This primer identifies important legal issues that founders must address early on so that they could focus on what really matters – their startups. As this material contains information of a general nature only, the assistance of professionals (e.g., lawyers) is recommended to address specific situations.
1. What business entity best suits my startup?
Considerations of speed of set-up, simplicity of management, protection from liability, capital and credit access, among others, go into deciding which legal vehicle best suits your startup. A sole proprietorship (where the entrepreneur is the sole owner) provides quick and easy set-up, but do not provide the protection from liability for losses and debts that other business organizations provide. Partnerships result when two or more persons own the business. Partnerships, generally, need to be registered with the Securities and Exchange Commission. Except for limited partnerships (where some partners’ liabilities are, as the term implies, limited), partnerships do not provide insulation from liability for debts and losses incurred. Corporations, whose formation is more stringent and reportorial requirements more cumbersome, offer the most protection to founders as their liability, generally, is limited to their stake, or shares, in the corporation. A single natural person is allowed to form a corporation. When two or more founders are involved and the startup will be technology-heavy, it is recommended that a corporation be set up as this entity will also serve as a “basket” where all intellectual property output could be placed.
2. How do I raise capital?
For most startups, capital is the fuel that will propel the business idea into commercial reality. But how do I raise capital? Note that capital can also mean seed money, or funds to conduct an initial study into the feasibility of the business or to build a prototype. If you do not intend to operate on bootstraps (i.e., not raise outside capital but use only resources that you have handy), you can have family and friends lend or give you startup funds (but you must be clear on the nature of this “investment” — in writing, if possible). Getting a partner or partners to put in money in the venture is another way. Offering shares to potential shareholders of a company that you are organizing is an option. Or you can try getting a loan from a bank that services entrepreneurs. You can also go to angel investors or venture capitalists (people who invest in startups in exchange for a share or equity in the venture). There are also incubators, entities which fund and help startups bring their products to market, also in exchange for a share (equity) in the startup. A new way of raising capital is by crowdfunding. Startups, using the internet, may sell goods and services in advance, or offer shares (or debt) in their company, and use the proceeds as capital.
3. How do I protect my business idea?
For some startups, ideas may be their most important asset. As such, it must be zealously protected. When discussing your ideas with third parties, a non-disclosure agreement is recommended. For written or audio-visual works, including software, copyright provides intellectual property protection. For inventions, the law extends protection through patents. For logos, product names and other graphic representations, trademark or service mark registration affords protection. Trade secrets also protect intellectual property, but can lose such protection if independently discovered by others. Industrial design registration protects the distinctive visual characteristics of creations.
4. What's in a (business) name?
If you intend to carry on your startup under a business name other than your legal or corporate name, you must register such business name to gain protection. But careful consideration must be made when choosing a business name. Other than complying with some basic legal requirements (e.g., the name must not be misleading, immoral etc.), one must choose a business name that best captures the essence of the good or service being offered, as well as position such offering in a crowded marketplace. And make sure no other startup or business is using the name. A Google search is a good first step.
5. How do I relate to other people in my startup?
When your startup involves others, e.g., co-founders, partners, shareholders, investors, creditors etc., it is best to settle everything in advance and in writing, even though those third parties maybe your relatives and friends. Founders’ agreements are essential in governing relations between and among founders. When borrowing money, loan agreements, which state how much, at what interest rate, and when you have to repay the loan, should be signed. For partnerships, a well thought out partnership agreement is essential. For corporations, a shareholders’ agreement is recommended. For investors, subscription or funding agreements are vital. These documents spell out each party’s respective rights and obligations in the startup.
