Legal Concepts and Best Practices Every Startup Founder Should Know
When starting a company, it can be tempting to get caught up in the exciting stuff—perfecting the product or service, brainstorming with colleagues, coming up with a great name—while putting off more mundane tasks like filling out a bunch of paperwork and going over contracts. These activities might seem tedious, or even daunting, when working through the early stages of a business, but putting a company on a solid legal foundation at the outset can spare its founders a lot confusion and trouble down the line. In a recent presentation at the AWS Loft in New York City, Paolo Cioppa, an assistant deputy general counsel at the blockchain technology firm R3 and a professor at Fordham University School of Law, addressed four key topics associated with founding and growing a startup:
- Trademark, copyright, and patent protections
- Deciding whether to become an incorporated entity
- Non-disclosure agreements (NDAs)
- Founders agreements.
“Try to be very mindful of the preliminary steps,” said Cioppa. And be sure to get an expert to oversee those steps.
In the first part of his talk, Cioppa lays out the differences between trademarks, copyrights, and patents. He describes how to consult a lawyer to determine whether applying for such protections is necessary, as well as the usefulness of enlisting someone who specializes in the particular type of protection being sought. He also gives examples of how to increase a company’s value through licensing its intellectual property.
Next, Cioppa explains how to decide whether to incorporate a business and, if incorporation is appropriate, how to choose the the kind of entity to incorporate as. He outlines the advantages of forming a limited liability corporation (LLC) and why it is generally a better option than operating as a sole proprietor or general partnership. He also compares the benefits and drawbacks of incorporating as a C corporation or an S corporation.
Cioppa goes on to emphasize the desirability of using NDAs from the very beginning of a business, when a founder will likely be discussing their ideas and plans with a large number of people (including potential partners). He explains how to draft an agreement that will serve the founder and company well, stressing the need to have an attorney create an NDA template that can be used with all clients and the importance of making the terms of the agreement mutual and indefinite.
Finally, Cioppa urges startups to bring in attorneys to put together a founders agreement, which should be of interest to anyone looking to avoid a “Social Network”-esque situation. “It’s a contract that company founders enter into themselves, and it governs their business relationship,” he says. “They really outline the rights, the responsibilities, the liabilities, the obligations of each of the founders. They are heavily negotiated, so [there’s] not really a template that you can use.” Getting as much as possible into writing “[makes] it a lot, a lot, a lot easier.”
“People sometimes underestimate lawyers because we are annoying, and we come there, and we just create problems. It’s not necessarily true,” says Cioppa. “Good lawyers solve your problems earlier on and create legal documentations that are going to help you effectively manage your business.”