Startup Law

Three legal issues to consider when founding a startup

Starting a business can be a daunting prospect. Startups can be unpredictable, so it’s important to set expectations among the founding team right from the very beginning, according to Nick Hitchens, LawAdvisor lawyer and the founder of Sydney-based Hitch Advisory.

Start with a good shareholders agreement

When founders are sitting around a table, formulating an idea for a startup, what each individual is going to contribute will seem clear. Without formal agreement, that initial clarity can be easily lost.

“We all go into it believing we know what we think we’re going to contribute,” Hitchens says.

“But we get in there and think, hang on a minute I’ve put in more cash, I’ve put in more time than I expected.”

That’s why a good shareholders agreement is worth its weight in gold, he says. A custom shareholders agreement will perfectly suit the needs of your company, and cost less than $2000. However it’s not always necessary to go the custom-route.

“If you understand it, get it off the shelf. Download it from a document provider. But if you don’t understand it, don’t touch it,” Hitchens says.

“They’ll help decide who owns what and what each person will be entitled to in the near future and also what they are going to contribute.

“It’ll also help with decision making. If we are all sitting on the board and we are all shareholders then it is pretty straightforward.

“But if we’ve got some silent investors and some active board members, what you can do is have some key decisions that are reserved for unanimous agreement, or a special resolution of shareholders.”

Such decisions might include the sale of the company, issuing equity, or employing people with a salary larger than a certain number, say $100,000.

Shareholders agreements also deal with the transfer of shares in the event of death or injury, and the ownership of intellectual property.

Look after your employees

When you’re building a business, it’s important to understand that if its value is too closely tied to a single individual, then you don’t have a business, Hitchens says.

“If you have a great team with a dozen people that all have both emotional and moral buy-in, and are backed up by really good financial motivators, then a purchaser is going to say this business is more than just one key person who may not be around tomorrow.

“This is a legitimate organisation and I can actually give you a ten times multiplier.”

There are a number of ways to ensure your employees have strong financial motivators. As most startups are strapped for cash, and struggle to offer competitive salaries, this is often achieved using cash bonus plans, Employee Share Option Schemes, or by issuing real equity.

Make sure you protect your employees and your business by using quality employment contracts which ensure that if an employee leaves, they can’t take your business’s IP with them, Hitchens says.

The Federal Government Fair Work Ombudsman has a great set of resources, including templates and best practice guides, which can be found here.

Compliance and contracts

For startups that outsource, whether they’re operating in the food and beverage, or manufacturing space, consistency of supply is really important, Hitchens says.

“You want to make sure your supplier is not selling the same product to your competitor.

“Make sure you are securing that channel of supply. Because again it goes to value. At its best form see a lawyer and get them to draft an agreement with your suppliers.”

If you can’t afford legal advice, Hitchens suggests drafting an email to send to your supplier. The email should include five headings: what, how much, when, who’s liable for what, and where does the IP sit.

“If that’s all you can afford, put it in an email and it will be better than nothing,” he says.

“If you’ve got someone coding for you, you want to make sure that IP is being assigned to you. If you’ve got somebody developing food products with your recipe, you’re making it clear that you own that recipe and they must not make any formulation of the same or substantially similar for any other customers.”