Introduction All successful startups grow from a great idea. Whatever your great idea - whether it’s a new product, solution, technology or means of communicating – you are probably reading this Startup Pack because you have started the journey to turn your great idea into a successful business. You need a great team to work with you on that journey: it is vital you surround yourself with experienced people you can trust, who look out for your interests, and have the skills and dedication to help you achieve your goal. The team should include trusted professional advisors, including an experienced lawyer* who is a specialist in your chosen industry, who understands your business and, crucially, is pragmatic and commercial – and, of course, is willing to work for fixed fees with no nasty surprises! We have put together this Startup Pack to introduce you to us at Blueprint Law and to explain some of the legal issues that face most startups. Although your focus will naturally be on developing your actual product or service, there are legal issues that should not be put to the bottom of the pile or left until you think you’ll have more time (you probably won’t…). Having a plan of action and identifying issues demonstrates good strategy and management, and is designed to prevent problems or panic down the track – for example, in not securing or protecting necessary IP rights for your business, not having appropriate terms of trade for your business, or not having the legal right to process data on which your business model depends. This is not an exhaustive guide to every legal issue that may be relevant to you; however, from our extensive experience, we know these are the typical issues that face most startups. And, of course, the contents of this Pack should not be taken as legal advice – if you want that, just ask! We have also included in this Startup Pack a Discount Voucher that entitles you to a complimentary introductory meeting with one of our directors, Gary Rogers or Nick Hart, to discuss your startup business and explore whether we can support you on your journey from a great idea to a successful business. The Voucher also provides a 30% discount on our (already extremely competitive) fixed fees for commercial work undertaken between now and 30 June 2016 (subject to a few conditions, of course) – see the back page of this Pack for details of this exciting offer. We hope you enjoy the read! *that’s us!
Getting Started Before we look at some issues in a bit more detail, we thought we’d let you in on a few tips that will help give you the best chance of succeeding in your venture (and even reduce the need for you to spend money on lawyers!). So, here we go:
Legal issues with your business concept: if you are planning to launch a new business, have a chat early on with a lawyer with relevant experience to make sure you identify any particular legal issues that may impact on your ability to operate the proposed business or which might require you to structure the business in a particular way. It could be a costly mistake to wait too long before getting this advice.
Working with partners: if you are setting up a new venture with one or more business partners, apart from making sure you establish an appropriate corporate structure (see the “Structuring Your Startup” section below), you should agree a business plan with your partners – the purpose of this is to make sure that you and your partners are in general agreement from the outset as to the important issues that will affect your business, such as the budget for establishing and operating the business, how the business will be funded, the scope of its activities, the commitment to be made by each of the partners, and when the partners will be seeking to exit from the business.
Keep written records: in all your conversations and meetings with other people relating to your business, including potential or actual suppliers, investors, service providers, and even business partners, keep a clear written record of the discussions. And consider following up with an email to confirm what was discussed and what is expected of each person involved in the discussion.
Confidentiality: if you are talking to other people about your new business, or sharing information, make sure you consider getting signatures on a confidentiality agreement (a.k.a. a non-disclosure agreement or NDA). At the very least, if you want a conversation to be confidential, make this clear to the other person before revealing anything confidential, make a note of the fact that you agreed this would be confidential, and then follow up with an email confirming that the conversation was confidential.
To be (bound) or not to be (bound)? when dealing with potential suppliers and other prospective business partners, you need to be clear about whether you intend to form a binding legal agreement with that person or company. You don’t need a written agreement signed by both parties to have a binding legal agreement; an oral agreement, or even an exchange of emails, can be binding. If you are negotiating with someone, or are even in the early stages of discussions with them about a potential deal, use the words “Subject to Contract” in your correspondence – even better, put this in the subject line of relevant emails – this should avoid there being a binding legal agreement until both parties have agreed to be bound. But you should really involve a lawyer at this stage to help you formulate the terms of the deal and document it properly*.
Misleading and deceptive conduct: you need to be really clear in your business dealings with suppliers, customers and others, to minimise the risk of being on the receiving end of a claim for misleading or deceptive conduct. Don’t promise or even imply that you can deliver something, or provide a benefit, unless you are absolutely sure that you can do it. And make sure that you document everything clearly, so that you don’t get embroiled in a dispute revolving around conversations where it will be difficult to prove or disprove something.
