Five lawsuit repellent strategies for start-ups

Directors of start-up companies should ensure they do not take shortcuts when it comes to their legal affairs.
So says Anna Pino, CEO of Lighthouse Business Innovation Centre, who has seen many instances where start-ups have tried to cut costs by copying things like privacy policies and terms and conditions off the internet, putting their businesses at risk in the process.
But while copying documents off the internet is very risky, she says many lawyers would also agree that it is not always necessary for start-ups to come in and see them.
Scott Chamberlain, CEO of Chamberlains Law Firm, says start-ups have more affordable options available to them before they start incurring the hourly fees most people associate with a traditional law firm.
“One of the options available to start-ups is to use online legal documents,” he says.
“While there are many online publishers providing ‘dead’ templates for which they accept no responsibility, start-ups should insist on ‘live’ online documents accompanied by a statement of legal advice.”
Chamberlain provides these five “lawsuit repellent” tips to ensure your business has the minimum viable legal protection:

  1. Shareholders agreement
    Ensure internal relationships are documented and solid. Founders should agree how the company will operate. This will include who will own it and control it, what will be contributed to its success and the circumstances in which people can be forced to leave. Without this agreement, it can be impossible to be rid of under-performers and you may find yourself in business with someone’s spouse or relatives if they die or get divorced.
  2. Remember equity is dearer than money
    Founders can be tempted to offer equity as a way of covering initial costs. This is almost always a mistake. Aside from the complex tax implications, any new shareholder should be bound by the shareholder’s agreement. Having too many small shareholders can pollute your share register and make it almost impossible for your company to restructure or attract new investment.
  3. Non-Disclosure Agreement
    Protect yourself from potential investors becoming competitors. You often have to tread a fine line between secrecy and collaboration when it comes to sharing information about your business. Non-disclosure agreements can protect the confidentiality of any information you might have to disclose when exploring the possibilities of a deal or project with another individual or business.
  4. Terms of Service
    Protect yourself from “deadbeat” clients. In real life things go wrong – for example, shipments are delayed, products break and we sometimes have deadbeat clients. Service agreements and terms of sale documents manage the fallout when things do not go according to plan. Most importantly, they confirm ownership of intellectual property (IP) and limit your liability so that you are not unexpectedly liable for massive damages because of a missed shipment date, or a small-but-crucial failure to perform.
  5. Employment service contracts
    Protect yourself from employees and contractors. Businesses can get themselves into trouble if they do not understand the difference between an employee and contractor. Start-ups can be crippled by unfair dismissal claims from disgruntled ex-employees they thought were contractors or payment of unpaid worker’s compensation premiums. Worse, while employers own the IP their employees generate, contractors own the IP they generate. You may find that someone else owns crucial parts of your business IP.

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