Several important tasks need to be performed early in the life of a startup to ensure legal safety.
By Yaima Seigley
Driven by the fearless entrepreneurial spirit and relentless innovation of Ohio natives and transplants alike, Columbus is emerging as one of the nation's fastest growing cities for startup businesses. As both a law student and a lawyer, I have worked with several startups and acquired a unique purview into the environments within which they are formed. As a silent observer of startup pitches, I have witnessed the infectious excitement generated by the collective exchanges that occur at these meetings. I often struggle to silence the lawyer within and to simply enjoy the experience. Often, I engage in the same internal monologue: Are any of these startups legally organized? Do they know the pitfalls that await them if they are not? Is the legal community doing enough to help start-ups succeed?
Pitches are crucial to any startup's development. They connect start-ups with potential end-users and investors, providing invaluable feedback used to refine their inventions. In preparing for these pitches, a heavy focus is placed on presenting a "legitimate startup," and limited budgets are often devoted to websites, business cards and other promotional items and little thought is given to the introductory legal organization necessary to start a business. Without properly organizing their businesses, many startups risk damaging personal and business relationships as well as their brand.
Forming a Legal Entity
Before participating in public pitches, start-ups should consider forming a legal entity. The process of forming a legal entity is fairly straightforward and inexpensive. For an hour or two of billable legal time (or sometimes even for free at legal clinics), startups can get advice from lawyers about what legal structure works best for their business before forming a legal entity. In Ohio, fees for forming a legal entity (either a limited liability company or a corporation) cost less than $100. These expenses should be part of any startup's initial budget.
Without a legal entity, the personal assets of the founders may be at risk should the startup get sued. Establishing a legal entity not only protects the founders from financial ruin; it also helps present the startup as a viable business. Presenting the startup as an organized entity helps boost investor confidence and may create more opportunities to secure capital.
Creating a Founders' Agreement
Another important step that is often overlooked is the creation of an agreement among the founding members. This ensures fundamental business decisions are made at the outset and that the founding members share a common understanding and vision for the business.
At minimum, a founders' agreement should establish:the contributions and responsibilities of each founder; that any intellectual property (such as the invention being created) is owned by the entity; the equity ownership and vesting interests among the founders and those to be given to future investors; and an exit strategy for any current or future member that establishes compensation for their contributions as well as a plan for continuing the business.
While capital is a concern for virtually all startups, properly organizing the legal affairs is part of the upfront costs of starting a business. The idea that the invention has to be perfected or the capital must be secured before getting to the legal issues is a mistake. Without taking these important introductory steps, a startup is likely to encounter legal issues early on, and emergency legal assistance will likely prove to be exceedingly more costly.
Yaima Seigley is an associate with the law firm of Isaac Wiles in Columbus. She can be reached at firstname.lastname@example.org or (614) 221-2121.