10 “Dos & Don’ts” for Startup Business Success
As we head into the new year, Goodlawyer’s Startup Lawyer Marty Finestone has provided a list of 10 tips to steer your startup in the right direction. If you haven’t talked to a lawyer about your business’ specific circumstances and needs in the new year, now is a great time to schedule a call with a lawyer in your industry. Get started with Goodlawyer
1. DON’T issue founders equity that doesn't vest
It’s important that you don't give anyone shares based on what they're planning to do. Even the best intentions don’t always pan out, and once you've given someone shares without any contract around it (like a shareholders agreement) they can do whatever they want with those shares. The minimum vesting time frame is at least a month, then they've only got a month's worth of shares if they leave after a month. If you give them all the shares upfront and there's no vesting, they can leave after a month and take all that equity with them.
2. DON’T issue all the equity in your company to founders
You want to keep at least 10-20% (no more than 20%) of your equity pool to incentivize your employees. When you work with a (good) lawyer, you can make sure you're reserving the right amount of equity and then draft and approve a stock option to grow your team with top talent. Learn more about Optimizing Your Startup’s Equity Compensation & Stock Option Strategy.
3. DO know who owns your Intellectual Property
Whether you’re working with service providers, contractors, or employees, it’s important to clarify who owns the intellectual property and, more importantly, have a contract to make sure your company owns the IP it paid that person to create.
In Canada, there isn’t a “work for hire” concept. Meaning, if you pay someone who is not an employee to create something for your company, they keep the IP rights unless you have a written contract transferring those rights to you. Not only do you need that contract in Canada, but you also want all creators to waive their moral rights (a form of personality rights) in what they do for you.
So don't even think about using that U.S. template you found online. Learn more about how to determine who owns the IP associated with your business.
4. DON’T use legal templates
We know, it’s tempting. They’re typically less expensive, and easy to run with, but there are nuances they might not cover for your business. We’ve seen founders run into a lot of trouble with templates that come back to haunt them — especially later when they’re having a serious investor come to the table doing thorough due diligence. Put your contracts to the test and have one of our Good Lawyers review your contract.
5. DO ensure you issue the right kind of equity to employees
Having clear business goals from the outset helps keep the law on your side. You want to ensure the right kind of equity for the context and think about things like having restrictions on voting rights. Working with a lawyer can help your company for investment while protecting yourself from personal liability, as well as the core legal documents you’ll need to get there!
Learn more about structuring your business for success.
6. DON’T take money under a SAFE without understanding how the conversion works.
SAFEs might seem like the simple way to raise money because you can push everything to the future. But too often, founders aren't taking the time to understand the ownership impact when that SAFE will convert to equity. It can be a shock when you realize how much equity you’ve given away once the SAFE converts. Talk to one of our lawyers to see if SAFE financing is right for your business.
7. DO have NDAs in place when hiring an independent contractor or employee.
Always have a Non-Disclosure Agreement (NDA) with your independent contractors and employees. This allows your employees, consultants, and service providers to know what information is confidential and the consequences they can expect if they breach their obligation to keep that information confidential. Simply put, without a legally sound NDA, it’s your word against theirs with a confidentiality breach.
Learn more about Non-Disclosure Agreements.
8. DON’T feel the need to send an NDA to everyone and their dog
We know we just said to use Non-Disclosure Agreements but sending an NDA for the sake of NDA becomes a hassle. They’re important when you're sharing or talking about something confidential. Otherwise, it's adding another contract that may be unnessesary. If you’re still unsure whether to divulge information, then we recommend you book a strategy session with a Good Lawyer.
9. DON’T collect or do anything with personal information without understanding the privacy laws in Canada, U.S., or Europe.
A company needs to comply with the privacy legislation of the jurisdiction the data comes from. For example, if you have European users on your app, you must comply with the GDPR, even if your business is located in Canada. It can start to get more confusing as different privacy legislations across the globe have different requirements. Not only that, but you should also understand whether you need to collect certain personal information. Best practice is to only collect the personal information you need to have.
Learn what you should know if your company is collecting personal information internationally.
10. DON’T send emails without understanding Canada's anti-spam laws
Our anti-spam laws are broad, even having a signature with your logo and a link to your website’s address means suddenly, you must fulfil all the legislative requirements. Best to read up on it, or better yet, come talk to a Good Lawyer to make sure that you're on the right side of the law.