* we know someone who can help you with this, by the way…
One of the first things you need to think about when setting off on your journey to turn your business idea into reality is to figure out how to structure your business. This will depend on a number of factors, and you will need to take legal and tax advice, but there are a few issues you can think about before seeing a professional for advice: Going solo If you are the sole “owner” of the business, then in theory you don’t need to set up an elaborate corporate structure, or even a simple company, but in due course we would recommend that you at least look to establish a company through which to conduct the business. This has a number of benefits, including limited liability (generally, a company gets sued when things go wrong, not its directors, shareholders or employees), you can keep your personal assets separate (and relatively safe) from claims against the company, and you can use a company to offer shares to investors and employees. Sharing equity If you are setting up a business with co-founders, or you want to offer equity to investors or employees, you will need a company (you can also set up a trust structure, but that may be too much detail for now). And if you set up a company with multiple shareholders, we highly recommend that you have an experienced lawyer, who really understands your business, to prepare a Shareholders’ Agreement – this is a contract between the shareholders which governs how the company will be run and sets out the commercial issues relevant to the management of the business. The Shareholders’ Agreement will deal with issues such as: agreeing how decisions are to be made between the shareholders – does anyone have a right of veto in respect of certain decisions? what happens if the company needs more money – are the shareholders obliged to put in more funds? when is a shareholder allowed to sell some or all of their shares – for example, do you want an embargo on share sales for a long enough period to provide some stability for the business? have you agreed when you will seek to exit from the business – for example, to sell the company or seek a stock exchange listing?
Structuring Your Investment
What if I start working with my co-founder without setting up a company? If the t wo of you agree to work on the project together, and have a common purpose in operating the business, it is likely that you will have created a legal partnership, even if this is not put in writing. This might not be a good thing! As partners, you will both jointly own the assets of the business, and be jointly and severally liable for the liabilities of the partnership (meaning that just one of you could be sued for a claim against the business, exposing that person’s private assets, even if the other partners were the cause of the claim). There are complications if one of you wants to leave the business or if you want to take on new partners. A partnership is not the way to structure a business if you are looking to raise money from investors as they will generally expect to invest in a company structure so that they have a tangible equity interest (i.e. shares) rather than a percentage in a partnership which could expose them to liability (which they wouldn’t have as a shareholder in a company). So, you have probably got the message… don’t operate as a partnership unless you know exactly what you are getting into. Do I need to worry about how I raise money? Well, perhaps it’s obvious, but there are a few things you need to consider before you start trying to raise money from investors:
there are restrictions on advertising for investors – generally, it is illegal, unless strict requirements under the Corporations Act are followed the Corporations Act places restrictions on how companies can raise money from investors – the starting point is that you may need to issue a formal offer document to raise money, but there is a useful exception for smaller companies, which can raise up to $2m per year from up to 20 investors without having to follow the disclosure requirements under the Corporations Act (however, we always recommend that any fundraising is carried out on the basis that the disclosure requirements have to be followed, to reduce the risk of claims from investors) having said all of that, make sure you take professional advice to make sure you are going about the fund-raising properly (that is, to protect your interests and to comply with all legal requirements)
What about making a pitch to investors? When you make a pitch to investors, you need to think about:
the confidentiality of the information you are presenting – consider asking the attendees to sign a confidentiality agreement (see the “Getting Started” section above) or check with whoever is organising the pitch session to see if they have organised for attendees to agree that the presentation is confidential (ideally, by signing an NDA) if there is or may be something patentable in your business, but you haven’t applied for a patent, don’t disclose the nature of the invention that is patentable, otherwise you may lose the ability to apply for a patent (unless the disclosure is clearly confidential, but that could be difficult in a room full of people) make sure you present accurate information, especially relating to forecasts of turnover, profits, etc. – otherwise, apart from potential investors not being impressed, you may expose yourself to a claim for misleading or deceptive conduct if someone uses that information to make a decision to invest and the information proves not to be true or was subject to factors that were not disclosed
Being prepared for investors If you will at some stage be looking for investors, or even if you want to sell the business, it is really important that you are well prepared – typically, in these situations, you will have lawyers crawling all over your business records trying to find reasons for their clients not to proceed with the purchase or at least to beat you down on price. So, the message is – be prepared! Make sure that, from the outset of establishing your business, you keep good, accessible records relating to your business, including:
keep your Company Register up-to-date and make sure you lodge all ASIC filings on time make sure you hold proper board and shareholder meetings and that minutes are taken and kept on the Company Register ensure that all contracts entered into by the business are catalogued and easily available make sure you can show how all intellectual property rights used by the business are owned by, or licensed to, the business keep a note of all relevant dates for the business – e.g. expiry of lease terms, licence periods, etc.
