knowledge | 6 October 2020 |
“Starting Strong” – How to Avoid Common Pitfalls for Start-Ups
Once a start-up is aware of the most common pitfalls for early-stage companies, then it is easier to take preventative action. Below we have outlined some of the most common issues we encounter with start-ups to help you take steps to overcome them.
1. Not engaging in early stage legal planning
The majority of start-ups have plans to expand. There are a number of key areas which should be strategically planned at an early stage to allow for growth.
The first step in early state legal planning is choosing the right corporate structure that will enable development and attract funding. You can read more about the types of business forms that are available to a start-up business here.
The next step is putting founder agreements and shareholder agreements that clearly define matters such as share ownership, how key decisions are made and roles and responsibilities. The importance of these agreements shouldn’t be underestimated as they will help to keep matters running smoothly as start-ups progress.
Obtaining tax advice to employ an efficient tax structure is another extremely important thing to look at early on in the start-up life cycle.
2. Protecting confidential information
A Non-Disclosure Agreement (NDA) is a vital tool to allow a company to protect its confidential information; it can govern the disclosure of confidential information and determine how information should be used. This is particularly important if a company wants to collaborate with external third-parties as an NDA can oblige all parties to only use such information in an appropriate way as required under the business relationship. It is essential that a suitable and robust NDA is put in place prior to disclosing any information to any prospective investors or third party collaborators.
Setting out how confidential information can and cannot be used gives assurance to your business and provides you with a legal recourse should the contract be broken through the unlawful dissemination of confidential information.
3. Lack of employment documentation
As your start-up grows, its needs as a company will multiply along will your need for employees. Under Irish law, employers are required to provide an employee with a written statement of the main terms and conditions of their employment within two months after their employment commences.
A well-drafted employment agreement can provide certainty for both employees and employers about their respective duties to one another. From an employer’s perspective, it is important that the employment agreement protects the interests of the company, and makes clear what the obligations of employees are in relation to the use of confidential information.
Losing a key member of staff can cause major interference with a start-up’s operations. The impact of this disruption can be softened by having documentation in place which deals with issues such as intellectual property, shares and confidential information. Additionally, non-complete and non-solicitation clauses can be added to the employment agreement to protect the company’s interests after an employee has left the company.
4. Failing to consider IP rights and protection
The core intellectual property (“IP”) of a start-up is often is its most valuable asset, and this is particularly the case for technology based companies. A key to the success for young businesses is proper IP protection. Both founders and investors alike have a strong interest in ensuring that the company’s IP is protected and that the company can enforce this protection by law if necessary.
Firstly, it’s essential the company has a clear chain of title for all of the IP that it owns. Where a third party assists in developing IP for your company it is vital to put in place licencing, contractor and/or employment agreements that contain sufficient IP provisions and transfers the IP rights to the company. Similarly, if an employee has created the IP, it’s important to put in place an assignment agreement. This is a contract that transfers the rights to the intellectual property from the employee to another entity, such as a company. An effective assignment agreement will ensure that start-up founders will have complete ownership of all intellectual property assets during the formation of the company. Such an agreement will be essential for providing assurances to investors who seek to work with the company.
You can read more about specific forms of IP protection here.
How can we help?
We at McCann FitzGerald recognise the dilemma that most early-stage companies face is the need to balance the requirement for good advice against the need to manage costs.
Through our Start Strong programme, we are solving this dilemma by providing top tier legal advice on transparent, flexible and start-up friendly terms. For more information on our Start Strong programme click here.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.