4 legal pitfalls startup owners must face

(Editor’s note: Curtis Smolar is a partner at Ropers Majeski Kohn & Bentley. He submitted this column to VentureBeat.)

A reader asks: What types of legal issues do I need to consider when starting my company and how much will it cost?

Answer: As an entrepreneur you have your work cut out for you.  There are many of legal pitfalls that you need to overcome, in addition to the day-to-day challenges. A lot, of course, will depend on the sort of business you plan on running. In general, though, there are five issues to keep in mind (detailed below). As far as cost, that’s often negotiable and many attorneys will agree to do these agreements at a reduced rate to get your business.

Business creation documents – No matter what kind of business you’re starting you’re going to have to decide on a type of corporate structure.  Some of the basic types are partnerships, limited liability companies (LLCs), and corporations.  Make sure you choose the appropriate corporate entity for your needs.

For example, if you want investors, but do not want to spend a lot of money on the formation, a standard corporation may be the best bet for your corporate structure.  A basic corporation gives shareholders limited liability, but has two levels of taxation, one on the corporate level and one on the individual level.

The basic corporation, however, is easier to create share and capitalization tables from because the percentage ownership, or a “share”, is defined by individual state laws and exists without having to be defined by a contract.

A limited liability company, meanwhile, needs to have a detailed contract defining the percentage of ownership of the company.  This contract will translate to more money for you, the entrepreneur.

HR employment agreements – Once the entity is created, you need to get people working.  As discussed in previous columns, hiring and firing people has a lot of potential pitfalls.  So it makes sense to plan for the worst in these situations.

Set up uniform employment contracts, which:

  • Do not discriminate against people based on any of the protected classes as defined by federal or state law;
  • Define the scope of the employment;
  • Say if the employment is for a term or “at will”;
  • Assign the pre-corporate formation intellectual property to the company;
  • Assign all subsequently created intellectual property to the company; and
  • Protect the corporate intellectual property from disclosure.

The last two categories of protecting intellectual property of the company can be accomplished by drafting non-disclosure agreements, and Proprietary Invention Assignment Agreements.

Insurance - Getting insurance for your company is a bet worth taking, given the potential unpleasant surprises of not being prepared. Again, your needs will vary depending on your company, but among the standard offerings are:

  • Comprehensive General Liability Policies (“CGL”) – A CGL policy is usually geared towards protecting a company from personal injury;
  • Directors and Officers (“D&O”) Insurance – D&O insurance may cover the wrongful acts of the officers and directors of a company;
  • Advertising Injury Insurance – Insurance that covers defamation, invasion of privacy, copyright infringement and other intellectual property injuries. (The advertising injury is usually a part of a larger policy, like a CGL, and not a policy onto itself.); and
  • Employment Practices Liability Insurance (“EPLI”) – The EPLI is a specialized insurance policy protecting companies against employment lawsuits.

Customer contracts – To be able to sell efficiently, a company needs to create agreements that explain to their customers the terms of the transaction.  These types of agreements can take two forms:

  • Account Signup Pages –where you have the customer input all of their relevant information and agree to the terms of use. (This is also the place where you can monetize your venture by requesting credit card information.)
  • Terms of use – This is the place where you see all the legalese, the disclaimers and the choice of forum clauses. The Terms of Use create the stipulations of the contract with the customer, that often include a license or an assignment of a user’s content to a web site.

There is a careful balance you need to strike with the customer agreements.  You want them to be comprehensive, but you also want to avoid the appearance of being unfair.

Intellectual property protection and agreements – Once you have your company up and running, protect your intellectual property through trademarks and copyrights.  These will require you to work with someone who has filed a copyright or trademark in the past.  This process is filled with potential risks, so a good attorney is essential.

Startup owners: Got a legal question about your business? Submit it in the comments below or email Curtis directly. It could end up in an upcoming “Ask the Attorney” column.

Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

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