The more you do to get all of this right up-front, the less of a headache it will be later on (and it is always more expensive to fix problems than to sort them out in the first place).
Protecting Your Idea Where do I start with IP? It is vital from the start that you identify the intellectual property on which your business is based, and the intellectual property rights necessary to bring your venture to market and which you can use to protect your commercial interests. These IP rights can include:
Registered Trade Marks to protect and differentiate your brand, products and services Copyright in various works and materials – e.g. software, brochures, logos, drawings and in the design and content of your website Patents including in technology, processes and products
What do I need to do? As IP laws provide exclusive rights to creators or owners of IP, you will need to ensure that your use of IP does not infringe anyone else’s rights. You also need to protect your own IP. By owning or controlling the IP rights relating to your business you will have the legal tools to prevent others from infringing your rights and to maximise your ability to commercialise your IP. It is therefore essential that you:
identify what IP you use and what IP you create – make sure you keep good records establish what rights you have in your IP – make sure you actually own it ensure your IP is protected – e.g. register any available trade marks or patents
Can I deal with IP later? Remember, every startup is both a user and a creator of IP. We recommend that you ask the questions above as early on as possible. If left too late, you might encounter issues like the ones set out below, which can be costly and difficult to resolve:
I have received a letter of demand because my new name/logo is apparently infringing someone else’s trade mark – minimise the risk of this by clearing the name/logo in advance I didn’t realise I don’t own the copyright in my logo even though I paid for it you need a written assignment of copyright from the designer My business model relies on using other people’s IP and I don’t have a licence to use it – work out what licences or other rights you need up-front, and get this documented
I am being asked to warrant that I own the IP in my product/service – you need to make sure you can give the required warranties, otherwise you are at risk of legal claims I waited too long to file a patent and now someone else has got in first – take advice from a specialist patent attorney to reduce this risk (and don’t disclose anything about your patentable concept without an NDA in place, otherwise you might lose the right to apply for a patent) I launched my business overseas but found someone else using my brand name – you can protect your brand internationally if you work out an effective strategy up-front I didn’t contact [insert name of IP specialists*] and discuss my IP strategy when I had the chance
Documenting your idea – why it is important to write things down but keep your ideas close Ideas themselves are not protected by copyright - for the purposes of protecting your IP, documenting your ideas is a must. For example, copyright can only subsist in a work once the idea or concept is put into a physical (or electronic) form. Putting things down on paper, and being able to prove how and when you came up with the concept, can also help to fend off infringement claims! It’s a good idea to not only document your ideas but to also keep them on a need-to-know basis until you launch your business. Patents and registered designs, in particular, usually have eligibility criteria that require them to be ‘new’ – i.e. that your design or invention has never been disclosed or revealed in public. This means that you cannot disclose or show your design or invention in public before seeking registration. The ‘public’ does not need to be a significant number of people either – even one person could be too many! Though it may be tempting, you should always avoid promoting or talking about your design or invention before you obtain registration, unless you have a suitable confidentiality agreement in place – to learn more about confidentiality agreements, see the “Getting Started” section above.
*that’s still us!
No ‘i’ in team – collaborative creation and ownership Collaborative environments are great for developing ideas but they can also lead to difficult questions around IP ownership and the contributions made by individual team members. For example, if you work in a team you may have to establish what contributions are made by each team member, the value of those contributions, and whether the team members are employees or contractors (this makes a difference as to who owns the IP - contractors will own the IP rights they create unless they assign the IP to you in writing). Setting up internal arrangements such as these to identify and track your IP can be crucial to protecting your business. Exporting your IP Registering an IP right in Australia does not automatically give you international protection – if you are looking to break into overseas markets, you will need to develop an IP strategy that suits the needs and resources of your business. For example, if you want to seek trade mark protection for your brand in other countries, you can file a trade mark application first in Australia and then have six months in which to pursue applications in other countries (with the advantage of these foreign applications being treated as having been made at the same time as the original Australian application).
