Updated: Jan 4, 2021
As you get closer to launching your new business, there are a host of matters you must plan for. Included in these are selecting an appropriate entity form for your new business, obtaining licenses and permits, purchasing adequate insurance for the business, choosing a business location, tax planning for the business, bookkeeping, classifying new hires properly, and the list goes on. However, much before launch, from the minute you start your entrepreneurial journey, there are a few legal “to-dos” we recommend you include in your initial planning and action items, including,
1. Protecting your intellectual property: Protecting intellectual property associated with your business should be a priority from day one. All businesses derive value from their intellectual property and for some intellectual property are their core assets. Understanding what comprises intellectual property is, therefore, important to adequately protecting it. Almost anything can be intellectual property. The World Intellectual Property Organization (WIPO) defines intellectual property as “creations of the mind – everything from works of art to inventions, computer programs to trademarks and other commercial signs.” Any idea or concept that is a creation of your mind or is unique to your business may be intellectual property. These may include your business's logo, name, formula, code, a manufacturing process, vendor list, customer list, or other information about your product or service. As you work on your new business plan, you may have to disclose your valuable idea or design or innovation to potential collaborators, consultants, others in your industry, or potential hires. Rather than counting on the goodwill of others to not misappropriate your intellectual property, we recommend all new entrepreneurs consider having a strategy in place regarding protection of their valuable intellectual property before they disclose it to others. Depending on the type of intellectual property, you may be able to obtain the protection of a patent, a copyright, a trademark, or a trade secret. We will not dive into the requirements for each in this blog. However, we do recommend consulting with an IP attorney (we are not IP attorneys) to understand what steps you can take to protect any intellectual property related to your business right from the beginning. At the very least, before you disclose information about your non-public valuable assets to others, request they sign a nondisclosure agreement. Caveat: Requesting a signed NDA from professional investors rarely is recommended ---for more on this you may review Cooley’s article “Should you require a signed NDA from a potential VC investor?”
2. Reviewing your employment contracts: If you are planning to start your business while still working at your current job, we recommend you carefully review all your employment contracts, including any non-compete agreement (a non-compete is enforceable in a very limited number of circumstances in California) and confidentiality and invention assignment agreement (CIIA). Many times, employees sign their employment contracts after superficially skimming through them, but these create binding obligations. Hence, as you start a new business, it is in your interest to review your employment contract(s) to ensure you are not encroaching on your employer’s rights or breaching any of your obligations under it. Specifically, examine the presence and scope of any clause that (a) allows your employer to claim ownership of any inventions or innovations you create during the period of your employment (sidebar: for California employees, review California Labor Code sections 2870-2872); (b) restrains you from starting and operating a business on the side while being employed in your current job; or (c) prohibits you from engaging in any competing business during, or for a certain period after, your employment with them. If you are unsure of the applicability of any such clause to your circumstances or want to know if it is valid, it may be worthwhile to consult an attorney right at the beginning rather than when you are knee-deep in your business. And employment contracts may have confidentiality or non-solicitation obligations you should carefully review to avoid being in inadvertent breach.
3. Executing a co-owners agreement: Finally, if you are starting your new business with others (including friends or family members), to avoid any potential dispute regarding your roles or ownership stake (after you have invested considerable time, energy, and resources in building your business), having an agreement in place among co-owners is an initial key step. Typically, this agreement should cover ownership interest of each co-owner, their roles in building the business, contributions being made by each, ownership of any intellectual property being created by a co-owner, authority and decision-making powers, methods of resolving potential disputes, what happens if one of them leaves the business, and overall goal of the business (We will cover co-owner/founder agreement in greater detail in a future blog). Ideally, this agreement should be drafted by an attorney. However, if engaging an attorney is not in your initial budget, consider putting together one based on available online materials and resources rather than not having one at all.
We believe taking care of these three action items are important to avoiding any potential roadblocks to your business's growth.