Starting Up: How to do it ‘legally’ (Part 2)

This is the second part in a series of articles about the legal issues that entrepreneurs have to bear in mind when they ‘start up’. You can read Part 1 of this story by clicking here.Developing a product

While developing a product, always ensure that use of external products or technology happens after acquiring proper and rightful license and rights for the same. Using a product without procuring a proper license and right can be a costly affair and can end up in litigation. For example, while using open source software, companies should be clear about the licensing restrictions and comply with the same. Open source doesn’t mean it’s free for you to do anything with it; it is the freedom to use and modify.

Founder relationships

Many founders of the company ignore the initial paperwork because the founders were friends in the beginning. Despite starting with friends, it’s always advisable to put everything on paper, legally. In case one of the founders quit at a later stage, it becomes difficult to resolve issues unless all the things have been documented regarding the same.

Issues also arise when the startup hits it big and gets funding. Therefore, it’s always better to have all the understanding and terms of the business documented regarding ownership, stakes involved, equity and capital structure and the position if a founder quits the company.

Choosing the right name

Doing proper due diligence regarding the selection of a proper and appropriate name for the company is very important. Many entities choose a name for their entity and later realize that the same or a similar name is already in existence. If the same occurs, it can later lead to ownership issues regarding the name and can also result in legal hassles. Therefore, before selecting a name for the entity, it is advisable to do proper due diligence by searching various available databases.

Non-competitive clauses

While working for a company, one cannot operate a competing business. Entrepreneurs before starting with their venture should first resign from their company or tell the current employer about the same. Also, ensure to check your agreements signed with the current company.

Some agreements might restrict from operating a competitive business for a certain period of time or within a certain territory. If someone is working on some invention check to see what assignments of the inventions might have been signed. Before hiring any employee from a company, check their existing agreements with the current company.

Some employees might be having an agreement wherein they are not allowed to work with a competing venture or might hold some trade secrets, which might prevent them working for your company.  A careful analysis of all the existing agreements is very important in order to avoid any legal claims by the said company.

Protection of trade secrets, ideas and inventions

Protection of trade secrets, ideas and inventions are critical for a company. If a company hasn’t obtained patent protection or in case patent protection is not available, make sure to maintain trade secrets.

Before disclosing any trade secret or confidential information to any other entity, potential venture capitalists or a prospect client, make sure to get the non-disclosure agreement (NDA) signed. Business plans should expressly state that they are confidential and proprietary.

While outsourcing any part of the work or services offered by your company always ensure to secure and retain IP rights with you. Always sign a master services agreement covering clauses related to IP ownership, confidentiality, relationship between the parties and the tax issues.

Every business and industry has different compliances to be followed. Make sure to comply with all the statutory and legal compliances and keep it documented. For example, some businesses might require international licenses to be complied with. Make a checklist of all the applicable licenses required and comply with the same.

By keeping in mind the aforementioned checks and pointers, a startup can avoid legal issues in the future. It’s also important that the owners of the company also remain personally involved in the legal matters since the beginning. Therefore, take time out to keep your venture legally safe and compliant since the beginning and watch the startup flourish.

This is the second article in a series of guest pieces being authored by Ritambhara Agrawal, Managing Partner, Intelligere. You can get in touch with her by writing to ritambhara[at]intelligere[dot]in. Also, do share with us your thoughts and views on this story by writing to us at [email protected].