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Contxto – Hiring a legal advisor from the get-go could potentially save your startup from lots of trouble. Matters like vesting schedules, tech agreements or terms and conditions should be of the utmost importance for entrepreneurs, yet sometimes fall by the wayside.
Entrepreneurs must juggle many things, legal advice being one of them. For many, though, this can be overwhelming. Especially if you are busy trying to grow and secure funding for your startup.
If you have no idea where to start, there’s no need to worry. I recently got some great legal tips for startups from Lexgo’s COO and co-founder, Juan José Figueroa. Here is some legal advice for startups from the Chilean entrepreneur.
A little bit on legaltech
On the plus side, now there’s legaltech to simplify matters. Legaltech is the technology created to make law services quicker and more efficient. Thanks to it, startups can obtain legal assistance through agile and cost-effective means.
“It is disconcerting to hear why traditional providers have resisted adopting these technologies since it is more lucrative for them to be inefficient in their work” commented Figueroa. “This is the reason why the change in the industry will come from the hand of legal startups, and not from law firms.”
Without further ado, here are a few things to keep in mind for your startup.
Hire an advisor from the start
According to Lexgo and its experience both as a startup and a legal consulting company, it is overall less costly to higher an advisor from the start. Hiring a lawyer for each individual case may cost you more than just having one accompany you along the way.
Sometimes, there might not be enough money for this at the beginning. However, it is important to take into account these expenses from the start. If you have the capability of hiring an advisor from the start go for it.
Create a vesting schedule
Vesting defines when and how shares and profits are distributed between the company’s members.
“In the beginning, every startup needs to be established by protecting the interests of the founders and their investors, which makes it essential to have the vesting of their shares,” said Figueroa.
Whether you realize it or not, vesting can make or break a startup. The right terms can allow a founder to walk away from a venture without accruing any damages. That’s to say, they’ll still be able to legally claim a share of the profits, but that’s only if they have their ducks in a row sooner than later.
With a vesting schedule, startups can ultimately come up with a plan to protect both the business and their interests.
A vesting scheme also creates a legal commitment between business members. Statutes regarding individual shares or guidelines pertaining to time served at the company can all be settled. Included is also the amount of equity that companies can buy back from partners who may forfeit ties with a company.
Don’t forget to make a Technology Assignment Agreement
Technology Assignment Agreements protect startups from potential legal battles regarding intellectual property. By assigning the ownership of the technology to a startup, you are essentially becoming its intellectual owner. Anybody who wants to obtain this property will have to go through you, but that’s only if you have a patent.
Truth be told, founders really ought to put all ownership of intellectual property in writing. It’s imperative that this is done while the company is still reaching a legal status.
“Any technology that has been developed prior to the creation of the company or during its validity must be assigned to it to avoid controversies about who owns it.” shared Figueroa with Contxto.
An assignment protects startups from losing their rights to use that technology in case somebody leaves the company and later wants to exclusivity claim its use. Nevertheless, the developer may still have some intellectual rights over it. This really depends on how the agreement is specified.
Another reason why these agreements are so important is that investors usually look for them. They’re kind of like a good sign of faith. Sometimes, this could be the deciding factor if they decide to invest or not. Besides, it will keep copycats and patent seekers away.
Be specific about your terms and conditions
A Terms and Conditions contract is also a necessity for startups as well as customers. This might not be at the top of an entrepreneur’s to-do list but it is certainly important.
Having this all cleared up earlier than later will protect your business and content, avoid misuse, limit the company’s liability and of course, save you time and money.
“Terms and Conditions must clearly state what the startup services consist of and their extension. This is in most cases the only contract startups will have with their clients.” This goes specifically for software startups, according to Lexgo’s advisor.
As Figueroa said, it could very well be the only contract you have with a client. That’s why it needs to be clear and specific.
Plan your Cap Table ahead of time
A Capitalization Table, also known as Cap Table showcases the company structure. Here, everyone who owns equity is listed. Founders tend to go first, followed by investors, and finally, employees with equity and executives might also be included.
“It is important to formalize each capital raising so that there is enough space in the Cap Table for later rounds. Therefore, it’s suggested at early or Seed stages to only do so through Convertible Notes or SAFE funds.”
Having too many investors or executives listed in the Cap Table might make it less attractive for future funders.
Convertible notes are great at early stages since you don’t have to determine their value immediately after the investment. On the other hand, a Simple Agreement for Future Equity (SAFE) works pretty much the same way. The only difference is that these don’t yield interest or maturity dates.
To reiterate, try to plan beforehand who will be part of the Cap Table. Set it up by stages. Perhaps if you’re lucky, you won’t have any trouble raising funds in the future. Even better, maybe you’ll be able to offer a fare share of equity to investors.
Hopefully, with all of this advice, you feel a bit more ready to tackle all of your legal needs. You know what they say, the early bird gets the worm. The sooner you hire an advisor and arrange all of the necessary documents, the better!