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Get Your Startup on a Solid Legal Footing From the Start
By Daisy Yu - E-Commerce Times
November 5, 2009 - Mumbai

So you've sought intellectual property protection for your patentable invention, or you've trademarked your logo. Do you think your startup is now protected? This alone may not be enough.

Technology entrepreneurs may understand the importance of protecting their intellectual property, such as trademarks and patents, yet many times they create startups without understanding what is involved in terms of protecting their business through other avenues -- such as contractual mediums, which can be more important than the registration of a trademark or patent.

Specifically, it is important for startups to create a proper legal structure so that the company may protect its core business assets and the interests of its shareholders and other stakeholders.

Need for Incorporation


Incorporating a startup prior to operating it is the simplest way to protect against personal liability. Generally, creditors of a company will not be able to hold the shareholders responsible for any liabilities incurred by the company, and the personal assets of the shareholders will be out of the reach of the creditors.

Thus, while it may be tempting to delay the incorporation process until it is relatively certain that the business will be a success, the savings incurred from the delay of incorporation do not outweigh the potential liability issues that could arise and negatively affect the unincorporated startup.

Another benefit to incorporating a startup is that it is also easier to attract investors if a corporation is formed to carry on business. Investors will be more willing to invest money into a corporation rather than offer it to individuals, so that they can receive shares in the company in return for investing. There are various ways to devise the share structures to meet each startup's specific needs.

A corporation is also taxed at a more beneficial rate, and the corporate status gives the entrepreneurs involved additional methods of structuring their income and their tax liability. Finally, a corporation provides the entrepreneur with instant recognition and begins the process of building goodwill. Goodwill is an intangible asset, which encompasses the reputation and branding of both the business and the products it represents.

Shareholder Issues


If there is more than one individual or investor involved in creating a startup company, it is highly prudent for the parties to enter into a shareholders' agreement. A shareholders' agreement outlines the rights, duties and obligations of each of the shareholders, and it governs the methods and procedures by which a shareholder can exit from the startup.

One of the key benefits of having a shareholders' agreement in place is to minimize the potential for litigation. In the event there is a dispute among the shareholders involving the operation of the corporation, or how equity should be split, the shareholders' agreement will govern.

Having established rules at the outset of the startup's existence will lead to a faster resolution of any potential disputes -- and settle them in a more amicable fashion.

IP Protection

Once the corporate foundation is in place, startups should perform an audit to ensure that all of its intellectual property is protected and not just the underlying core patent or trademark.

The exact ownership of the intellectual property should also be revisited, since the initial patent or trademark may be in a personal name as opposed to the name of corporate owner.

Different types of intellectual property protection are available.

Agreements for the Web Site

Particularly if the startup is a Web-based company, there are various agreements that are important for the operation of the Web site. First, all Web sites -- especially those that require customers and users to create password-controlled accounts, or those that enable the purchase of goods or services -- should have a thorough privacy policy that outlines how personal information collected by the Web site will be treated.

Most jurisdictions have statutes regulating the collection, retention and destruction of personal information. Thus, care must be taken to ensure that the privacy policy complies with the various requirements established under those statutes.

Another important agreement for Web-based startups is a Terms of Use Agreement. A Terms of Use Agreement provides the terms and conditions by which users and customers can access the startup's Web site.

A Terms of Use Agreement usually contains disclaimers from liability, which is particularly important if there are links to third-party Web sites, products or services, as a proper Terms of Use Agreement will ensure that a startup does not incur any liability from the activities of such third parties.

Lastly, having an End User License Agreement in place may also be prudent for startups, especially if the products to be launched include software.

Other Agreements


There are various other agreements a startup should keep in mind as it begins its operations. For example, if a startup intends to distribute its products and services through third parties, distribution agreements or agency agreements can be executed to document that relationship.

In addition, if a startup plans on hiring help, it is important to enter into employment agreements or independent contractor agreements, depending on the nature of the relationship between the startup and the help.

Thought will have to be given to whether the relationship is between an employer and employee, or a company and an independent contractor, as legal implications can arise, depending on the status of that relationship.

Money Invested Now Will Lead to Savings Later

Technology-based startups must be mindful of the fact that protecting their intellectual property is only one action they must undertake in order to safeguard their business.

In the long run, having a proper legal foundation in place at the forefront will save the startup from headaches and unnecessary costs. With the proper legal foundation in place, startups can simply focus on improving their products and services.

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