The most common mistake founders make during the initial startup phase is not properly documenting their business relationships. Limited capital and resources often cause founders to prioritize other facets of their business. In order to get a product to market, companies typically allocate investment into R&D, inventory and marketing. However, neglecting to put funds toward legally binding contracts in the beginning can harm your business down the line.
Here are three ways to legally protect your company
1. Hire a Lawyer
Finding a lawyer who specializes in business law early on is crucial. If the process feels intimidating, utilize your business network, family and friends for referrals. Search online for business law offices in your area, read reviews and interview several offices. Look at the investment as more than just a one-time need. As a company grows, having a solid relationship with a business lawyer or firm is one of the most valuable tools a founder needs as other legal questions and issues arise. A business lawyer is essential in writing your contracts, and reviewing legal documents you receive before signing them. When you find the right fit, be honest about where your budget is; they may be able to work out a payment plan or a lower fee for your initial needs. Once you have contracts signed and dated, be sure to keep a physical and digital copy on file. It is also wise to email an attachment of the contract to your law office for their records.
2. Define Founder Relationships
Los Angeles-based business lawyer and partner of Nolan Heimann LLC, David Schnider says the most common issue he deals with is between founders. “Early on, everyone is putting in sweat equity and trying to make something from nothing. Usually little thought is given to who owns what or how the relationship will work. Even if business owners discuss their relationships, it’s surprising how often they don’t write them down. At the time, everyone seems to be on the same page and there are no issues. But as time goes by, people forget the details of their agreements. Memories differ. Two years later, business partners may have a fight because one remembers they agreed they would recoup their initial investment in full and the other thought their sweat equity offset that investment.”
To avoid this situation, determine how the equity will be divided as well as clarifying the roles and time commitment expected from each founder. Include what each person has invested, what salary will be given to whom and at what point. Outline voter rights and future scenarios such as buyouts, acquisitions and ramifications if one founder breaches what was agreed upon. After determining key factors, a business lawyer can help hammer out a comprehensive contract.
3. Get Ownership Rights
Unless specified in a written agreement, work done by freelancers such as graphic design, art, photography, coding, programing, etc. is their copyright ownership, not your company’s. Even if work is executed by the vision you describe to the person hired with details specific to your company, you do not own it if it’s not signed and agreed to in writing. This is where it gets tricky. If your company grows, contractors may come back to you, demanding compensation. If you don’t have a legal document in place, they have the rights to prohibit and restrict how their work performed is being used. Whether it is a good friend, someone starting out or a seasoned professional, always have a contract in place.
Schnider is all too familiar with this scenario. “A client worked with a third party to help design and launch a new product line. That product line took off and is now worth millions of dollars. My client never documented her relationship with the third party, and they had a dispute about the terms of their agreement and ownership rights. The dispute complicated my client’s efforts to develop the brand and sell her company. A simple independent contractor agreement up front could have avoided this problem.”
Typically, independent contractor agreements will clearly state the designer is granting the client exclusive ownership of the final work produced worldwide in perpetuity, and permission to use the work in any derivative at any time or location. It is also important that the document gives you the rights to modify or change the final work. The freelancer’s fee must be included as well as verbiage that the work created is protected by work for hire provisions making them ineligible for additional fees or commissions.
Always set aside a budget for legal support and build a good relationship with a business lawyer who meshes well with you and your company. Define business relationships early on in a written agreement made or reviewed by a lawyer. Depending on the type of contract and details needed, legal fees for contracts can range from a few hundred to a thousand dollars. This nominal investment is a small price to pay for guaranteed protection for you and your companies assets.