4 Legal Issues Entrepreneurs Should AddressBy Jeff Koegel on June 25th, 2015 /
Entrepreneurs are great. They see a problem, develop a solution, and dive head-first into implementing it. It is an enviable line of work but often laden with risk and without sufficient resources to endure multiple missteps. For those reasons, entrepreneurs pride themselves on running lean. As an attorney, however, I feel compelled to mention a few relatively inexpensive legal precautions I wish entrepreneurs would take early on in order to prevent greater headaches down the road.
Put Your Intentions in Writing
Many entrepreneurs are great collaborators, but they are also often not so great at putting into words exactly what each member will contribute to a project.
For example, let us assume Aaron and Barry are working together to create a new mobile game. They enjoyed working together but they never really discussed what each’s role would be in the Company aside from agreeing that each would own 50% of the Company. After a few months, they have a falling out because Aaron is dedicating significantly more time and effort to the project. Meanwhile, Barry is working 40 hours a week at another job. Though Aaron has unquestionably done most of the work creating the game, Barry still owns, as was the agreement, 50% of the Company. This seemingly unjust result is a common byproduct of the failure of founders to properly articulate their visions and apportion their interests into a formal agreement.
Coming to the appropriate contract terms by way of a formal agreement can be an uncomfortable and tense exercise, so the necessary documentation is often avoided. It is essential, however, that these issues are not left unresolved and that the Aarons of the world establish, up front, agreements that better reflect their “fair” share before problems arise.
Secure Your Business Identity
Owning your unique brand name or mark is crucial to your business at its inception. You should not be investing your resources into a name you do not own, cannot use, and which may expose you to legal liability from another similarly named business. Furthermore, investors may be reluctant to get involved in a business that does not own its name rights.
Registering your name/marks with the U.S. Patent and Trademark Office is one of the best investments you can make for your business. Although you do get some rights automatically by being the first to use a unique name/mark in connection with the sale of your specific goods/services, registering your name/mark for federal protection arms you with significantly greater protections.
Since trademark rights can be confusing (even for lawyers and judges), they are often difficult and expensive to protect in legal proceedings. Registration of your marks, however, provides you with a presumption of ownership (among other beneficial rights), which settles much of the confusion that ordinarily exists when disputes arise over the use of similar marks. It turns out, then, that registering your marks can be a tremendous cost-saving measure.
Assign Ownership to Your Intellectual Property
Most start-ups are light on assets and, instead, derive their value from their intellectual property (“IP”). Yet, the question of who owns the IP can become a murky issue when you have several partners, employees, or collaborators involved in a shared endeavor. It is, therefore, important to have in place formal agreements which govern who owns what rights to the IP.
For instance, copyright rights generally attach automatically to the authors (e.g. creators) of original works fixed in a tangible medium (e.g. books, photographs, software code, etc.). So, if a work was co-authored by Aaron and Barry while working for Company, each may have equal rights to it. If Barry leaves the Company,
Barry may continue to exercise his separate and equal property rights to the work made with Aaron. This could be devastating to Aaron’s Company if Barry begins competing with Aaron.
One way to avoid this problem is to have agreements in place where the parties agree that any and all IP they create is the property of the Company and they have no individual and/or separate rights to any Company IP. That way if Barry leaves, he does so without any rights to use the Company’s IP which he helped create.
Protect Your Trade Secrets
Other legal agreements with which every entrepreneur should become familiar are Non-Disclosure Agreements (“NDAs”) and Non-Compete Agreements. NDAs are customarily used when a company shares its valuable trade secrets with a third-party in order to work together for a limited purpose. NDAs articulate the purpose of the agreement, the proprietary information being shared, and the remedies available to the sharing company if the third-party breaches the agreement. Since the value of trade secrets are difficult to determine, the NDA acts as an assurance that the sharing company will have some readily available relief against a breaching third-party.
Non-Competes, meanwhile, are agreements between companies and their employees whereby the employees will agree not to leave and compete with the employer for a limited period of time and geographic distance. Since a company may need to share its trade secrets with employees in order to carry-out its business, Non-Competes are effective at dis-incentivizing employees who may wish to leverage knowledge of the company’s valuable trade secrets into a better job with a competitor. Non-Competes, however, must be crafted carefully in order to be enforceable as many courts dislike prohibitions on competition and limitations on worker mobility.