What legalities should startups be thinking about?
I first became interested in law when I was in the process of selling a small company I had founded with a friend during college. My partner and I would sometimes get frustrated with the legal hurdles we had to jump when we were getting off the ground, but when we were in talks with our buyer, I realized just how critical each of these steps were – and how much the law was preserving our value and determining how the deal would be structured.
Once I started law school and began to understand some legalese, I realized how many different areas of law bear on new ventures. Below, I outline a handful of the different types of law and legal concerns effecting startups. This list is not exhaustive, but it is a good start for those curious about the legal steps their new company should be considering.
Most companies form in Delaware given their favorable business laws (which still apply to companies running entirely out-of-state), but founders have to decide whether Delaware formation makes the most sense for them. Likewise, founders must decide what legal entity is best suited for their venture: a limited liability company, a C corporation, an S corporation, etcetera. The best option for the structure of a business will likely be driven by how one plans to, or hopes to, fund one’s venture.
Although some founders put off dealing with equity because they’re not sure what documents are important, or how the legal nuances should be constructed, putting together a solid equity structure early on is critical. This includes putting together (or having an attorney put together) equity agreements and an incentive structure for employees and certain consultants and investors. This is one area that can greatly affect a company’s profitability down the line, and one that necessitates certain tax filings – so hiring legal counsel may prove worth the investment. Attorneys will likely also be able to advise on what market standards are.
A number of elements of employment law affect startups, even very small ones. For instance, companies will likely want to use formal offer letters, employment agreements, nondisclosure and/or noncompete agreements, and companies will have to comply with independent contractor and intern laws. Companies with over 50 employees have a stricter set of employment rules to comply with.
Intellectual Property Law
Properly dealing with IP is critical for startups. This can be the difference between protecting highly valuable, painstakingly developed code and having it released or replicated. Founders will likely want to have employees assign any work-related IP rights to the company. Companies should also consider whether any assets should be trademarked, or whether any copyrights should be registered. Companies should always run a trademark search before picking a name in order to make sure it’s not already in use in the same industry.
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Alexandra Kleiman is a second-year law student at NYU Law and InSITE Fellow. This summer, she worked on the Legal team at Contently.