7 legal tips for the budding startup or young entrepreneur

There are several misconceptions or things overlooked from a legal perspective by entrepreneurs starting or running a business. Here, a Mindspace based lawyer recounts some. Read them, learn them, and strive to avoid them.

Written by Coral Braun

3 months ago

Starting a business goes hand-in-hand with bureaucratic dealings. The process is rough, seemingly eternal, and often confusing. Every procedure – from registering the business, to hiring consultants and employees, to reporting income, signing non-disclosure agreements, registering patents or filing for copyrights, and distributing options – is accompanied by its respective legal process. It becomes easy to get lost in it all. And that’s where lawyers come into play.

“Hi-Tech Lawyers rarely have sexy or high-profile cases, but there is great satisfaction helping young individuals with very big dreams bring their ideas to life”, says Asaf Zagury, a Mindspace-based lawyer and co-founder of Salaryo, a Techstars-backed startup in the 2017′ class Barclays accelerator. Different stages of a startup are accompanied by varied legal practices, he explains, but oftentimes, critical stages are overlooked – positioning a startup less than ideally for future dealings. To avoid such pitfalls, Zagury laid out seven tips for budding startups and young entrepreneurs. Follow them, and you’ll be golden.

1. Don’t Overlook the Founders Agreement

When launching a venture, there is nothing more important than establishing a clear founders’ agreement that defines the roles and responsibilities of the founding team, outlines equity and vesting ownership, and assigns IP ownership. Defining these key issues is critical if you wish to secure the future viability of your new venture. Oftentimes, Zagury explains, entrepreneurs overlook this agreement when starting a venture with friends. “They think they don’t need it”, he says, when in reality, the opposite is true. Drafting an agreement ensures that your friendship remains in tact when disagreements arise or your venture comes to a dissolution.  “If everything goes smoothly, you won’t ever need to look at the founders’ agreement”, says Zagury. “But in the case that things get rocky, you need the agreement to make sure that you stay friends even if the journey comes to an end”.

2. Establish Very Clear Agreements with Employees & Consultants

Agreements protect the work that others do for you. So when hiring a new employee, freelancer, or external consultant, make sure to draft a contract that details the nature and terms of your relationship. It’s that simple.

Asaf Zagury ADV

Asaf Zagury. It becomes easy to get lost in it all, that’s where lawyers come into play.

 

3. Don’t Rush to File a Patent

If you have some spare cash, use it wisely, Zagury advises. As a young startup, you should invest your already scarce resources in product and business development, setting up the right legal framework, and hiring new talent. “Don’t go rushing into unnecessary patent applications”, he says.  Instead, entrepreneurs should examine their options very carefully. One too many times, Zagury notes, big patent firms will recommend that young startups with limited resources invest “tons of dollars” in often-unneeded patent applications. So before you go filing that patent – make sure to test the market, identify a need, develop your product, and build a team. Patent filing will come in due time.

4. Be Smart with Option Distribution

“Options is a very trendy word in the tech industry”, says Zagury. And entrepreneurs, at times, are too quick to distribute them. The key when dealing with options, he says, is “to have a clear plan and understand what it means to give them away”. Make sure to have concrete agreements in place with option-holders that clearly define when option rights can be exercised and under which conditions. Like any other contract, an option agreement will save you from a messy disagreement later on.

 

5. Google is not a Standard Contract Provider

Seeking legal documents on the web has become too common of a phenomenon. But Google is not a know-it-all when it comes to the law. Printing out templates found on the web for standard contracts is a rookie mistake, says Zagury. Downloading and using documents sans customization is risky, especially when overlooking the fine details of these cookie-cutter contracts. Instead of scouring the web, Zagury advises that you seek professional counseling. “Don’t save money on account of legal counseling”, he says. Doing so, will only hurt you later on.

 

6. Relax with the NDA’s

Non-disclosure agreements are important and essential if you wish to maintain a competitive advantage. But there’s no reason to have every person that crosses your path sign one. “You should sign consultants and potential employees, but there’s no need to sign your attorney, your accountant, and most definitely not your potential investor”, says Zagury. “It is a very common mistake that often deters investors”, he affirms. When an NDA is appropriate though, make sure that it is tailored to the signing individual. Zagury recommends that when going into business you have a lawyer draft up two types of NDA’s: One for consultants, and one for potential employees. So be selective with NDA distribution – and don’t worry about putting your idea at risk!

 

7. Steer Clear of a Finders’ Fee Agreement

Fundraising is often high on the priority list of any entrepreneur launching a startup. But as important as it is to fundraise, it is even more important to do it right. Oftentimes, startups will use middlemen, called ‘finders,’ under the (false) premise that said ‘finders’ will connect them to potential investors. This relationship is often sealed with a ‘very standard’ signing of a finder’s fee agreement. However, “there is nothing standard in such an agreement”, Zagury emphasizes. And it is integral that you read one carefully before signing, because if you don’t, “you may find yourself being subpoenaed to court by this so called ‘finder’ who will sue you for his commission with regards to an investment that he had nothing to do with”. Zagury recommends to never sign such an agreement, unless its been looked over by professional lawyer.

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