There’s no shortage of things to do in the days after you decide to go into business for yourself. Your list will include big decisions such as what your company will do and be called, where it will operate from, and so on.
In these heady, possibility-filled days, legal matters aren’t usually top of mind. But getting the right documents and systems in place at the beginning can save you a lot of expense and hassle later on.
Over the last couple of years, Fogler Rubinoff LLP partner Matt Norris has helped a new cohort of entrepreneurs start companies. A lot of these startups have built significant public profiles. That’s a good way to attract business, but it also has downsides. “It opens you up to possible claims,” he notes. When a startup gains traction, people begin to emerge from the woodwork—unhappy customers, jilted former workers, or patent trolls claiming your intellectual property as their own. In each case, having legal defences can go a long way to ensuring you live to do business another day,
Here are six legal matters Norris says startups need to tackle as early as possible.
Entrepreneurs—particularly those going solo—often skip the lucrative and risk-reducing step of incorporating. That’s a mistake, says Norris. “What a corporation does, versus some of the other business entities, [is] it allows you to [limit] liability to the assets of the company,” he explains. “So it insulates the founders from any personal liability.” (The exception is a personal guarantee offered to secure a bank loan in lieu of company assets; in that case forming a corporation doesn’t limit liability to creditors, but “still insulates you from the public”).
Most companies eventually need to raise money, and incorporating can make attracting outside investors easier. It also simplifies tax planning, and may help to reduce the amount you have to pay by enabling income-splitting.
“You can always convert to other business entities at a later date,” notes Norris. “But the sooner you [incorporate], it kind of limits your tax and legal expenses that go with converting down the line.”
2. Shareholders’ Agreement
Founders used to operating on a handshake don’t always see the need for a formal document outlining their rights and duties. “But when you get into business—especially if you’re going to be successful down the road—you’re going to run into issues around ownership, commitment, management decisions, and [eventually] buying and selling the business,” says Norris. A shareholders’ agreement addresses these issues
For an early-stage startup, division of labour and decision-making procedures are particularly important. Shareholders’ agreements cover who brings what to the table in terms of money, time and labour, and how crucial choices must be handled. “These are all issues that are better discussed up front,” says Norris. “Nobody really wants to [make] that decision today necessarily, but you better have it today than tomorrow when it becomes a fight.”
As the company matures, it’s also important to have policies in place to cover exits and unfortunate events like divorce or death. “There’s a myriad of situations where, at law, you could lose ownership of your shares,” observes Norris.
Take a company that has several founders that own shares. Absent a shareholders agreement, if one of the partners dies the stake will go to whoever his or her will designates. “If you and me are in business together, I might like doing business with you very much,” says Norris. “And I’m sure your spouse is a lovely person, but maybe I don’t want to be in business with them.” A shareholders’ agreement might include a clause that requires that the deceased founder’s stake be sold to the other owners.
It may seem morbid or premature to think about these eventualities at the very beginning of your business, but Norris says a shareholders’ agreement is best put in place early. “If you’re going to create value, everyone should be on the same page,” he says. “It’s much easier to make an agreement today when we’re all in the same room, excited about our business and getting along great, than in several months time when there’s a problem.”
3. Cash considerations
Once you’ve identified an opportunity and come up with an idea to take advantage of it, you’ll usually need some money to get the business going. “So you go to friends and family,” notes Norris. “They’re not going to pry too deep [or] do too much due diligence—they’re really just investing in you because they love and care and believe in you.”
But having personal relationships with these people doesn’t remove your legal obligations to them. When a company sells equity “it raises a whole bunch of corporate and securities laws,” says Norris. He advises clients not to sell equity without consulting him first.
It’s not just a way to run up billable hours. Making sure you’re complying with the rules saves you legal trouble now and may help you in the future. “It’s often an exercise in dotting the Is and crossing the Ts, making sure the paperwork is in place,” Norris says. “At later stages, when you’re going to get more sophisticated investors to the table, they’re going to be looking back at how you did it in the past.”
4. Staffing arrangements
To grow your business, you’re going to need to bring in other people. Whether you designate those workers as “employees” or “consultants” will significantly impact what they cost you, but you can’t simply pick one word or the other. “The CRA in the law kind of says, If it walks like a duck and talks like a duck, it’s a duck,'” notes Norris.
Staff will sometimes prefer the contractor’ or consultant’ designation for tax purposes, but they may meet the criteria for employee’ status under the law. That becomes an issue if you ever need to terminate workers—you may have thought of and treated them as consultants, but they may be entitled to financial benefits associated with being employees. “That’s why it’s very important when you’re deciding whether to hire people to really make a true assessment of it, engage your professionals, and figure out what you’re dealing with so you can make an educated decision,” says Norris. “If they’re employees, you have an obligation to treat them as such.”
5. Intellectual property
IP and good will are often high up the list of a company’s most valuable assets. Take name and branding.”If you get a registered trademark in Canada or in the United States or wherever else you might be operating, that’s important in terms of name protection,” notes Norris.
Obtaining registered trademarks, copyright or patents from governments allows you to enforce your IP rights against people who may try to infringe them. “[It] really gives you a competitive advantage that is almost immeasurable,” says Norris.
Employment agreements can also save you from intellectual property concerns. Laying out what rights your company receives prevents a situation where an employee comes out of the woodwork and claims a piece of your financial success because they had a hand in creating a product or service. And you want to ensure that consultants can’t poach your clients or make off with your confidential information if the working relationship ever ends. “You want to make sure your agreements are rock-solid in that respect,” says Norris. “Investors—especially sophisticated investors—are going to be looking for that when they dig under the company to see what’s there.”
6. Privacy agreements
If you’re going to be dealing with other people’s or organizations’ data, it’s important to make clear how and for what you plan to use it. Too many companies simply copy the text from a competitor’s website, says Norris. “While these are boilerplate, there’s a reason that everyone has them,” he notes. “Privacy laws in particular are a very hot topic.”
Whether it’s just email addresses and names or credit cards and banking details, few businesses can avoid gathering customer information these days. “These things carry big stewardship obligations on companies to use and collect it properly,” says Norris.
Ensuring that your policies properly reflect the law not only reassures clients, it also shows you what your business needs to be doing to be compliant.”They’re the foundational blocks of your interactions with the public. If you pay attention to it now, it’s like an insurance policy—you’re going to be happy that you have it,” says Norris. “You might never need it, but if you do need to rely on it, you’re going to be happy that it’s done properly and not just cribbed out of the air.”
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