Startup entrepreneurs don’t have the time for sloth, gluttony and coveting neighbour’s wives – leave that for after the successful exit. However, they do suffer from other vices. Here are the 5 Deadly Legal Sins of Startups.
1. Ownership Structure
The money is tight, no one is sure if the idea is going to go anywhere, so people skimp on the legals at the very beginning and don’t get the ownership structure right. In most cases it is much better to own the shares in your company through a family trust rather than owning them in your own name. One major Australian technology entrepreneur has been known to say that owning the shares originally in his own name has cost him millions over the years.
Save money on legals elsewhere, but get a lawyer to set up a family trust for you. Costs between $750-$2000 to get a lawyer to do it. Money well spent!
2. Shareholders Agreement
We know, you and your partner have been mates for years, nothing could ever come between you. Trust us – either too much or too little money will generally cause something to come between you. This is when the old adage “Good fences make for good neighbours” becomes relevant. Always document the deal between the initial shareholders. A lawyer can put an agreement together inexpensively, but, even if you don’t go to a lawyer, make sure you put each party’s expected inputs and outputs into a document and sign it.
3. Pristine Website Terms
Here is where you can save money on lawyers. The fact is that if you are small startup with no money – no one is going to sue you. Why spend money on lawyers to draft the website terms and conditions for your first iteration site? Chances are that few people will go to the site and far fewer will even look at the terms.
A low cost alternative may be to get “inspiration” for the terms & conditions of your website from the terms of a similar website and redraft them as your own – rather than paying a lawyer. Make sure you change the wording as that is the original website’s copyright – but just rephrase the wording sufficiently so it does not resemble the original terms and make sure if fits your site’s requirements.
If your site operates in highly regulated industries such as financial services or health, then forget the above advice – it is critical to get legal advice early in these sectors, otherwise you may end up building a site that is illegal. Like the guy who built a lucrative currency trading site before realising currency trading is a regulated activity and you need a licence – Business Gone!
4. Names
You have to find a name no one else is using, otherwise be prepared to lawyer up and fight like Avida Motorhomes. This is an Australian motorhome company that in 1978 decided to call themselves Winnebago Australia, taking the name of the US motorhome company. 35-odd years of legal fighting later, in February 2013, Winnebago Australia has had to change its name to Avida Motorhomes.
Key steps to finding a name:
- Is the domain available – use a domain registration site like GoDaddy and see if the .com or at least the .com.au domain is available (and secure it).
- Check to see if there are any registered trade marks that are the same or similar by searching on the IP Australia website.
- Do a Google search and see if the name is being used to describe any businesses
5. Employee Options
Australia is out of step with the rest of the world in that options granted to employees are taxed at the time of the grant of the option (ie. when the employee does not have the money from the options) and not at the time of the exercise of the option (when the employee does have the money from the options). There are ways to issue incentives which achieve the same effect as options but do not have the adverse tax consequences, for example deferred bonus structures or so-called “loan schemes”. It is important to see a lawyer to discuss this issue as it is complex and risky.
We wish you all the best with your startup and while there may be the occasional bouts of avarice and greed, please stay clear of the 5 sins mentioned above and you are well on your way to that successful exit.
The Helpful Lawyer
