You have a great idea for your startup and you’re ready to get into business! However, don’t jump the gun too early because forming your startup is not something you should take lightly, and it’s certainly not something to rush into.
Before forming your startup, make sure you have a solid legal foundation in place. This is where this blog post will help you.
Follow the key steps below to ensure that you have a solid legal foundation when forming your startup.
1. Get Your Legal Structure Set Up Early
This is particularly important if there is more than one founder in your startup because there are going to be things at stake like shares held, IP, and also tax compliance.
You need a structure to your founding team. One that clearly outlines the roles and responsibilities, and entitlements of each founder. This should include share options, IP rights, and anything else deemed important. The easiest way to set this structure up clearly is with a bespoke Shareholders Agreement.
This document will prevent future legal issues arising, so it’s a must-have legal document for your startup.
2. Choose The Right Business Structure
For most startups, you’re going to need to form either a Limited Liability Company, Partnership or a Limited Partnership. Each of these has different advantages and disadvantages.
Choosing the right type of business structure is not easy and will largely be determined by your long-term goals and current circumstances. The only way to know for sure what structure to go with is to speak with a lawyer.
3. Protect Intellectual Property
If you’re serious about your startup and the value it provides then this should be a no-brainer for you.
If you’re operating in the technology space then it’s likely you’ll probably need a few patents. Regardless of the industry you’re in, you’re probably going to need to trademark your startup’s name and make sure you have copyrights applied to your works, website, and anything else that plays a role in the startup’s ability to generate profits.
Make sure you speak with a qualified IP lawyer in regards to the kind of IP protection your startup needs.
4. Get Your Equity Incentive Plan Set Up
Establish an Equity Incentive Plan for your company at formation. This way, you give the founders and other long-term key employees an incentive to remain with the company and perform to a high standard. These equity plans will generally involve restricted stock options, incentive stock options, and non-qualified stock options.
These can be complex so make sure you speak with a lawyer about how to set up an Equity Incentive Plan for your startup.
5. Get Funding Incrementally
All startups need capital to survive and how you’re going to get capital should be of primary concern when forming your startup. There are different ways you can get capital whether it’s bootstrapping, from friends and family, VC funds, angel investors, and many other ways. However, we want to point out that it’s good practice to fund your startup incrementally and manage your cash flow because if you find yourself in a situation where you need a massive influx of capital then you may find it hard to get and your startup could end up failing because of it.
Make sure you build up value in your startup first, start generating cash flow and profits, use the cash flow from your profits to fund the startup slowly. Once you’ve built up this value in your startup, that you can demonstrate easily, then start looking for larger cash infusions.
Final Words: 5 Steps To A Solid Legal Foundation When Forming Your Startup
Following these five steps will ensure that you have a solid legal foundation while you’re forming your startup. For most startups, much of this will require speaking to lawyers. We recommend you do the same so you know what you need specifically for your unique circumstances.
You can book a free Startup Legal Session below and speak with a legal expert who will tell you what you need to legally when forming your startup.