Taking People On What’s the difference between an employee and a contractor? Taking on employees means that you have a lot more responsibility as their employer – for example, you have to pay PAYG to the ATO, you have to pay superannuation, and the employees are entitled to employment benefits such as sick leave. Contractors, however, have to take care of their own tax and super (but not always – see below). So it’s better for me to just take on employees? Perhaps - but when you take on some contractors, the law may in fact treat them as employees, so you need to check up-front whether you can really treat them as contractors (there are various tests to work out whether they are likely to be treated as employees or contractors). So even if a service provider says they are happy to be a contractor and to get paid by submitting invoices, the ATO may take a different view (and the service provider may later change its mind and then seek employee benefits from you!). Surely I don’t have to pay super to contractors? Unfortunately, a lot of businesses don’t realise this but you may have to pay superannuation to contractors, even though they may not receive any other employee-type entitlements. There are a few tests to assess whether you have to pay super to a contractor, so make sure you figure this out up-front. Can I take on interns and not pay them? Many startups have relied on “free labour” provided by interns, justified on the basis that the interns gain real experience which will be of value to them in finding paid employment in future. The position on this has, however, changed recently so you are now legally obliged to pay “interns” unless they are participating in a formal vocational placement (i.e. as part of a recognised course from an authorised educational or training institution), or you can otherwise demonstrate that there is no employment relationship between your business and the intern. If neither of these circumstances apply to your interns, they will be treated as your employees and entitled to be paid for their work (at the relevant minimum or award rate) as well as receive other entitlements under the Fair Work Act. There is no absolute definition or checklist to work out whether an employment relationship exists – however, if you can answer “yes” to the following questions, it is likely that there is an employment relationship in place:
is the intern engaged to carry out (and have they in fact carried out) productive work for the business (as opposed to merely observing or performing tasks for the sole purpose of learning, gaining experience or being trained)? is the work being carried out by the intern integral to the operation or progress of the business?
Ultimately, a genuine unpaid work arrangement is one which is essentially for the benefit of the intern – if your business is gaining a significant benefit from the intern’s work, the arrangement is more likely to be construed as an employment relationship, and you will be required to pay them. Please note that even if you do not need to provide entitlements to interns under the Fair Work Act, you are likely to have other obligations in relation to the interns under other laws (e.g. work health and safety laws and anti-discrimination laws). If I pay a contractor for their services, I own all of the rights in what they create for me, don’t I? Unless you have a written agreement in place with your contractor (or freelancer) which provides that you will own all of the IP rights in the product of their services, your contractor will retain ownership of the IP rights in the works created for you. This restricts what you can do with the works, including preventing you from selling, assigning or licensing the IP rights in those works to anyone else. So you need to make sure you have a suitable contract in place with your contractors. And what about employees – do I own everything they create? With your employees, the situation is simpler. Everything they create “in the course of their employment” will be owned by you – however, this is not as straightforward as it may seem and requires an assessment of the scope of the employee’s duties and instructions from the employer, the circumstances surrounding the creation of the works, and any terms agreed in the employment contract. For example, if an employee’s role is to write software code for a particular App, but they come up with an idea for a new App that has nothing to do with your business, they are likely to own that concept and any code they write for it (unless, for example, you have provided for this in their employment contract). To this end, the employment contract should accurately describe the scope of their employment duties, and an appropriate IP clause should be included in employment contracts where employees are likely to create important IP rights.
