In this Mucker Growth Session, Amanda Busch, General Counsel at Mucker, discusses the legal basics founders should consider when building their startup.
Link to Slide Content: Mucker Growth Series – Legal 101
***This webinar does not create a lawyer-client relationship, nor is it giving specific or customized legal or tax or investment advice. Please consult your own attorney for that information.***
Starting a business requires careful planning and an understanding of various legal elements that impact your company’s foundation. This webinar provides an overview of essential legal topics for startups, focusing on the formation process, team considerations, commercial agreements, fundraising, and governance. Below are the key insights broken down into digestible sections.
Formation Process
Most founders begin by exploring ideas and envisioning their product or service. Early legal concerns are minimal unless you have existing obligations to an employer, particularly regarding intellectual property ownership. Your initial steps likely include choosing an entity type:
- Sole Proprietor: Simplest form, no legal distinction between the owner and the business.
- Partnership: Limits liability but generally has pass-through taxation.
- Limited Liability Company (LLC): Combines benefits of partnerships and corporations, offers liability protection and pass-through taxation.
- Corporation (C-Corp): Offers the most comprehensive liability protection and flexibility, preferred by venture capitalists; subject to double taxation but beneficial for raising funds.
Team Considerations
It’s important to understand team roles from the beginning and establish frameworks that prevent issues and provide structure to decision-making down the road. You’ll want to consider the following as you form and build your company:
- Board of Directors: a Board of Directors oversees the company and appoints officers for daily management. Understanding the distinction is crucial as founders may often occupy both roles.
- Equity Allocation: determine founder equity based on contributions and establish vesting schedules to prevent future conflicts, especially if a co-founder leaves.
- Avoiding Gridlock: Having a 50/50 split in shares can lead to deadlocks in decision-making. Consider alternative arrangements to mitigate potential conflicts.
Employment and Hiring
It is important to establish good employment and hiring hygiene from the beginning of your startup to prevent future headaches.
- Documentation: Have clear contracts for employees and consultants to protect intellectual property (IP) and define work scope. Utilize Confidential Information and Invention Assignment Agreements for consistency in IP ownership.
- Classification: Understand the distinction between employees and independent contractors to avoid misclassification risks and associated legal liabilities.
- Termination Considerations: Maintain records and agreements upon an employee’s exit, ensuring all IP rights and confidentiality obligations are preserved.
Commercial Agreements
It’s important to familiarize yourself with common agreements such as supplier contracts, service agreements, and NDAs early on. Make sure to clarify expectations and responsibilities in writing. Make sure contracts contain these key elements:
- Duration and Termination: Note the effective date, term, and renewal clauses.
- Roles: Clearly state who the parties are and ensure proper representation.
- Operational Obligations: Outline deliverables, payment terms, and liability limitations.
- Intellectual Property Rights: Protect IP rights, ensuring clear ownership and usage terms for both parties.
Fundraising and Financial Strategy
If fundraising is part of your financial strategy to grow your startup, spend time preparing for external investment and fully understanding the implications of raising capital, including changing your entity type (LLC to C-Corp) for investor approval purposes. You’ll also want to take a look at your Equity Incentive Plans for your employees. Establish plans early to facilitate employee motivation and retention, aligning interests across the team.
Corporate Governance
While you may be just a handful of individuals at the very beginning, it’s critical to establish, practice, and document governance processes from the beginning. Despite being a small team, documenting corporate actions, decisions, and board meetings is essential for maintaining clarity and authority within the company. In that same vein, it’s also critical to understand the fiduciary duties of directors from the beginning. Know the key fiduciary duties like the duty of care and loyalty to protect personal liability. Ensure informed decision-making and act in the company’s best interests.
Key Takeaways
Starting and running a successful business entails navigating a complex landscape of legal considerations. Founders should seek adequate legal counsel early in the process to ensure they are informed and prepared for future challenges. Stay engaged with resources and experts who can support your startup’s unique journey.
- Establish the right business entity for your startup’s long-term goals.
- Document every agreement and decision meticulously to protect your interests.
- Understand the differences between employees and contractors to avoid misclassification issues.
- As you grow, prioritize getting legal advice tailored to your business’s specific needs.
By addressing these foundational areas, startups can build a resilient business framework that supports long-term success and compliance with applicable laws.
Thanks to Amanda Busch for this overview of basic legal considerations for early stage startups.
