Founding a startup is a daunting process, but with sound legal guidance, it’s possible to establish robust foundations that prevent future complications.
The initial decisions made by startup founders can have long-term consequences. Making them confidently is crucial for the business’s success. That’s why effective legal support allows founders to focus on growth and scalability.
While each startup is unique and demands vary depending on the business model, there are common considerations to keep in mind. This checklist provides a solid starting point, yet specialized legal advice remains indispensable.
At lawi.io, our diverse, international team understands the intricacies of the startup ecosystem. With a wealth of cultural and professional experience, we specialize in guiding startups at every stage. Our services are meticulously crafted to ensure founders can expand and launch their businesses across different global jurisdictions.
To ensure compliance with essential legal matters, we’ve compiled a checklist featuring critical items:
1. Corporate Structure
Choosing the right corporate structure is pivotal, as each type carries distinct tax and legal implications. Factors such as investor profile, capital requirements, and operational base dictate the choice.
In Brazil, common structures include “Sociedade Limitada” (Ltda) and “Sociedade Anônima” (SA). Internationally, Limited Liability Companies (LLCs) and C Corporations (C Corps) are standard.
These structures may include strategies like the well-known “Cayman Sandwich,” frequently utilized by startups to leverage fiscal and regulatory advantages of jurisdictions like Cayman and Delaware. During investment rounds, jurisdiction is among the primary concerns for accelerators and investment funds.
Many startups make mistakes by attempting to handle these complexities independently or with basic accounting services to cut costs. While incorporating may seem straightforward, errors can lead to serious consequences if the business lacks foundational stability or appropriate safeguards. Expert legal guidance is essential to avoid such pitfalls.
2. Founder’s Equity Vesting
Implementing a vesting schedule ensures founders remain committed to the startup long-term. This agreement gradually distributes equity over time, incentivizing founders to stay with the company.
Typically, vesting includes a “cliff” period (often one year), during which no equity is vested. After this initial period, equity vests regularly (e.g., monthly or annually) until reaching the total vesting period, typically four years.
This safeguards the startup by ensuring that departing founders do not take a substantial share of the company, thereby promoting continuity and commitment.
3. Shareholders Agreement and Articles of Incorporation
These documents outline governance rules and shareholder relationships, including strategic decision-making processes. Key provisions typically cover:
- Voting rights for directors and shareholders in specific scenarios;
- Protocols for conflict resolution;
- Procedures for shareholder or director resignation or death;
- Conditions for positive or negative equity exits;
- Spending limits without consent;
- Measures to protect minority shareholders’ interests.
Clear rules enable startups to operate confidently, creating a stable and attractive environment for investors and stakeholders. This process requires customized negotiations best handled by legal specialists.
4. Employees or Service Providers
Whether hiring employees or engaging service providers, contracts must comply with labor and tax laws. Protecting intellectual property generated by employees and contractors is critical.
Initially, startups may require basic employment contracts, but as they grow, specialized contracts and an employee handbook become essential.
5. Intellectual Property
Intellectual property is one of the most valuable assets of any business, especially startups. Without proper protection, there’s a significant risk of having ideas and products copied or misused by competitors.
Registering trademarks, patents, copyrights, and trade secrets secures the startup’s creations and technologies, while also adding value to your company and investors.
6. Terms and Conditions
Terms and Conditions are crucial as they define product and service usage rules. They establish user expectations regarding liability, intellectual property rights, usage restrictions, and dispute resolution. This helps protect the startup against potential litigation.
For SaaS startups, including a Service Level Agreement (SLA) specifying service standards and issue resolution timelines is advisable. These outline the standards users can expect from the service based on a percentage, as well as the measures and timelines for resolving any issues. The SLA is legally binding, meaning in case of conflict, this agreement can serve as protection for the startup.
7. Data Privacy Policy
Privacy and data protection have become increasingly important for startups, especially since 2018 with the implementation of the General Data Protection Regulation (GDPR) by the European Parliament. A compliant startup has a robust and secure privacy policy for users of its products and services, as well as for the startup itself.
This policy should detail how user data is collected, used, shared, processed, stored, and protected. This is especially crucial if your users are in regions with strict regulations, such as California, where there are specific requirements.
Compliance with data regulations is crucial to avoid penalties and heavy fines. Specialized legal assistance like lawi.io is essential in this regard, to correctly interpret applicable laws and implement policies that meet legal requirements in relevant jurisdictions.
8. Investment Rounds
For startups seeking funding, understanding key investment instruments is crucial:
- SAFE (Simple Agreement for Future Equity): In exchange for funding, SAFE grants the investor the right to acquire shares in the company in a future investment round, under predefined terms.
- KISS (Keep It Simple Security): It simplifies investment security, offering investors a stake in the company with straightforward and clear terms, making the process easier for both parties.
- Convertible Notes: Initially function as a debt instrument, offering an interest rate on the investment and a deadline for conversion into company shares, based on specified valuation conditions.
Each of these has specific implications for the capital structure and founder dilution of the startup. Specialized legal assistance like lawi.io can guide strategically and attractively on financial decisions for investors, ensuring a solid fundraising process.
9. Permits and Licenses
Obtaining appropriate permits and licenses is indispensable for a startup to operate legally. lawi.io helps identify and obtain them, such as commercial, environmental, and health licenses, depending on the specific sector of the startup’s operation.
Ensuring compliance from the outset not only avoids legal issues but also builds a solid foundation for growth and expansion in the market.
10. Compliance
Certain sectors (e.g., finance, healthcare) require strict regulatory compliance. Specialized legal support ensures startups meet sector-specific regulatory requirements. Implementing robust compliance practices not only ensures legal operations of the startup but also fosters trust among investors and customers.
Without proper legal guidance, it’s easy to overlook aspects that can lead to significant future problems for your business.
While not every item on this checklist may apply to your startup, it underscores the importance of tailored legal advice. Generic solutions and AI tools may seem cost-effective initially but often fail to address specific legal needs effectively.
Seeking robust legal counsel not only ensures compliance but also facilitates strategic discussions and expert advice based on practical experience.
At lawi.io, our specialized team is equipped to address your startup’s specific needs comprehensively.
Contact us to establish a solid, secure foundation for your business’s success!