Signing Up Customers What are Trading Terms? When you sign up a new customer to your App or business, you are essentially creating a contract with that customer, even if it is not written on paper and isn’t physically signed by anyone. Generally, for online businesses or Apps, you will have “Trading Terms” (or “Terms & Conditions” or “Ts & Cs”) that form this contract with your customers. They are an essential part of any business because they represent the terms and conditions on which you agree to provide goods or services to your customers. Trading terms are especially important for online startup businesses as they can cover everything from payment terms to liability to ownership of user-created content, and much more. Can I just copy someone else’s trading terms? Well, you can, but this might get you in trouble! Apart from a potential claim of copyright infringement against you, another trader’s terms might not be suitable for your business. Although in reality hardly anyone reads online trading terms in detail, you need to be sure that your terms are appropriate for your business if you need to rely on them to take action against a customer or to protect you from a customer’s claim. Effective and suitable trading terms are not something you can adequately prepare yourself unless you are an experienced lawyer. How do I make my Trading Terms binding? If you want to rely on your trading terms (e.g. if a customer owes you money and you want to cease providing the relevant goods or services), you need to make sure they are legally binding - the best way to do this is to make sure the customer has agreed to them before they enter into a transaction with you. Typically, the easiest way is to make sure that the trading terms are easily available to view by the customer and the customer is required to tick a box to confirm their acceptance of the terms at the time of, for example, registering with your service.
Updating your Trading Terms? You need to make sure your trading terms are kept up-to-date as your business develops, both to reflect accurately how your business operates and to keep up with any changes to the law. And you need to make sure you have arrangements in place to be able to update your trading terms and ensure your customers have accepted the new terms. What if a customer complains about my service? It depends on the type of complaint, but, for a start, you need to make sure you provide the service in accordance with your own trading terms, otherwise you could be liable for a breach of contract. You also need to make sure you haven’t made promises about the service which are “misleading or deceptive” – note that your trading terms can’t exclude these types of claims. The best way to minimise the risk of these types of claims is to make sure that the customer gets “what it says on the bottle”. For example, don’t promise them that you are providing a free service but then catch them out with hidden charges. What if a customer wants a refund? Although this may be covered by your trading terms, Australian consumer laws provide fairly extensive protection to “consumers” (which can also include some businesses). As a result, you may not be able to avoid providing a refund, but there are things you can do to minimise your potential exposure – it depends on your particular circumstances, so take advice as early as possible. What if I am targeting customers overseas? Well, this is when it gets even more complicated! Your terms and conditions will need to be prepared carefully to minimise the risk of your trading terms not complying with local laws where your customers are located. But this is one of the most difficult aspects of trading online – you cannot be totally protected from a customer outside Australia seeking to sue you in their own jurisdiction, but there are ways to minimise the risks.
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Respecting Privacy Is privacy relevant to my startup? Privacy is relevant and important for every business, whether you have a strict legal requirement to comply with the Australian privacy laws, or at least want to demonstrate that yours is a responsible business by being open and transparent in how personal information is handled, used and managed. When do the privacy laws apply? In general, the Australian Privacy Principles in the Privacy Act apply to businesses (including any not-for-profit organisation) with a turnover of more than $3 million, to private sector health providers, or for businesses that sell or purchase “personal information”. However, it is good business practice to follow the requirements of the Privacy Act even if your business falls outside of its ambit. What kind of information is protected under privacy laws? Any personal information is protected, which means information (or an opinion) about (a) an identified person or (b) a person who could reasonably be identified. This potentially covers a broad range of information – such as names, addresses, dates of birth and phone numbers. What do I need to do to protect a customer’s privacy? Relevant businesses (as described above) need to comply with the Australian Privacy Principles (APPs). In essence the APPs:
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Next Steps Introductory Meeting If you need legal advice in relation to your new venture, we are happy to meet with you for an hour at no charge to make sure we are the right fit for you. We prefer to meet face-to-face, but we are happy to do this by telephone or Skype if that is more convenient. If you are happy to engage us after that, we will send you our Client Service Agreement which will set out the terms and conditions on which we will provide our services to you. Our Service Promise We promise you:
high quality legal advice - given with a commercial and pragmatic approach a personal service – we will take the time (at our expense) to get to know your business fixed fees for most work – there will be no surprises overall, we will provide you with a first class service!
So, whether you are a maverick, disruptor or entrepreneur (or all three!), we look forward to working with you.
Contact Us Gary Rogers solicitor-director E: firstname.lastname@example.org T: (02) 9300 3101
Nick Hart solicitor-director E: email@example.com T: (02) 9300 3103
Or find us at: Level 3, 2 Martin Place, Sydney NSW 2000 www.blueprintlaw.com.au
ÂŠ Blueprint Law 2016
Published on Dec 2, 2016
Blueprint Law, Sydney-based commercial lawyers specialising in working with startups, have created this guide to the legal issues that face...