Ever hear the following? “For your tech startup dream team, all you need is a hustler (your salesperson), a hipster (your designer), and a hacker (your coder).” You likely have heard this, because it’s repeated so often that it’s now practically industry dogma.
But startups are never quite so secure; the waters surrounding them are fraught with risk — in the form of legal liability. That’s why you need one additional player on that dream team: competent legal counsel (a.k.a your “Shark”). And if you’re still skeptical, consider the following five reasons why:
1. Founder conflicts
In a perfect world, a startup business would roll out following a well-structured plan. In reality, startups are multiple acts of improvisation and agile adjustment; and in a multi-founder company, people’s commitment and input to the enterprise may change over time as economic, personal and market realities unfold. Your Shark can help your team create written operating agreements so that roles and expectations are established from the outset and ownership is apportioned fairly and in accordance with the value that’s been created.
2. Employee matters
In addition to other founders, employees provide critical input for your business. At a minimum, you’ll need employment and confidentiality agreements to protect the interests of your company. But employment agreements and incentive plans can’t be done willly nilly, and a shark can keep you in compliance with state and federal tax regulations. If your startup is cash-constrained and you contemplate offering “deferred compensation” (don’t!), your Shark can help you structure agreements to prevent employees or founders from falling prey to any unintended tax traps.
3. Patents and trademark issues
Intellectual property (IP) is foundational to your company’s value. Whether it’s in the form of software code, trade secrets, trademarks or patents, IP is vulnerable. And the least you need to do is work to avoid infringement of others and, even better, stake out some beach-front intellectual property so that you can defend and build your enterprise value.
You also need to ensure that employees and contractors assign works to your company to make your company the sole owner of your IP. Procedurally, the steps needed to protect your IP aren’t complex, but some deadlines are inflexible, so your Shark can keep you on track to protect or build your IP portfolio.
4. Form contracts and agreements
You won’t be taken seriously — especially in the B2B world — if you don’t have professional legal contracts and agreements. And to avoid the downside risk of seeing the value you’ve created collapse from haphazard legal underpinnings, you’ll need boilerplate-form agreements for your terms of service, your privacy policies, non-disclosure agreements and other agreements that can all be easily prepared by a competent Shark but are required to run your business.
5: Compliance with securities law
Many startup entrepreneurs take pride in being nimble and innovative, but when it comes to compliance with state and federal securities laws, there is little room for experimentation. If you expect to issue options or sell equity to employees, friends, family or investors, the involvement of a Shark is required. At best, without one, you’ll be in danger of expensive legal “cleanup” down the road. At worst, you could find your company regarded as unfundable by investors, and you could be liable for civil or even criminal charges.
Regardless of whether your Shark is a founding partner, hired counsel, individual or a composite of these types, his or her addition to your dream team will help you avoid some of the fatal flaws that afflict many startups. So, recruit a Shark at your company’s inception and feed him/her well.