Early stage startups can be overwhelming, complying with laws and regulations only adds another layer of complexity. For Giants Weekly, we were joined by, Law Squared’s corporate lawyer, Shaun Restorick-Barton, who simplifies the Australian legal process. We will cover how to set up your legal structure, manage equity and important contracts and how to protect your IP. Watch Shaun’s presentation in full below or read on for our key takeaways.
Determining your legal structure is an initial decision that will have a lasting effect for your business - it determines your risk exposure. Potential legal structures for startups include sole trader, not-for-profit, private company, partnership and trust. While being a sole trader might be useful for some startups during beta testing, the majority will need to be set up as either a private company or a not-for-profit. Not-for-profit organisations can exist on a spectrum and are an increasingly popular way to meet the growing consumer demand for ethical enterprises. There are a number of operating structures that can be used by these type of enterprises:
- Company limited by Guarantee
- Incorporated Association
- Charitable Trust
- For purpose/or profit company
Shaun advises that you be clear about your vision, the risk profile you want and seek proper advice before you choose a legal structure. By getting it right from the start, you can expand into other jurisdictions, raise finance and bring on other partners without complex legal problems.
Equity is the cause of the majority of disputes that Shaun sees, it’s imperative that you give out equity frugally, keep rights the same and ensure all shareholders agree to a dilution. Some key considerations:
- You will be unable to claim the ‘work’ in an R&D application
- Vesting shares keeps people honest and accountable
- Have a clear buy-back understanding
Vesting equity is locking up equity subject to an employee achieving certain milestones or KPIs. This encourages people to remain with a startup for the long haul and aligns their goals with the business. Your ‘Shareholders Agreement’ or a separate Vesting Deed can set out the terms for vesting equity e.g what happens if an employee leaves before the time period. If a person leaves before their shares have been fully vested, vesting terms ensure they must sell back any unvested shares at cost price. For their vested shares they will receive fair market value (provided they leave on good terms). If they leave on bad terms (violation of company policy etc), they will receive a discount to fair market value (commonly 20%).
The two most important internal contracts are the Founders Agreements and Shareholders Agreement documents. For a Founders Agreement, equity and vesting covered above is particularly relevant. Additionally, it is critical that everything is laid out in a business plan e.g. IP assignment (IP belongs to the business entity not an individual) and the roles/responsibilities of each founder. Here is a useful visual for what is to covered in the Shareholders Agreements:
Brand Protection & IP
Protecting your ideas and intellectual property is an integral part of any startup. There are a few tools for safeguarding your IP, the first is a non-disclosure agreement. However, when you are raising funds, it is industry practice for VCs to not sign these agreements due to the volume of different ideas they see. Additionally, confidentiality terms can protect IP from investors, employees or interested parties. Finally, you can look at trademarks and patents to project your IP. They are both the safest and most expensive ways to do so.
We’re taking next Tuesday off due to the national public holiday here in Australia, but make sure to register for the next Giants Weekly session with Fable and Shoes of Prey co-founder Michael Fox on Tuesday 2nd February.