Starting a new business is exciting and you may be tempted to rush into sales immediately. However, start-up success depends heavily on taking the necessary legal protections early on. This article outlines five legal hacks to safeguard your start-up for success.
1. Protect your intellectual property
Trade marks are particularly important for start-ups, and must be formally registered to be protected. They protect an identifying aspect of your start-up, such as a logo, colour, sound, scent, picture or phrase. Once registered, a trade mark gives the owner exclusive rights to use, sell and licence whatever has been marked.
Start-ups should also include intellectual property assignment clauses in their business and employment contracts. These clauses set out who owns the rights to the intellectual property of your business. In most cases, you want intellectual property rights to be assigned to your business. For example, if someone has created a logo for your start-up, you may wish to agree contractually that their rights in the logo have been assigned to your business. This prevents costly disputes about intellectual property ownership arising later in time.
2. Incorporate restraints of trade
Restraints of trade are contractual clauses applying to employees who leave your start-up. Generally, restraint clauses will prevent former employees from competing against the business or taking clients from the business after they have left. For example, a restraint clause may provide that an employee may not start another business in the same market within 20 kilometres of the company’s location within three years of ceasing employment. Restraint clauses are only enforceable to the extent that they are reasonably necessary to protect your legitimate business interests.
When incorporating restraint of trade clauses, start-ups should consider how far the restraints extend. Notably, restraint clauses which are too long in time or cover a large geographical area may not be considered reasonably necessary to protect legitimate business interests and may therefore be unenforceable by courts.
3. Check your contracts
Contracts are the main source of legal protection for your start-up. Any agreement you have with a supplier, manufacturer, employee or other business should ideally be in the form of a well-drafted written contract. A good contract clearly sets out the rights and responsibilities of each party to the contract so there is no confusion if a dispute arises.
Importantly, start-ups should ensure their contracts have no unfair contract terms, as these are unenforceable. Unfair contract terms are terms which create a significant imbalance in the parties’ rights and obligations under the contract, are not reasonably necessary to protect legitimate interests of the benefiting party to the term, and cause detriment to a party, whether financial or otherwise.
4. Develop strong policies and procedures
5. Do your due diligence
Due diligence is one of the most important processes for start-ups as they enter any mergers or investments. The process involves understanding the risks and uncertainties of a business before making an investment or entering a business deal. Investors looking to enter into an agreement with your start-up will look at your financial statements and processes as part of the due diligence process. Accordingly, it is crucial that start-ups have proper financial records in place and are transparent about their assets and liabilities.
Building a successful start-up is about having detailed agreements, processes and protections in place from the outset. For the best chance of success, start-ups should:
- Register their trade marks and protect their intellectual property;
- Incorporate post-employment restraints of trade in their employment contracts;
- Maintain properly drafted contracts with no unfair terms;
- Have detailed processes and policies in place; and
- Ensure they are transparent with their assets and liabilities for any potential investors or other businesses engaging in the due diligence process.