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Common legal pitfalls for start-ups

The road to success is a slippery one at best

Excerpt from QUT blue book

There’s nothing quite like starting up a new business venture to get your heart and mind racing.


In the whirlwind of ideas, obstacles and conversations, it is all too easy to focus on the aspects of the business you are most familiar with or passionate about, without taking the time to properly establish yourself in a legal context. But this really is a case of a ‘stitch in time saves nine’. Formalising relationships and agreements through legal contracts is your front line defence against future disputes or potential losses.

“The key is not to prioritise what’s on your schedule, but to schedule your priorities.”  – Stephen Covey, Author, The 7 Habits of Highly Effective People.

Start-up Matrix

The formation and growth of a business is not a linear experience, and every business has different needs at different times. The team at Redchip has developed a Start-Up Matrix (in conjunction with our Start-Up Tool Kit) as a framework for outlining the common stages of a start-up’s life and the corresponding considerations and documentation.

Strategy

As soon as you decide to set up a business, it’s time to start considering your strategy. This includes discussions around what you want to do, where you want to go, how you are going to get there, who is going to help you and how you are going to make money. At this stage of your venture, some critical issues include:

  • Do you need to keep your idea confidential? This can be done using a simple non-disclosure agreement (NDA) whereby the recipient of any confidential information is bound by an obligation of confidentiality. Whilst it is not feasible (or necessary) to have every person you approach about your new venture sign an NDA, you need to consider the context (who you are meeting with, nature of discussions, current stage of matrix). If you are intending to seek patent protection at any time, NDAs are especially important.
  • What is your business name going to be? Along with registering a business name with ASIC, it’s important to check whether there are any existing registered trademarks that you might infringe if you adopt a particular name.

Foundation

The foundation is at the centre of our matrix, as your structure underpins every aspect of your business. It is important to start with the end in mind as it can be a costly and difficult exercise to change your structure down the track. If you intend to seek investment or ultimately exit from your business at any point in time, getting your structure right is paramount. In this phase, important legal considerations include:

  • Company Incorporation: Whilst you can operate a business as a sole trader, in a partnership or in a trust, an incorporated (proprietary limited) company structure is the most appropriate vehicle and provides the greatest flexibility moving forward.
  • IP Assignment Deed: In order to appropriately transfer ownership of IP, this needs to be documented in writing and assigned by the creator. Most people erroneously believe that if you have paid someone to create IP (including copyright), you will own it – that is not the case. To the extent that anyone has helped create logos, websites or develop code, an IP Assignment Deed (or at the very least, a provision in an agreement assigning IP) is required. This will help to avoid future claims on the company from undesirables when your start-up gains traction.
  • IP Licence Agreement: An IP Licence grants a related entity or an unrelated third party the right to commercialise the IP in some way. For example, you may have a corporate group structure whereby an R&D entity licences a trading entity to engage with end users, utilising the IP created.
  • Shareholders Agreement: Sets out the rights and obligations of shareholders and directors of the company and provides the ground rules for how the company will operate and mechanisms to deal with disputes.

Start

Time to launch and start making some money! As you start interacting with customers – be it online, in store or via provision of a service – some rules and agreements are required around how these interactions should take place:

  • Terms & Conditions: These can apply to buying, using or in any other way interacting with your business, products or services.
  • Website Terms & Conditions: The rules that define how people use your website, and what rights you have when they do.
  • Trading Terms & Conditions: Your standard terms for selling goods or services, for example the length of the warranty.
  • Privacy Policy: Relates to the personal information you collect and retain, and how your business will use it in accordance with privacy laws.

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This is an excerpt from a chapter contributed by Redchip to the QUT blue book: Tips for Start-up Founders at QUT. Redchip is an active participant in the start-up community, particularly in terms of supporting initiatives to foster entrepreneurialism and innovation in Queensland. To read more about this topic and other insightful tips for start-ups, you can download a free copy of the book here: http://www.qutbluebox.com.au/book.

If you would like to know more about Redchip’s Start-Up Tool Kit and establishing the legal foundations for your new business, please contact Tim Gerbanas on 07 3223 6100 or email timg@redchip.com.au.

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