You have your idea, you have your team and now you are ready to launch your new company. Here are two legal pitfalls that can seriously jeopardize the long-term viability of your startup if not taken care of out of the gate:
1. Failure to align founder expectations. The quickest way to kill your startup is to have misalignment of founders’ expectations.
a. Founder ownership allocation. Who is contributing intellectual property, who is contributing cash, and how much ownership will be allocated to each founder? Who will have voting control (e.g., will major decisions require the approval of a majority or require unanimity)?
b. Founder time commitment. What is the expected time commitment for each founder? E.g., full-time or part-time and how many years/months will the founders dedicate to making sure the company is able to get off the ground (before they go looking for another job)? Will the founders be allowed to pursue other business ventures and/or jobs? Will all or a portion of each founders’ stock be subject to a founder stock repurchase agreement with reverse vesting schedule, and if so, what is the vesting term?
2. Failure to secure your intellectual property. Everyone knows that it is critical to protect your company’s intellectual property, but the first step is making sure your company actually owns the intellectual property. In the flurry of activity surrounding company formation, an often overlooked step is to make sure all founders and consultants assign their work product (both initial and going forward work product) to the company before they begin work. Attempting to obtain retroactive assignments of intellectual property can be difficult and expensive.
I recall one situation where two founders developed some technology and then formed a company to commercialize the same. Fast forward a year later, and while the technology was gaining significant customer traction, the relationship between the two founders was becoming increasingly contentious and the founders (not-so-amicably) decided to part ways (one founder left the company and the other stayed put). Neither founder had properly assigned their ownership in the underlying intellectual property to the company. The founder who left the company then licensed the intellectual property to a competitor.