Have you taken the legal steps to protect your startup from disaster?

signed contract

The best time to see a lawyer is when you don’t think you need one

“We didn’t really have a clear understanding of what were the expectations between the co-founders, what was everybody going to get if we were going to pursue as a team, what was going to happen if we were going to break apart.”

If any of this sounds familiar in the context of your startup venture, be concerned and don’t wait to get your house in order.

Frank Bouchard made this comment last year to the CBC. His Ottawa startup, Wipebook, ran into trouble after one of the three founders filed a lawsuit against the other two. The conflict led to an out-of-court settlement and cost the startup a $300,000 investment from Dragons’ Den’s Arlene Dickinson.

Heady with the success of a Kickstarter campaign that raised $420,000, the founders had neglected to distill into writing their obligations and responsibilities to the business and to each other.

It’s a mistake that is all too easy for first-time entrepreneurs to make. Because let’s be clear: Despite the fabulous technology that may be at the heart of the company, a tech startup is still about people. Whether it’s friends, university classmates or other like-minded souls, they found themselves in the right place at the right time and found they worked well together.

In those early days, it’s easy to assume that you don’t need rules. But then the company begins to grow. The founders need to bring other people on board, they consider venture capital or angel financing and begin to separate roles and responsibilities with job titles. 

If you don’t plan for this dynamic transition, you will face challenges. Add in the complicating factors of interpersonal relationships and money, and you have a recipe for disaster.

Experienced employment and business lawyers can see these bumps in the road a mile off. They can provide the objective and arms-length counsel you need to anticipate and prepare for the real-world problems that could someday arise.

Here are some things that should be defined in writing sooner rather than later:

Who outranks whom?

If two people start a business, don’t assume that makes them equal partners. Maybe a verbal agreement was made for one to be the employer and the other the employee. But then the company becomes a multimillion-dollar success and the employee is feeling like they got the short end of the stick. Or one partner argues the other partner didn’t pull their weight and shouldn’t get an equal split of the profits.

Don’t risk it – get that relationship defined in writing on Day 1. Or, even better, the night before.

Defining the relationship could take a number of forms. It could consist of an employee agreement. This spells out duties between employee and employer, addresses compensation and dictates entitlements upon termination. It can also include clauses to protect the business, such as confidentiality, non-compete requirements and ownership of intellectual property. The goal is to protect the rights of the individual and reduce the business’s liability for things such as wrongful dismissal. 

Defining the relationship could take the form of a shareholder agreement that details how shares can be bought or sold and the associated entitlements, or a partnership agreement outlining the rights and obligations of business partners. 

Protect your IP

Intellectual property protection is a vital consideration for tech startups. There are many different aspects, from copyright of creative works (which includes software), to trademarks and patents.

A tech startup should carry out a comprehensive IP audit to determine what trademarks and creative works are under its control. This again must be distilled into writing to define, without ambiguity, who owns what.

The employer wants to ensure it owns whatever an employee came up with on company time. The employee, meanwhile, wants to document and protect what they created prior to joining the company. The blurry line that is more challenging to clarify is determining what is created by an employee on their own time with their own resources, versus company time and resources.

And don't forget other workplace policies 

Then there are the mandatory workplace policies that are required by law. The Accessibility for Ontarians with Disabilities Act and Occupational Health and Safety Act are among the pieces of legislation that require that employers maintain particular policies in the workplace.

Other policies that are highly recommended include human rights policies, workplace privacy policies and social media usage policies. In the modern workplace, what employees can do on their work computers and on their social media pages is increasingly important. Setting clear expectations goes a long way toward preventing problems. 

So don't be afraid to talk to a lawyer

All this paperwork can seem daunting for a couple of over-caffeinated friends hammering out code in a garage-turned-office. But if that great idea becomes a multimillion-dollar company, it’s well worth the effort. 

The key is to find a trusted legal advisor who understands the budgetary constraints and growth challenges of a tech startup. The Employment and Business Law Groups at Nelligan O’Brien Payne have the experience and eye for detail to put you on the path to success.

What can Nelligan O'Brien Payne do for you?

Find a lawyer or consultant by name or contact Nelligan O’Brien Payne by email at info@nelligan.ca, or by phone at 613-238-8080 or toll-free at 1-888-565-9912 (Canada) for assistance. Visit us at nelligan.ca.