for your startup

This is one of the most integral decisions that you can make for your startup, which impacts:

  • Your level of personal liability for debts of the business
  • Tax liability
  • Degrees of asset protection
  • Succession planning and growth potential
  • Ownership, control and management of the business

Some of the structures that you can use for your startup include:

Sole trader

  • You are personally liable for the debts of the business
  • Requirement to report business income on your personal tax return

Partnership

  • Profits and losses are shared between two or more partners
  • Each partner is personally liable for the debts of the business

Company

  • A separate legal entity owned by shareholders and managed by directors
  • In most cases, the company is responsible for the liabilities of the business
  • Directors can be liable if they provide personal guarantees for company loans, or if they breach their statutory director’s duties
  • The company pays a flat corporate tax rate
  • Shareholders pay tax on dividends paid to them by the company

Trust

  • A structure where a trustee (either an individual or company/corporate trustee) carries out the business on behalf of the trust members
  • The trustee is responsible for the liabilities of the business

Your decision regarding structuring will govern how appealing your business is to potential investors, who generally favour businesses with corporate structures. Many of them also prefer to see more complex structuring, such as a separate holding entity that owns the valuable assets (including IP) of the corporate group. This is to protect the assets from creditors of the, now separate, trading entity.

Handpicked related article: Corporate Structuring: Are You Parking Your Bright Idea in the Right Spot?

2. Enable and manage investment

If you intend to obtain equity-based capital, you will need a well-drafted Shareholder Agreement for your business’s investors. A suitable Shareholder Agreement will also mitigate fallout from any in-fighting amongst startup founders. Many founders, unfortunately, experience difficult separations from their co-founders (either in the immediate or long-term after significant business expansion), which can be avoided with the right Shareholder Agreement at the outset with pre-determined terms that deal with such separations.

A good Shareholder Agreement will address critical decisions and processes around:

  • How the company and the business will be managed
  • Which decisions will be made by directors versus shareholders
  • How often directors and shareholders will meet
  • How dividends will be paid
  • How shares can be issued and sold
  • Selling the business
  • Resolving disputes
  • Legal documentation (eg deeds of accession) for incoming shareholders
  • Managing low performing shareholders and the conditional issuing of shares

Similarly, a specific Partnership Agreement with your co-partners may address:

  • The equity of each partner and conditions (or KPIs) tied to such ownership
  • Rights to partnership income proportions and salary entitlements

Handpicked related article: Shareholder Agreements – Why are They Needed and What Happens if They are Inconsistent with the Company’s Constitution?

The Short Legal Checklist that Every Innovating Startup Needs

3. Protect your core IP and confidential information

The protection of valuable business ideas from competitors and registration of core IP can be inadvertently compromised in preliminary negotiations with potential co-founders, investors and business partners (or employees and contractors), or through premature marketing and promotional efforts.

For some businesses, the core value may be launching as the first to market over competitors. In this case, the best protection may be duties of confidentiality within your network. Similarly, patent and design rights can only be secured with respect to innovations and designs that have not been made public.

In these types of scenarios, your startup will be reliant on well-prepared Non-Disclosure Agreements prior to all discussions with other parties, or upon applications for patent and design registration before your valuable ideas have been disclosed and your IP assets and business advantage compromised.

For all IP that you intend to monopolise and/or commercialise (whether that be licensing or selling), you will need to seek the maximum possible IP protections, including registrations. Depending on the nature of your idea, innovation, or service, you may need to rely on registered design, patents and trademarks (brands) to achieve this aim.

Without these rights, your startup may be vulnerable to competitors exploiting your ideas, taking over your market or, even, seeking to block you from using your own unregistered brand, design or innovation.

Handpicked related article: What You Need to Do to Secure Core IP Before You Export?

4. Other considerations

We would also encourage you to factor in other key considerations for your startup such as:

  • Employment and contractor agreements

If you intend to hire staff or contractors to bring valuable skills to your startup, you will need to be familiar with all your employer obligations, and will need to enter into agreements (including to ensure you protect your IP and information, as noted above).

  • General terms and conditions (for your service and/or your site or application)

This will be one of your core documents with your customers to ensure that you manage your business’s liability and risk, as well as clarify your key commercials, including fee and payment terms with all your customers (and so are able to enforce these).

  • Specific requirements for your industry

You may be required to hold specific licenses or permits in order to operate, or there may be specific requirements in your state regulating your proposed industry and/or business.

  • Privacy policy

If you collect any personal identifying information from your customers in the course of your business (such as their name and contact information), you must have a privacy policy in place that you can provide to individuals regarding the collection and management of such information (as well as well-planned internal processes and policies, in accordance with Australian privacy laws).

Does your startup need help with ticking all the boxes in this legal checklist? Contact us for a consultation.

Tamsyn Vassallo

Tamsyn Vassallo

Lawyer, BA L.L.M (JD) at mdp
Tamsyn is commercial and an intellectual property (IP) lawyer with strong, practical acumen. She works with small to medium enterprises and private clients to assist them to strategically identify and manage businesses’ opportunities and challenges and to develop and protect their ideas and innovations. Her experience encompasses a range of industries, including technology, design, retail, health and publishing.
Tamsyn Vassallo

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