Seed Stage Legal Checklist
By Trent Hooper, Shareholder, Jupiter Law Group
You are likely well aware that minding the legal details of your business can make or break your success. A solid patent and trademark can be the ticket to securing investors and selling at a high value. On the other hand, when legal matters are unattended to, you could see your business walk right out the door with a disgruntled partner. The issues can seem daunting and confusing. But they don’t need to be. This is the first of several checklist articles designed to simplify and clarify some of the most critical legal tasks and documents that should be in place for your business to succeed.
When launching a business knowing when to tackle which legal tasks can be tricky. If you read enough articles and hear enough horror stories you may get the impression that everything is critical and ought to be done immediately. Taking care of all legal issues immediately may be cost prohibitive and not possible. These checklists can help you prepare to tackle the right legal issues at the right time. Our goal is to simplify the issues and help you take the steps on a successful profitable course.
These checklists are designed to help you identify and prioritize your legal needs. This article is not legal advice tailored to any particular case. Nor is any company perfectly protected from legal issues. However, these checklists should help you get a better picture of the critical issues that should be on your radar. To address your specific needs please feel free to contact us, or other competent counsel.
The prices ranges mentioned here are based upon observations in practice and are offered to give you a frame of reference. They are not a guarantee of what any particular firm might charge you. Our firm offers most of these services at a flat rate based on the size of the task, so you have a predictable price from the outset.
Ultimately, having a clear view of your legal needs and a plan of when and how you will put critical pieces in place will give you the confidence and piece of mind that you can grow your business with the confidence that you are protected and on sound legal footing. On to the checklist.
Checklist #1 – Seed Stage
The following are critical at the early stage of development, in the order that they likely should be addressed:
- Non-disclosure Agreements (NDA)
Risk: Losing ownership of your idea. Losing your ability to patent or protect your idea as a trade secret. Risking someone else beating you to a patent.
Cost: $50-$150. In more complex cases this could be higher but should likely not be more than $500 – $1,000
Many businesses lose much or all of their value if they do not own their ideas and intellectual property. You could be sunk before you cross the starting line if you freely talk about your idea with friends, family, colleagues, and strangers without an NDA in place. You not only risk someone stealing your idea, but just as importantly, you could prevent your later ability to patent or protect your idea by trade secret.
A basic non-disclosure agreement nearly eliminates this risk. The standard non-disclosure is less than a page in length and requires parties with whom you’d like to share your idea to acknowledge your ownership and to promise not to disclose your idea to anyone else. The content and strength of the provisions may vary based on the sophistication and threat of the party with whom you are dealing with. In many cases you can get a form NDA that you can use again and again by simply changing the name of the parties.
- Knowing your IP needs – patent, trademark, copyright, or trade secret
Risk: Losing your chance to obtain a patent, delays in obtaining protection, failing to implement appropriate protection.
Cost: Very little, and likely nothing
They say knowing is half the battle. Legally, this is certainly true. Entrepreneurs that ignore these issues can find themselves unwittingly walking into issues that can sink the venture or cause significant financial and time setbacks. There are enough entrepreneurs that ignore their legal needs that simply by understanding your needs, it is possible to gain a significant advantage.
Your product, method, team structure, growth strategy and timeline, competitors, and other factors will affect the type of protection that you need to implement and when. Many intellectual property attorneys are glad to go to lunch or have a consultation with you free of charge to help you build a strategy of what you ought to protect, when, and how much it may cost. In addition to the tactical business this may give you, it will also help you plan your finances, and give you peace of mind knowing that you have gained a grasp on a critical area of your business.
Risk: Exposing your personal assets to your business liabilities, inability to contract, obtain loans, and attract financing.
Cost: $300-$1,000 for a simple entity. This varies depending on the type of entity you need and whether you have bylaws and an operating agreement prepared.
You likely already understand the benefits of incorporating, but the number of companies that I come across that are doing business, but have never incorporated surprises me. If this is you, don’t panic, but this is most likely the item that you should take care of immediately. The risks can be substantial, and the solution is fairly inexpensive and easy.
Legally, some states are cheaper and easier to incorporate in than others. You do not need to incorporate in the state where your principal place of business is located, and there can be some advantages to incorporating elsewhere—including reducing the annual fees and the ability to reduce your personal profile from a predatory litigious competitor or disgruntled client.
The three states known for having the most favorable laws for corporations are Delaware, Nevada, and Wyoming. Delaware has the highest fees to incorporate and maintain a company. Nevada’s fees have been rising as well, as businesses have continued to flock there to incorporate. Wyoming is still very inexpensive to incorporate, and has similarly favorable laws as Nevada. Local attorneys may simply incorporate your company in California, where the fees are higher, and the laws not as favorable in some instances. There are capable firms in Wyoming who can assist in incorporation at reasonable fees. We are also licensed there and are glad to discuss it with you.
