Where do you start when you want to navigate the legal technicalities of setting up and running a business? From this next material you will learn what the main things to consider are.
If this is the first time you are starting a business, it's normal for you to feel overwhelmed by the idea that you have to deal with all the legal aspects of your business and that it will cost you time and money. The feeling is even more pressing when you're starting the business yourself, and you’d rather direct your time and money to developing the product and the business (although you cannot actually call it a business, at least not a business one can invest in, if you don't have the legal matters of the business covered). The key to keeping all legal matters under control is the same as for any other aspect related to starting a business with limited resources: prioritization.
In order to be able to prioritize reasonably, you need to determine which criteria are most relevant to you and your business, because most often these criteria are not relevant to all startups. The experience shared by other founders is valuable, but you must pass it through your own filter. Here are some ideas to help you determine your own criteria and define your priorities.
Set up a company
When you're still at the idea stage and thinking about where to head from there, you don't need any form of organization. But you should seriously consider establishing a trading company (you should not take into account any other form of organization) later on, when one of the following becomes imminent:
You are not alone, and you either have or want to attract a co-founder
You develop substantial intellectual property items
You contract suppliers, including those who contribute to the development of the intellectual property items
You want to hire your first employees
You have your first customers
There are some situations in which you could get by without setting up a company even after some of the aforementioned situations occur, but you could make your life significantly easier by using a trading company as your business vehicle from the very start.
When deciding to start a company, an LLC is obviously a no brainer for an early-stage company (unless you will be operating in a regulated field, e.g. financial services, which requires you to set up a joint stock company). It takes little time and money to set up an LLC. You don't have to worry about having complex company rules, unless you have co-founders.
And even when there are two or more co-founders, the corporate governance approach in the company (through the Articles of Incorporation and, if you don't like simple things, through the Shareholders' Agreement) depends a lot on the connection between the co-founders, the level of trust between them and their willingness (some would even say recklessness) to postpone some complex discussions about control and financial aspects for a later time.
But what I can say from experience is that many times, after the romantic period of the early days is behind you, and the financial stakes increase, some co-founder teams no longer collaborate as harmoniously as they intended at the beginning. That's why it's worth having clear, even if more complex, rules regarding the relations between the partners from the very start. And when you create these rules, focus on the only two aspects that really matter in the relationship with any co-founder or investor: decision control and financial aspects.
Pay attention to the essential regulations
There are many regulations relevant to any business, but not all of them have the potential to destroy your business if you do not comply with them. Your goal should be to comply with all regulations from day one, but you have to take into account that in certain industries (for example, financial services, medical services, energy, etc.) and depending on the product you make or the business you develop, you cannot start operating legally if you do not meet strict regulatory and authorization requirements.
These are the ones you need to prioritize, scrutinize and make sure you adhere to. If you do this early on, from the idea stage, you will be avoid working unconsciously in a direction where regulatory barriers may be insurmountable.
Protect your intellectual property
Not every start-up is designed to develop and own significant intellectual property. If you're starting a business in a field that doesn't involve technology, chances are the most important piece of intellectual property in your business's assets is a trademark. Even in such cases, however, it is advisable to handle the protection of your intellectual property from the early stages of the business.
In case of a brand, first of all make sure that your brand does not infringe the intellectual property rights of third parties by being identical or similar to theirs. It's worth investing resources to make sure of this before you start promoting your brand or trade name and spending money on marketing.
This is more important when starting a B2C business than when you have a B2B product or service. Dropping a brand because it infringes another third-party’s rights and starting a rebranding process after you've already started spending money on PR and marketing can be more expensive and generally more detrimental to the success of a new B2C business than a B2B one.
When it comes to software and the intellectual property rights associated with it, protection can be ensured through agreements executed with the people and entities that contributed to the development of the solution. That is why it is important for any contribution to the development of the software to be based on an agreement (e.g. software development agreement or employment agreement) executed before any person or entity actually starts working on the software in question. More often than not, when you don't do this from the very start, you'll have to put in significantly more effort later to straighten things out.
It is not uncommon for investors to require founders, as a condition in the investment documentation, to obtain assignment statements or other intellectual property transfer documents from former collaborators of the founders who contributed to the development of the software (and who are not easy to track down anymore or who think they could take advantage of the situation to get some money from the founder which is about to receive an investment).
Draw up a decent set of contractual terms for your customers
A decent set of contractual terms actually means a contract that is as clear, concise and balanced as possible according to the sold product or service, adapted to its specifics, which does not expose you to major commercial risks and which is not burdensome for the customer.
For such a contract it is worth discussing and working with someone with experience. You will find that any cost incurred for the preparation of such a contract will often be compensated by 2 major advantages that you will get:
you will save a lot of time and energy in negotiating the contract with your customers;
you will be perceived by your customers (especially large ones, who have experienced procurement and legal departments) as a serious supplier, which approaches any contractual relations maturely and deserves their trust, even though you are a young company.
All the above is particularly valid in B2B relationships, but do not be tempted to neglect the contractual terms when operating in B2C relationships, especially since in the latter case you may be subject to the general consumer protection regulations or, to particular ones applicable only in certain sectors. If you pay attention to all of the above and prioritize them according to the specifics of your business, you will consolidate your business and be prepared to effectively prevent or address major risks as they arise.
Catalin Grigorescu has been, for many years now, a Managing Partner and leader of the technology advisory and transaction division of bpv Grigorescu Ștefănică Law Firm, which is one of the top law firms with a Technology, Media and Telecommunications division of Romania. Cătălin is also an investor in Innoship and company adviser.