Is your new startup a legal landmine? 5 tips for founders

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Is your new startup a legal landmine? 5 tips for founders
Lazarus Legal is a legal firm based in Sydney, Australia, serving clients around the globe.

It's a topic most business founders never talk about.

Is your new startup’s concept a huge legal landmine and you are not aware? Starting the entrepreneurship journey is always exciting. Most startup founders’ trend to assume the best-case scenarios which at times can be helpful. But the reality can be a lot harsher.

We paid close attention to the Food & Beverage sector and companies lately as they are starting to rely on AI and Machine Learning to develop their products. A Chilean startup develops a ‘milk-like’ product that’s plant-based using artificial intelligence and it’s starting to enter the US market. Using AI to guide and develop your food and beverage products is a new territory that many startups are considering. Whilst there seems productive and potentially beneficial for both the company and consumers, a competitor or a consumer might sue you for a million reasons - especially if you are bringing significant change and quote, unquote, “Disrupting the market.”

Startups are inherently based on the idea of ‘disruption’ and disruption is not welcomed by everyone. Every new disrupted product or industry can come with a range of legal disputes and cases that can potentially bring any company to ashes.

For example, using the term 'Veggies Burger' can potentially be illegal in Europe. How about 'veggie sausage,' 'yoghurt-style' and 'cheese-like?' Same story. The EU is currently going through a historical milestone which could potentially ban terms like these. So, all the new vegan start-ups can potentially be undermined.

So, as a startup, how do you protect your business especially if you have new technologies powering your business model?

Lazarus Legal Director, Mark Lazarus shares his top 5 tips to protect your startup.

Tip #1 - Don’t rush past the legal setup

It’s imperative to get your legal framework right without eating into your startup capital or curbing your momentum. You started your business with a vision of exactly what success looks like for you. You’ll work harder than you ever have before to reach that dream and it will feel like your ‘to do’ list only ever grows. In these early days, there are protections you should put in place to make sure that, on the day when you reach success, it isn’t taken away from you. So, don’t rush past this. Most entrepreneurs are surprised to find that the protections they need are affordable even for solo entrepreneurs and small businesses, and don’t take long to put in place. The best time to get your business protected is right at the start. You will be glad you did.

Tip #2 – Get your shareholders' agreement right

The shareholders' agreement is the most important agreement you’ll ever sign.

As soon as your startup has more than one owner, you need one of these, and this may turn out to be the most important contract you ever enter into. A proper Shareholders’ Agreement will govern how important business decisions are made, how the company will raise further capital in the future and how the investors will ultimately exit – all crucial matters about which there should be a clear agreement in advance. Of particular importance will be pre-emption rights on new issues of securities, which help to prevent the investors from being diluted by future capital raisings, as well as pre-emption rights on transfers of securities to give the investors certainty about the particular individuals with whom they are going into business. Tag-along and drag-along rights can also prove to be crucial when one or more of the owners are seeking to exit the business. Creating a shareholders’ agreement for your startup will force you and your co-investors to sit down together and address these vital points upfront.

Tip #3 – Create an EOP (Employee Option Plan)

An Employee Option Plan (otherwise referred to as an Employee Share Option Plan, ESOP, Employee Share Scheme or ESS) is an equity incentive arrangement that allows employees and consultants of a company to acquire shares in the company in the future at preferential prices.

Why adopt an Employee Option Plan?

An Employee Option Plan enables the company to remunerate key staff members with equity. You may have heard the term “sweat equity,” which means paying employees for their work with equity incentives. Doing this means, the company can hire key staff members and grow the team without needing to raise cash to pay their salaries.

Giving key employees a stake in the ownership of the business aligns their incentives with those of the shareholders and helps. Giving key employees a stake in the ownership of the business aligns their incentives with those of the shareholders and helps to motivate them to work hard towards increasing the value of the business.

Tip #4 – Protect your intellectual property early on

IP is an important part of what distinguishes your products or services in the marketplace and the branding you portray to your customers. Having sufficient IP protections in place prevents people from copying your branding, website content or original product and from essentially piggy-backing off your reputation and goodwill.

  1. Register your Trademarks

Trademarks can be a word, logo, picture, product shape, colour or any other aspect of branding. It’s not compulsory to register your mark, as over time you develop some ownership rights through public awareness. However, it’s always a good idea to register because enforcing your rights will be much easier in the event of an infringement.

  1. What about Copyright?

Copyright protects any expression of ideas and applies to literary, dramatic, musical and artistic works. It’s an automatic right, so you don’t need to worry about registering or issuing copyright notices. As long as your idea is “original”, utilises a degree of skill, and created by a human, it will generally be protected for 70 years following your death.

  1. Prepare Non-Disclosure Agreements (NDA’s)

Always use NDA’s! These are essential if you want to talk about your idea with potential co-founders or capital providers. These agreements ensure that no-one can discuss or use your idea without your express permission. If you don’t have an NDA, it’s harder to stop people from stealing your ideas.

Tip #5 – Hire a competent commercial lawyer

A major misconception that many business owners have around startup lawyers is that they are only meant for medium and large enterprises. This couldn’t be further from the truth. One of the most critical stages of a business is its infancy stage. Your biggest vulnerability is when you are starting. This is when your business is least experienced and prone to fatal mistakes that can cost your business everything. The cost of not having a competent commercial lawyer can be the entire business and more. One commercial dispute or litigation can change the game forever and we’ve seen and heard of businesses that never bounced back.

When you set out to find the right commercial lawyer, consider the following 4 criteria

  1. They fully understand your business model
  2. They understand your work culture
  3. They are business thought leaders
  4. They can spot dangerous territories ahead of time

Who is Mark Lazarus?

Director of Lazarus Legal and formerly the Legal Director for energy drink brand, Monster Energy, Mark is a lawyer and former barrister who has extensive experience working with startups, FMCG businesses, Tech companies amongst many other industries and sectors, on a variety of commercial law areas including intellectual property, litigation and dispute resolution.

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