These Are The Top 4 Legal Problems Founders Face When Launching a Startup

The checklist that founders stare down when starting a new technology company can be daunting – everything from choosing a business structure, setting up finances, buying insurance and determining the best way for workers to communicate once the business is up and running. Founders need to also navigate a slew of legal hurdles when launching a startup.

Here’s a look at the top four most common legal challenges founders face and some practical tips for achieving the ultimate goal of launching the company.

Capital Raising

Founders know that capital is key to the operation. However, the manner in which they structure capital raises for early-stage companies can be critical because it sets the stage for capital raises in the future and it allows the company to better project what its capitalization table might look like going forward. Founders also need to consider questions about how they pursue sources of capital, which can vary. Should the company, for example, pursue debt, equity or a combination of the two? If the company elects to pursue equity capital, then it should have a solid understanding of the sources of capital available to it and which approach might be better for it at each stage of development. From a legal perspective, founders need to be aware of how state and federal securities laws play a role in the capital raising process. Companies should also have a fundamental understanding of the concept of valuation and how it impacts the analysis regarding a capital raise.

Assembling the Proper Management Team

The question of assembling the proper management team should also be at the top of the list for founders in the early stages of development. At the early stage of development, founders often face a conundrum with respect to the formation of a management team, and they seek to answer these fundamental questions: How can I assemble a management team with little or no capital? Should I try to raise capital first and attempt to assemble a team after or the other way around?

Another question founders need to answer is whether they plan to bring in their management team as employees or consultants. With that decision made, founders can best determine the type of agreements that need to be in place and how those agreements should be structured. For example, this can include employment agreements, consulting agreements and others that spell out the terms of the relationship, including the services to be provided, compensation, termination provisions and whether the team member will receive equity. If equity is granted, the terms of the equity grant should be described, including any vesting schedule.

Intellectual Property

A company’s intellectual property is its bread and butter. Without it, a company likely can’t function. Technical aspects aside, founders need to think carefully about how to manage and potentially protect the company’s IP.

Some important legal considerations include whether the founder(s) owned any IP relevant to the company before the company’s formation. If so, a decision must be made as to whether their IP needs to be assigned to the company.

The second piece is being cognizant of what IP is being developed by the company once it’s operational and whether to pursue IP protections. The benefits of these protections are that they can provide the company with both statutory and common law protections against infringement by third parties.

When it comes to IP issues relating to employees, consultants and other third parties, agreements need to be in place that include various legal protections such as work-for-hire provisions, which will typically provide that any IP developed by an employee, consultant or third party while working for the company belongs to the company.

Board of Directors

When launching a company, founders need to determine the structure and the authority of the board. In this regard, there are many legal considerations that must addressed, including the proper size of the board, who might make a good board member and why, whether the board should be compensated, what authority the board should have and the process of removal. These issues should be addressed in the company’s governance documents.

Final Takeaways

Launching a company can be a strenuous undertaking, but the upshot can have huge potential. Still, it’s critical that founders think about these key legal considerations early on in the process to avoid headaches down the road.

About the author:

Startups to Fortune 500 companies turn to Alonzo Llorens for experienced legal counsel. A partner at Parker Poe in Atlanta, Alonzo advises clients in areas such as capital markets and finance, mergers and acquisitions, securities compliance, and corporate governance. He can be reached at alonzollorens@parkerpoe.com.