- Operating Agreement
Risks: Loss of your invention; loss of your trade secrets; law suits over dissociation of a partner; contention over decision making and control; and more.
Cost: The cost of this is very difficult to predict. It can be as low as $500, but often ends up being quite a bit higher
An operating agreement is a document that controls the critical operations of the company. It addresses a wide range of issues including the decision-making process, tax issues, ownership of intellectual property, how dissociation of a partner is to be handled and much more. Waiting for a problem to arise before deciding a method to address the problem can cause small issues to sink businesses.
For example, you have likely heard of painful stories of a departing partner causing serious problems for a business. While this cannot be entirely prevented, an operating agreement can go a long way to reduce the possibility of a fight. It can give a lot of protection to the remaining partners, and the departing partner that otherwise are not there.
If there is not an operating agreement in place the default provisions of the state’s corporation statutes kick-in and control the situation. Those laws may or may not render a result that the other parties are happy with.
From an intellectual property standpoint, the operating agreement can clarify who owns the intellectual property being contributed to the venture and who has rights in that intellectual property moving forward. When there is no operating agreement, or the operating agreement is vague in defining who owns the intellectual property, it is not uncommon to have a nasty dispute when the leaving party begins using all that he learned in your company, against you at a new company.
You may wonder why the cost is so variable. It is common for people to think they want the Operating Agreement one way and then to completely change course after a week or two of thinking about it. Consequently, it is not uncommon for an attorney to need to draft, and then redraft the agreement two or three or four times. This is ok, just be aware that it can increase the expense.
Risk: Losing your business name or product name. Having to pay a license fee to another party to continue to use the name. Having to defend a trademark infringement suit. Having to contend with a competitor that beats you to registering your name and then demands that you stop using it.
Cost: Typically $1,200-$2,500
Would it hurt your business if you had to change your name? If the answer is yes, you need a trademark. Have you settled on a name that you want full rights to? If the answer is yes, then you need a trademark. Often the cost of renaming would cost substantially more than the cost of a federal trademark. In some respects a trademark is like an insurance policy for your business, but without a monthly on-going premium.
Trademarks can be words, logos, or even colors, sounds, scents, or packaging, that are distinct and help customers identify that you are the source of the goods and services. There are a few instances where a trademark may not be an option. But in most cases, owning the trademark strengthens your brand, helps you build goodwill, and allows you to protect against possible future infringers of your name.
If you are at the point of selecting a business name now is the time to talk to an attorney about the trademark spectrum of distinctiveness so that you can select a strong protectable name. On this issue, an ounce of prevention will go a long way to avoiding cease and desist letters, demands for disgorgement of profits, or other trademark skirmishes down the road. These can be costly fights that could be avoided with a simple trademark. Jupiter Law Group offers attorney guided flat-fee trademark services.
A caution about internet trademark services. There are services that will file your trademark in less than 48-hours for a few hundred dollars plus the federal filing fees of a few hundred more. These services often do little or nothing to vet your mark for defensibility and against potentially conflicting marks. Meaning you could be walking right into trouble, with no attorney at the helm pointing out the hazards to avoid. The trademark process takes about a year and in over 60% of cases requires overcoming an office action issued by the Trademark Office. Online services do not guide you through office actions, or they may, with extra fees and questionable service. So while the price may be tempting, it is not uncommon for these folks to need to also hire an attorney to straighten out the issues with the mark that had originally been filed through an internet service. There are many competent attorneys that can walk you through this process. We offer attorney-guided flat-fee trademark services, and pride ourselves in working faster than traditional firms, at a predictable and often less expensive rate. Feel free to contact us if you would like more information.
- IP Assignment Agreements
Risk: Losing ownership of your intellectual property; complicating your IP registration process.
Cost: Typically $100-$300
An IP assignment is a simple document or portion of a document that states that a party assigns or transfers its intellectual property to your business. These are particularly important when you have a partner or independent contractor joins your venture bringing ideas, creations, processes, drawings, inventions, or other intellectual property that you intend to become a part of the new business.
Once you have a form assignment you can often use it over and over with new independent contractors, partners, employees, and vendors.
Resolve to get your legal matters in order. It’s not as bad as you think and you’ll be glad you did. These issues may seem complex or daunting. They don’t need to be. It’s important to remember that there are professionals out there who love to help innovators and entrepreneurs get it right, and who understand start-up budgets.
This list is not a comprehensive list of all legal issues, but it does cover some of the biggest and most common legal tasks that should be put in place to protect your business and give you a solid foundation for growth.
Stay tuned for our next legal checklist for “Early Stage” businesses that are beyond formation, where we will cover items such as: employment v. independent contractor agreements, license agreements, branding, and more.
For more information, feel free to contact us at www.jupiterlawgroup.com or 916-277-8900.
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