Important Note: The analysis and resolution of trademark issues depends to a great extent on the facts and circumstances of the situation at hand. You should not rely on this information to make decisions critical to your business, as it may be incomplete or incorrect when applied to your particular circumstances. This general information does not constitute legal advice, and is not intended to replace the counsel of a trademark attorney.
Startup companies face unique challenges in the business world. With the founders often focused on capital raising, product development, and marketing, the legal requirements that come with running a business and becoming an employer are not always prioritized. However, a failure to address these issues could result in significant liability for the company and its founders, halting the business in its tracks before it gets out of the starting gate.
The below is meant to serve as an overview of the types of legal questions and issues founders should consider at the beginning stages of their company.
Choose the Right Type of Legal Entity Early On
- Select the appropriate entity type from the outset, planning for future growth and capital-raising to avoid unnecessary changes in entity type in the future, which can be costly and time-consuming
- Choose the type of legal entity that best supports achievement of the company’s and founders’ goals from legal, tax, and early-stage investment perspectives
- Be aware that entity types commonly recommended or chosen for other business types may not be a good fit for a growing startup business
- Consider that limited liability companies (LLCs) and limited partnerships can be problematic for startup businesses that want to issue equity compensation or plan to get venture capital funding (in which case it is typically preferable to structure the business as a C-corporation)
- Avoid inadvertently exposing founders to personal liability. For example, partners in a general partnership have unlimited liability • Ensure that all business activities are conducted through the legal entity, once formed, and not by an individual founder or other third party
Clear and Protect the Use of Brand Names, Logos, and Domain Names Before Creating Value in Them
- Clear the rights to the company’s business and brand names, logos, and domain names while the business is still in the conceptual stage
- Protect the company’s right to:
- use these trade designations when and where the company wants to sell its products or services; and
- prevent other people or entities with a similar business concept from using them.
- Plan for growth and success by filing proactively for rights protection in the US and foreign jurisdictions where the company reasonably expects to do business in the future. Startup companies should:
- make a list of jurisdictions where the company plans to operate and decide where the company can afford to file;
- take advantage of intent-to-use US trademark registration, which allows the company to register a trademark before actually using it if the company has a genuine intent to use the mark in connection with the goods or services listed in the company’s trademark application; and
- keep in mind that the world generally works on a first to file basis. It is common practice in some areas of the world for third parties to register the trademarks of growing companies to extort cash from those companies by selling the rights to these registered trademarks back to them.
Clearly Agree on and Properly Document Founders’ Roles and Responsibilities
- Formalize relationships between the company’s founders and avoid acting through casual business relationships (even among friends and family).
- Set out in writing each founder’s role and responsibilities, including day-to-day operations of the business.
- Record ownership percentages among the founders and any other owners of the business.
- Specify how key decisions are to be made (for example, capital raises and sale of the business).
- Create a mechanism for dispute resolution between the founders (for example, how to break a tie if two founders disagree).
- Address the possibility of a founder’s exit from the business, including whether:
- the departing founder’s stock is subject to time-based vesting;
- there is any limit on the departing founder’s right to continue to hold an equity stock in the business;
- the departing founder has any voting rights on business decisions; and
- any restrictive covenants govern the departing founder’s conduct after leaving the business.
Develop and Implement a Comprehensive IP Strategy to Ensure that the Company Has and Retains Essential IP Rights
- A comprehensive IP strategy should cover IP creation, acquisition, and protection and anticipate business growth and expansion.
- Ensure that core IP contributed by founders, employees, and third parties is owned by or at least securely licensed to the business.
- Determine the appropriate kind of IP protection for technology developed by the company, taking into account:
- the likelihood of obtaining that protection;
- the time and costs required to obtain the protection; and
- the protection’s length and strength
- Decide, for example, whether to seek trade secret or patent protection for the company’s inventions in light of these factors
- Protect the company’s IP in early-stage business activities. For example:
- safeguard confidential business information and trade secrets by using confidentiality and nondisclosure agreements;
- register copyrights and use copyright notices;
- clear and register trademarks and use appropriate notices;
- secure rights protections for any company proprietary software; and
- take steps to protect the company’s valuable data and databases
- Balance IP protection against a desire to open source company technology
- Adopt a company social media policy and educate employees on how to comply with it, including who owns works created by them and whether and how they may share those works outside of the company
- Create a process for adequately clearing third-party content, considering what rights must be obtained, including for social media and other non-commercial uses
Comply with Securities Laws When Raising Capital
- Be aware that federal and state securities laws and regulations apply to all offers and sales of securities, including to friends and family
- Do not issue securities without a valid exemption from federal and state registration or proper qualification requirements
- Take appropriate actions to avoid:
- facing potential regulatory action;
- incurring an obligation to offer investors a right of rescission; or
- harming the economics of a future investment in, or sale of, the company
- Consult with qualified securities counsel before issuing any securities to non-founders. Counsel can help the company:
- identify an exemption from federal securities registration; and
- comply with state blue sky laws, which may require filings or notice
- Proceed with extreme caution if issuing securities to non-accredited investors, even close friends and family. Rule 506 of Regulation D, the most commonly relied on exemption from federal securities registration, is generally only practical in securities offerings made solely to accredited investors