The Legal Issues a Tech Startup Needs to Know
Creating your own tech startup can be a very exciting venture. You get to unveil the new piece of software, app or device that you’ve been working long hours to perfect, not to mention the opportunity to be your own boss!
The only downside is the boring admin that needs to be done to make sure you protect your startup from a legal dispute in the early stages of its life. We’ve detailed some common legal issues that your new tech company might face in its first year, and how you can avoid them.
Forming the Company
You may be surprised to learn that some startup founders forget to do this! Trademarking the name and setting up the website are both important for the success of your company, but they should come after setting up the entity.
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At this point, it’s also very important to remember to issue stock to yourself. At the early stages, it is an even exchange in terms of value as your shares aren’t worth anything. However, you begin to build its value daily once the company has started. If you delay it until further down the line to issue shares to yourself, you’ll have to pay equal value or end up with a hefty tax bill.
Who Your Cofounders Are
You may want to put a vesting schedule in place in the early stages of your startup. There are a couple of different models to choose from, such as a graded vesting schedule or a cliff vesting schedule.
These options will help you protect your company’s credit as they can be based on how long an employee or founder has been working there. So, for example, if your co-founder decides they can’t devote the energy or time expected, or they need to leave to earn a salary, they won’t walk away with 50% of the company.
If you find yourself in this situation and without a vesting schedule, we recommend hiring a litigation lawyer to advise you on the best way to proceed with this complex arrangement.
The Implications of Crowdfunding
If you have raised the funds for your tech startup through crowdfunding, you should make sure you’re aware of the risks involved with unaccredited investors. They’re likely to be less tolerant to risk and may have tight disclosure obligations that you might not be ready to undertake.
Crowdfunding also means that you’ll have a larger number of stockholders. So, if your company’s exit opportunity ends up being an acquisition, for example, you will need to stockholders’ consent to close the transaction (and you could require as high as 90% consent!).
Patents and Trademarks
Finally, remember to perform a trademark search when you decide on the name you want to go to market with.
If there’s another company with the same name, it will not only affect your ability to get a trademark but could also cause many potential problems down the line. Some business owners become very attached to their company name, which could result in a lot of time, effort and money in the fight to keep it. Alternatively, you would have to go through the hassle of renaming and rebranding all of your products.
Protect your company by considering these lessons in legal. By staying on top of your admin and having some foresight into potential issues, you can reduce risk, avoid tax penalties and perhaps even attract investors to your tech startup. All by staying organised and planning ahead!