A recent New Tech Seattle event at the Seattle Center brought together a group of interesting budding entrepreneurs. Discussions with several people led to the realization that many of them are facing the same basic legal issues, and these issues affect family business entrepreneurs as well as other entrepreneurs. Here are three quick tips that can benefit any startup—
1. Choice of business entity: Corporation or LLC? If you plan to seek equity investors in the future, a corporation is a no-brainer. A corporation lets you issue shares and options. An LLC doesn't have shares to issue (only membership interests, which are not attractive to investors), and stock option plans don’t work well with LLCs. An LLC is fine if you plan to have a non-scalable business that will make you money, and you (wisely) would like a shield against personal liability and flow-through taxation.
2. Contracts with Suppliers. Have them. Sign them. So many small (and not so small) businesses try to do business without them. Or they sign a poorly drafted agreement. Operating without good agreements works fine while things are going well. But doing so can be expensive and emotionally taxing if and when things go wrong.
Have a term sheet? Great. Probably no enforceable contract yet.
Performing on the term sheet? Now you might have just created a contract. Only now the terms aren’t fully fleshed out. And your legal rights are in limbo. The best advice:
(1) Engage legal counsel early to draft up a standard agreement.
(2) If the supplier gives you a contract to sign, have counsel review to make sure standard but critical terms are included. A little investment early saves a lot of heartache later.
3. IP Agreements. You are an entrepreneur. You have a new idea. You have developed software or graphics or a new product or something. Protect your intellectual property!
Your employees, independent contractors, and even you need to sign an IP Assignment Agreement to ensure that your company retains the exclusive rights to your intellectual property. Otherwise you risk having folks run off with your work and take the benefits of your labor and insights.
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These are some basic legal frameworks with which all budding (and experienced) entrepreneurs should be acquainted. With these in place, you can feel more secure that a basic legal foundation to your business is securely in place.