Legal Issues Faced by Startups

Throughout Skyscanner’s journey from start up to scale up, we’ve come up against all manner of legal, regulatory and compliance issues ranging from contract, IP and employment issues to competition law, mergers and acquisition. When you’re moving fast there’s plenty of scope for error and mistakes and based on our experience, we’ve prepared a list of the key legal pitfalls we believe anyone starting out should be aware of.

Pitfall 1 – not putting in place the right corporate structure

It’s essential to formalise a corporate structure for your business as early as possible - making your business a ‘legal person’ in its own right.  The most common legal form for start-up businesses is a private limited company as members have limited liability. However, there are other structures including partnerships and LLPs.

Failing to do so could result in:

Pitfall 2 – not making the deal clear with co-founders

When starting up a business with others, it is critical to make sure that rights and responsibilities of the respective founders are agreed and clearly documented at the outset.

Put in place written agreements (shareholders’ agreement and articles) which clearly document:

Legal input on such documents is recommended, but if you can’t or won’t pay a lawyer, having anything in place (in writing) is better than nothing.

Pitfall 3 – not having restrictive covenants in place

Restrictive Covenants are contractual terms which protect a business by preventing competition (non-compete or non-solicitation clauses); infringement of IP (assignment of IP clauses); and disclosure of confidential information (confidentiality clauses). They can be used in shareholder agreements; consultancy agreements;       non-disclosure agreements; and employment contracts.

Pitfall 4 – not owning your IP

Intellectual property rights are one of the most important assets of your business.

Principle forms of IP to be aware of:

It is critical to ensure that you actually own the IP that is being generated by your business.

Avoid the situation where you have a deal set-up for the sale of your business or for a major investor to come onboard, only to discover during the diligence process that you don’t actually own the IP that you thought you did…

Who owns IP?

Avoid the IP ownership pitfall by making sure that every contract you enter with a developer or other third party contains a clear IP assignment clause! Where there is any critical IP in your business that you don’t own (e.g. a third party software platform on top of which you have developed your product), make sure that you have a clear, perpetual and irrevocable licence to use it as required.

Pitfall 5 – using OSS without having checked the licence terms

Open source software

Pitfall 6 – choosing a brand that infringes someone else’s rights

When picking a company name, brand and domain name…

If your great idea is taken, better to realise that at the outset than to find out three years later when your big marketing push results in you receiving a ‘cease and desist’ letter from an existing trade mark owner. Disputes and litigation are costly and can be a major distraction which can be avoided by taking the right steps at the outset.

Pitfall 7 – ignoring the implications of data protection /privacy laws

If your business collects or processes user personal data, you must comply data protection/privacy laws to avoid regulatory fines and potentially irreparable damage to brand and reputation.

Key steps to ensuring compliance:

Pitfall 8 – failing to put in place written contracts when doing business

When you’re busy getting your business off the ground, its easy to think of contracts as a hindrance rather than a help:

However, taking the time to put in place written contracts which clearly set out the rights and responsibilities of both parties, is actually of real benefit to your business. For example….

Contracts:

Recommendation – invest in a template form NDA, commercial contract and development contract early on. Many law firms will give you a good deal on pulling some basic templates together in the hope of further work from you.

Pitfall 9 – not putting in place adequate employee incentivisation arrangements

Start-ups have a tendency to give away too much equity (shares) in the early days to bring in high calibre management/employees.  There are few fundamental problems with this:

A better solution is to grant options to employees/management via a tax efficient incentivisation scheme.  Such as:

These are the key legal pitfalls we most commonly encounter when speaking to start-ups. If you’ve got a question or would like to chat about any general legal issues (we’re not your lawyers but can give you general guidance or pointers before you seek legal advice) we’ll be running legal clinics at RookieOven – keep an eye out for the dates on the RookieOven mailing list.