What Are the First Legal Steps for a Technology Startup?

The office of a startup tech company

In a recent article in the Roanoke Times, I discussed with reporter Yann Rannaivo the first steps a startup business should take to protect itself from legal liability and secure legal protection for its intellectual property. This blog posts expounds on the brief thoughts I shared in the Roanoke Times by providing further detail on those key first steps a technology business–or any startup–should pursue to protect its legal interests.

Create a Business Entity

The first step for any business should be to create a business entity–in Virginia, either an LLC or Corporation.  This is true even if the business has not engaged in any significant activity, and is also true even if the business is operated by one person.  A business entity provides those operating the business with limited liability, or a legal shield that protects these persons’ personal assets, assuming they observe the appropriate formalities.  In other words, if organized and operated correctly, a business entity can ensure that those that operate their business only ever risk their investment and their ownership interests in the company–not anything they own as individuals, like houses, cars, personal bank accounts, and other property.  By creating a business entity, founders can also more easily ensure that intangible intellectual property assets they have created belong to the business, and not those individual persons.  It is of no moment if only one person creates and operates a business entity–a single member LLC can provide the same liability shield to that single person that a multi-member LLC can provide to multiple business owners.

Adopt a Written Agreement to Bind the Partners

Once a business has a legal entity behind it, it is important to quickly or contemporaneously create an operating agreement or bylaws to govern the operation of the entity. This serves as a contract between all of the current (and future) owners that determines how major decisions and other events (like distribution of profits) occur. Without such an agreement, the owners could have quite a predicament in the event of infighting.

Transfer Ownership of Existing Intellectual Property … and Plan for the Transfer of Ownership of Future Property

Oftentimes, startup businesses chug along for quite a while without a formal legal entity or any kind of written agreement concerning the disposition of the intellectual property being developed. For instance, a software startup where five coders write code that has not created any written agreement concerning the ownership of that code may create larger problems down the road. It is important that the founders and other “employees” transfer the ownership of this intellectual property to the business.

Assess Your Intellectual Property Issues

As I tell all of our business clients, intellectual property issues have two dimensions: infringement and protection. For instance, as my colleague  noted in a recent blog post, the name or brand identity a business chooses may share too much of a similarity to an existing name or brand, creating the risk of legal liability for trademark and trade dress infringement.  So while a company may have a name and brand it wishes to protect, it must first determine whether another company has already taken that name or brand in the same or similar market.  That infringement-protection dichotomy exists for all of the kinds of intellectual property protection that exist.

While these steps may seem relatively straightforward, they do require the counsel of experienced intellectual property and business counsel.  We regularly work with businesses to help them to choose, create, and organize a business entity, and to assess whether patent, trade secret, copyright, or trademark protection is appropriate for their business.