Creating any tech startup brings with it a range of challenges. There is an obvious need to ensure that the product or service it is offering can go toe-to-toe with any competitors and issues such as premises, staffing and distribution all require careful thought.

However, the legal side of a startup needs to be viewed as at least as important as any other aspect of its activities. This requires identifying and addressing the legal priorities that can be crucial to a tech startup’s future success. Getting the legal matters right for a startup is vital from the beginning if that company is serious about maximising its chance of success. A failure to do this can lead to a range of problems – both in its early stages and later in its existence.

It is an approach that requires ongoing attention, both to ensure that all legal obligations are being met and to reduce the potential for unforeseen legal difficulties. It is also an approach where it is important for the startup to find the best legal partner that can be there each and every step of its journey. Such a relationship is likely to prove a valuable investment as a startup develops and progresses.

A startup faces various legal issues. This article outlines them in a concise way that relates to the various stages that a startup is likely to go through.

Starting Up

It can be a fairly straightforward exercise for an entrepreneur to create a basic legal entity. But this does not mean that the right approach is always taken in such situations.

All too often, the decision is made to go for the cheapest and / or quickest option. That may seem convenient at the time but this can mean that the business lacks a sustainable structure as it grows. It will usually be more beneficial to seek advice about the right way to start - in order to head off potential pitfalls in the future.

When creating a startup, it is important to choose the right legal structure, whether that be a corporation (C-Corp or S-Corp), limited liability company (LLC), or partnership. There is also the need to register your business with the appropriate authorities and, when necessary, obtain the licences and permits required for the company to function.

Intellectual property (IP) is also a key issue for a startup – even in its very early days. Protecting your IP via the use of patents, trademarks, and copyrights is essential. Such assets are vital to a startup and so nothing can be left to chance. With this in mind, clear policies regarding IP ownership for employees and contractors have to be devised and implemented.

When a startup is becoming a reality rather than an idea, contracts have to be created for (and signed by) co-founders, employees, contractors, and partners. Such contracts are the only way to ensure clarity on all-important matters such as equity ownership, individuals’ responsibilities and compensation.

Up and Running

Once a startup has been created, it has to manage another range of situations – all of which will require the use of the law. Any failure to meet legal obligations or conduct activities in a legally compliant way can easily lead to problems.

There will be a need in the early days to draft and negotiate agreements with vendors, suppliers and customers, including terms of service and privacy policies for your tech product.

Any startup will also have to make sure it is not breaching employment laws wherever it does business. It has to ensure it complies with legislation relating to matters such as wages, working hours regulations and employee classification. Policies and procedures will need to be created and implemented to cover legally sensitive areas such as workplace harassment, discrimination and measures to accommodate staff or other individuals with disabilities.

Dispute resolution clauses will need to be included in contracts to make clear how conflicts will be resolved. Legally sound - and updated when required - terms of service and privacy policies will also be required to detail how a startup’s product or service works and how user data should be handled. A startup may also want to take advice on implementing vesting schedules and equity incentive plans to attract and retain talent.

Any mistakes or misjudgements in drafting agreements and contracts could mean legal or financial problems later on – problems that could have been avoided with the right advice. The other party may look to legally challenge the nature of a contract or report it to the authorities. There is even the danger that a badly drafted agreement may harm the company financially if the provisions in it do not cover all eventualities.

Funding

Tech startups often need to raise funds. This may be when their founders are looking to turn their bright idea into an actual company or later on, when they are planning to expand or make other changes to how it operates.

At whatever stage funding is sought, those seeking it will need to understand the securities laws and regulations that govern fundraising activities. To take an example, there is a need in the United States to ensure compliance with Securities and Exchange Commission (SEC) regulations, including Regulation D for private offerings.

It should be emphasised that there can be a number of potential pitfalls when it comes to seeking funding, not least (to take another US example) general solicitation rules. Such pitfalls can make legal advice all-important when it comes to seeking funding.

Compliance

Any tech startup has to comply with data protection laws, like the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA) in the United States.

It must also take all necessary steps to ensure that its tech products comply with industry-specific regulations and that it has all the aforementioned licences and permits. There is also the need to ensure that all relevant tax regulations are being complied with.

While there is little doubt that compliance can feel like a burden for companies, it is a burden that has to be taken on. A tech startup faces a raft of legal obligations relating to all aspects of its work. The aforementioned data protection and product compliance are just part of a list that includes everything from health and safety and treatment of staff through to marketing and promotional activities. There is plenty of scope for failing to comply with any of this. But the risk of that happening is removed with the right legal support.

Exit Strategy

If a startup intends to acquire another company or go public there has to be a full understanding of the legal implications and the processes such an activity involves. Exit options have to be aligned with the interests of founders, investors, and employees. But they also have to meet all the requirements of the law.

If this does not happen – which will probably be because the company has not sought the relevant legal advice - what could have been the next successful stride forward can easily prove to be a hugely damaging backwards step.

Startups have to ensure that they are meeting all their legal obligations at each and every stage of their development. This requires some investment. But it is a cost-effective investment that will go a long way to minimising risks and maximising the chances of success.