Founders of new businesses are often so excited about getting their business operating that they are hasty and forget about some of the key legal protections that can safeguard their business from malicious disputes and unwanted competition.
So for this month’s blog we teamed up with the legal experts over at Darwin Gray to get some insight into the common protections that start-ups neglect.
Below are 5 legal considerations that are commonly overlooked by new business owners, as well as the reasons they should be addressed to avoid issues in the future.
1. Regulating relationships between shareholders (Business Structure)
The majority of start-up businesses will incorporate as a private company limited by shares; with the founders being the first shareholders. Often the founding shareholders are too busy thinking about the logistics and funding of the business that they forget to think about their legal relationship with each other.
Although there is no legal obligation for a shareholders’ agreement, where there is more than one shareholder in a company, a shareholders’ agreement can help protect a founder’s investment in the company.
A shareholders’ agreement will regulate the relationship between the shareholders, the management of the company, ownership of the shares, and most importantly, can provide for what happens if the shareholders fall out with each other.
Too frequently people set up companies with friends and family and do not consider protecting their own interests in the company from the outset. Unfortunately, disagreements can occur between business partners and trying to agree on a sensible resolution when the relationship has broken down can be almost impossible and will inevitably damage the business.
Spending time at the outset to formalise an approach that will be taken if the business relationship breaks down can avoid costly and protracted litigation in the future.
2. Creating a logo that can be registered as a trademark (IP)
Start-ups will commonly invest significant sums in creating a trendy logo only to discover that it cannot be registered as a trademark or that a similar logo is already being used.
It is vital to ensure that your logo (or one similar to it) is not already registered or in use for the same, similar or related product /service you offer. A quick search of the trademark register can avoid unnecessary application fees, this can be done at: https://www.gov.uk/search-for-trademark.
Even if a mark is not registered, it can still attract protection and you may be liable for infringement if you are using a similar one. It is therefore important to carry out searches in your market area such as internet searched and reviewing trade directories and the companies register before creating and launching your logo to the world.
You should also ensure that your proposed logo is unique. When applying to register a logo, the mark will be examined to assess whether it is distinctive. In other words, whether the mark can be recognised as a mark that differentiates your goods or service as different from someone else’s.
Start-ups sometimes try and describe the goods or services the mark will relate to; if the mark is too descriptive then it is unlikely to be registered. Try to avoid the mark having any connection with the goods or services.
3. Protecting against competition following a departing employee
Another common mistake for start-ups is failing to implement appropriate employment agreements with initial employees. Often start-ups will simply take precedent contracts found online and give them to their initial employees. Although this may be fine to cover some of the main terms of the employment relationship, it is unlikely to fully protect the business.
A professionally drafted employment contract can ensure that confidential information, including business “know-how”, is protected not only during the course of employment but following termination of employment.
It can also limit an employee’s ability to set up a similar business in competition with yours. This may be particularly important for key or senior employees who have helped develop goods/services and have had access to confidential information and a strong understanding of the business.
4. Having bespoke Terms and Conditions (“T&Cs”) (Trading)
Start-ups will have no doubt spent vast amounts of time creating and developing a product or service to stand out from competitors. All of this work could be rendered useless if the start-up cannot actually protect itself when it trades with customers.
Too often start-ups will try and limit costs by simply downloading template T&Cs from the internet or copying from their competitors. However, these terms are unlikely to be drafted in a way that mirrors your particular business procedures and processes, and therefore unlikely to assist you in the event of a dispute.
It is also important that your T&Cs comply with consumer protection legislation if you are selling to individuals.
Remember, you have invested time and money into developing your bespoke product/service along with specially designed internal procedures; so why should your T&Cs be any different?!
A modest initial investment to have T&Cs professionally drafted can avoid future disputes and save substantial sums of money later down the line.
5. Safeguarding your website
It’s important to remember that it’s not just the look of your website which is important, there are also a number of legal obligations which your website must comply with.
It must set out certain basic information such as your business name, a physical address and details of how you can be contacted. If you are a limited company, then additional information such as your company number must also be displayed.
The next step is to consider what you are using your website for. Will you be taking orders through the site? Will customers create accounts or sign up to receive newsletters through your site?
Depending on your intended use you may need to display other information to make sure that you are compliant with, for example, consumer protection and data protection laws.
6. Using confidentiality agreements to protect ideas
Start-ups are often eager to showcase their ideas to potential investors, partners or manufacturers. However, they sometimes forget that these ideas can be shared in confidence and kept secret.
Start-ups should consider using non-disclosure agreements (NDAs), also known as confidentiality agreements when disclosing ideas or commercially sensitive information to a third party. A non-disclosure agreement is a legal contract which outlines confidential material or information that the parties wish to share with one another for specific purposes. Common examples include customer lists, business plans and technical processes. Without an NDA, there is a risk that others may use your ideas or material without your permission.
Start-ups are also sometimes quick to sign an NDA which another party asks them to sign; without fully checking the terms carefully. This can lead to unfair restrictions being placed on the start-up’s business activities or placing onerous burdens on them that they are unable to comply with. If you are unsure of the terms of an NDA, you should seek professional advice.
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