Introduction
There are countless legal hurdles that Colorado start-ups face that can prevent them from being successful businesses. Discussed here are entity selection, brand name clearance, founders, intellectual property, raising capital, employment laws, and equity plans. Many of these issues must be resolved at the outset of the company and should be addressed prior to transacting business. On the bright side, many of these issues are easily managed by attorneys in this space. This checklist identifies some of the more common legal issues that start-ups should consider. This is intended to be an overview and should not be relied upon by businesses without proper guidance.
Entity Selection
Changing your entity type after your business has grown can be expensive and time consuming. Select the correct entity at the outset by having a clear picture of the company and its goals. Some issues to consider when forming an entity include:
- Who the company seeks to raise money from?
- What sort of exit the founders are considering in the future?
- What are the founder’s goals for growth of the company?
- Are the founders protected from liability for the company’s actions?
- Are the tax implications of a particular entity well understood?
For a comparison of Colorado corporations vs LLCs click here.
Brand Name Clearance
Prior to forming your business and settling on a brand name, logo, domain name, etc., it is important to conduct the necessary searches. Ensure that no other company or person already has rights to the same name that your business wants to use. Necessary searches include:
- A search with the Colorado secretary of state for business name availability
- A search with the USPTO to ensure no brand names, logos, colors, etc. are already trademarked
- A search with the U.S. Copyright Office to find potential conflicts. A broad range of works can be copyrighted (think anything creative like literature, music, drama, etc.)
- Potentially, a patent search
- Domain name availability
Failure to conduct these searches or not conducting them properly can have significant consequences. This includes forfeiture of any profit made on an already trademarked item.
Relationships of Founders
The relationships of the founders should be formalized and documented in case of any disputes or bad break ups. Agreements between founders can include:
- Ownership percentages
- Roles and responsibilities
- Decision making powers and processes
- Dispute resolution procedures
- What happens when a founder leaves the company
Intellectual Property
One of the main legal issues start-ups should consider is intellectual property. IP strategy is critically important for start-ups. Failure to properly protect IP could lead to significant costs as the company grows. A business should:
- Determine the proper IP protection it needs (trademark, copyright, trade secret, patent) and takes steps toward gaining that protection such as detailing the process and the cost it takes to obtain the protection
- Ensure that the company owns all of its IP or at least licenses it (issues can arise with employees and independent contractors)
- Have the necessary agreements in place with employees and independent contracts such as confidentiality/non-disclosure agreements and proprietary rights agreements
- Clear third-party content to ensure that the company is not infringing on the rights of others
Raising Capital
Raising capital is an important step in the business cycle for start-ups, however, it is crucial that a company comply with both federal and state securities laws when doing so. This can generally be done through a private placement, however, a lawyer who is experienced with securities should absolutely be consulted. A few issues that arise with raising capital are:
- Ensuring that securities are sold through a valid exemption from both federal and state registration, which is an expensive and time-consuming process
- Issuing to non-accredited investors
- Not having adequate agreements in place with investors like subscription agreements and shareholder agreements
- Not complying with the required filings or notices
Consequences of not complying with securities laws include:
- Right of rescission by investors
- Regulatory action
- Not being able to raise money in the future under certain exemptions
Employment Laws
Not all start-ups have employees at the outset. But most start-ups that undergrow growth find it necessary to hire employees at some point. When that occurs, the company should ensure that state and federal employment laws are complied with. Things to consider are:
- Wage and hour laws such as exempt/nonexempt status, minimum wage requirements, and overtime requirements
- Correctly classifying independent contractors (there is generally a four or five prong test to determine whether a person is an independent contractor or employee)
- Complying with paid sick leave laws
- Having in place written policies or employee handbooks
- Clarifying which employees are at-will and clearly specifying this employment relationship in offer letters, agreements, and handbooks
Equity Plans
Often, executives and employees of start-ups put in significant effort towards the growth of the start-up but their compensation in the short-term is not proportionate to the amount of work they put in. In order to incentivize employees and executives, companies can use equity plans to issue options and restricted stock which may vest at a later date. With equity plans, companies should consider:
- The types of equity that is best suited for a particular executive or employee and the structure of the equity plan
- The tax implications of different types of equity
- The implications of equity plans for future investors (options must be included in the outstanding stock to have an accurate picture of who owns what portion of the company)
- Compliance with securities laws when issuing equity compensation
Companies should also consider having executives sign employment agreements which can include provisions detailing compensation, severance, tax issues, and restrictive covenants.
This article only serves as an overview of legal issues that start-ups should consider, by no means is it exhaustive or comprehensive. Please reach out to Miles Williams at miles@mwlegalgroup.com with further questions and for help with your start up! View our services to see how MW Legal Group can help you.
