Three Legal Questions Young Startups Should Ask | Article – HSBC VisionGo

How to get going by the book early on

Starting a business can feel like an adventure. Encouraged by a buzz of ideas and the thrill of disruption, startup founders often find themselves in high octane environments and active networks.

Taking care of legal matters does not exactly fit into this charged atmosphere. Some might even say it is a bit of a buzzkill–going through a list of terms and conditions may perhaps not promise as much excitement as being the next global disruptor.

However well a startup is doing, if the paperwork isn't in order, a future legal tussle could throw a wrench in the works. Here are three questions that founders should consider to keep the startup legally grounded.

  1. How Should I Incorporate My Startup?

This is the first question founders should ask themselves. How a startup is incorporated largely determines its ownership structure, liability obligations, profit sharing, and stipulations of the laws of the land, such as taxation.

Going ahead with business without incorporating the startup is generally not recommended, because getting this done once the ball is rolling can become a messy affair.

Generally, businesses can be incorporated as a sole proprietorship, an equal partnership, a partnership with limited liability, or a corporation such as a private limited company, although this can vary based on country.

Although many governments have streamlined the incorporation process to stimulate innovation, it is a good idea to get a lawyer involved at this stage, since incorporation is a long-term decision and founders will want to make sure that they get it right.

  1. Do I Need A Founders’ Agreement?

The answer is absolutely yes, regardless of how much founders trust each other. A founders’ agreement clarifies the ownership arrangement within the company, and the terms on which these can change. It also makes clear what the duties and obligations of each founder are towards the company, so that everyone is on the same page in terms of the role they play as a founder.

Specifically, a founder’s agreement elucidates how much of the company each founder owns, and what their duties towards the company are. It should ideally also cover what options founders can exercise with the shares they hold, and how their equity will be dissolved upon exit.

Such an agreement is particularly useful when more shareholders and investors are added to the company. This is because it can be fairly simple to reallocate shares between founders earlier on.

However, once the founders’ ownership percentage starts to get diluted because of equity transfers to investors, shareholders or employees, the agreement can help decide the percentage by which each founder’s stake gets diluted.

  1. What contracts are important?

The two most important contracts for a startup are employee contracts and investor contracts. These two relationships greatly influence the future of startups, and if done right, can guide the company to success.

Young companies should be sure that they are comfortable with how voting and veto rights are arranged amongst investors, or it can lead to the startup forgoing lucrative opportunities that come their way. Having investors also sign a contract is also a good way to resolve any conflict of interest or differences in opinion between founders and investors.

An employee will also want to join the startup on good terms. Working for a startup lends careers a greater degree of uncertainty as compared to an established business, and employees will want to make the best out of it.

Having an employee contract can ensure that terms of employment and expectations on both sides are clearly managed.

There are plenty of other legal aspects that startups should invest thought into, such as Intellectual Property Rights, compliance with regulatory authorities, privacy and non-disclosure policies, and so on.

In this respect, it is best to get a lawyer on board; someone that the founders trust and can form a lasting relationship with to keep the startup out of legal knots. As the maxim goes, the devil is in the details, or in this case, the fine print.

Header image by Ben Rosett on Unsplash