The first legal steps for a technology startup
When starting your own business, it may seem that the main issue is having a unique idea that stands a chance for market success. However, as emphasized by Michał Bogacz, senior manager at the law firm Olesiński & Wspólnicy which is a partner supporting the MIT Enterprise Forum Poland program, in order to achieve success, it is also necessary to remember about structuring business issues relevant to the law. Namely? Check out what you shouldn’t forget about when starting your own business.
What form of business is best taken from the perspective of a technology startup?
Michał Bogacz, Olesiński & Wspólnicy: In my opinion, there is no universal recipe for the best business frame. It all depends on the startup and its founders. Civil partnerships can be a temporary form, at the stage when the nucleus of a business idea appears in the minds of the future entrepreneurs. This is the simplest form of cooperation between partners, which has no legal personality in itself. When the idea develops and starts taking on a structure, it becomes unique and it would be good to protect it, then it is worth changing the frame of business activity into a capital company, especially a limited company. It is easy to set up, and the liability of partners in the business is basically limited only to the amount of assets that they bring to the share capital. In addition, such a company is better perceived by financing entities, such as banks or potential investors. You can also choose partnerships, e.g. registered or limited partnerships are the most popular. They are simpler, slightly cheaper in principle, but they do not protect partners against property liability. If a company has to pay a liability, the creditor may reach for your personal property, for example your car or home. For this reason, in my opinion, the limited company is a good solution for startups.
When at the beginning of the road, it’s good to remember that we will be able to change the business structure, depending on how our business will change. It is also worth mentioning here that when choosing the optimal legal form for a given business, tailored for a specific idea, it is good to consult a lawyer. This can save a lot of problems in the future.
What is a “simple joint-stock company” and is it worth having a closer look at it?
MB: A simple joint-stock company is a proposal of new regulations in the law submitted by the Ministry, which has reached public consultations. For this reason, it is difficult to predict and determine in what form and if the project will be adopted at all. However, it is certainly worth taking a closer look at it, because at this stage, the bill contains provisions that meet the freedom of conducting business, introducing a new form of the company. In principle, the proposal includes a number of simplifications for solutions such as startups, in the form of even a more accessible form of establishing a company or bringing know-how and ideas to it. We have to keep our fingers crossed that the draft will come into force.
As a technology startup, what do we need to know exactly about the applicable law? Which of them are important at the beginning of a business?
MB: That’s a good question. Our country is not known for simplicity in regulations; there are so many of them alone. In my opinion, from the perspective of startups, there are three main areas of law that beginners should be familiar with. If the startup has already been formally established, it is worth knowing the basic provisions related to the conclusion of contracts and contractual liability. This knowledge will be useful when concluding the first contracts with clients. The second area in which it’s good to have insight are accounting and tax issues. Here I’m talking about the forms of employment or paying specific taxes, which is influenced by the frame of the business. The area of intellectual property is also very important for startups, after all, their business is based largely on know-how. It is worth knowing how we can protect unique solutions before someone misuses them without our knowledge.
Should a founders’ agreement be signed? What should it contain? What are the additional contracts that should be concluded when starting out with your business?
MB: It all depends on the chosen business frame. A founders’ agreement (also known as an investment agreement) is a form of agreement between partners, which determines how they will work, how they will settle accounts, how they perceive business development, do they plan to admit an investor or later sell the company’s value. Through such agreements, the partners can determine the scope of activities in the future in accordance with the adopted involvement in the business. As for the main areas that such an agreement should define, it is primarily the line of development of the undertaking and determining the activity of individual partners in the business, as well as various types of guarantees and safeguards, e.g. in the form of the right to repurchase shares sold by one of the partners or a competition ban. The agreement should also include issues of capital injection in the company, obligations to make deposits or contributions in selected circumstances.
Through such an agreement, the shareholders may determine the scope of the activity in accordance with the adopted involvement in the business. Therefore, as the development of a startup becomes more advanced, it is better to have such an agreement in place and act on the basis of it, but this is not a must have. Some of these provisions may be included in a well-prepared company agreement, but you should remember that the document is public in the National Court Register, as opposed to the founders’ agreement.
Another area is the form of contracts with clients or contractors and assumptions on relationships with them. This is especially useful when a startup starts selling its products. As the last element, I would say issues related to the employment of employees – what form it adopts, which is important in the context of intellectual property protection.
What issues from the perspective of patent or protective law are important for new technology companies? When should we consider them?
MB: As I mentioned earlier, the issue of employing workers is important, because often innovative solutions are the fruit of the work of many people who can be employed on various contracts. It is important that this know-how and the output of intellectual property produced by employees or subcontractors be owned by the startup. It’s about a guarantee of property rights (specifically, the transfer of intellectual property rights regarding these ideas to the startup), which can be provided by clear contractual solutions. This will allow you to avoid situations when a colleague files a claim. The presumption of the employer’s right to the products of employees (in the case of employment based on a contract of employment) are provided for by law. In the case of B2B contracts or orders, such solutions need to be included in the contract.
What legal mistakes do startups most often make? What do they result from and how can you protect yourself from them?
MB: I would put it this way – in the case of startups, in order to achieve success, you need balance between a good business idea that is feasible and marketable and formal and legal issues. Young entrepreneurs should solve matters on the business structure, paying taxes, relations with partners and clients or subcontractors as early as possible. In addition to this, you should take into account internal relations with employees. To avoid mistakes, it is also worth reading carefully and making sure that we understand all the provisions of the contracts, especially those concluded with large entities. Non-performance of the contract may be secured, for example, by a high contractual penalty.
NDA – a necessary safeguard or unnecessary formality hindering and extending the start of your own business? Is it necessary to sign this agreement in every situation?
MB: Non-disclosure agreements are a good solution for the protection of intellectual property rights. It should be included in the initial stages of cooperation, when the startup invites subcontractors or contractors to it, showing them the behind-the-scenes on how the chosen technology works. There is then a risk that one of these entities will use this knowledge without an agreement with the startup. The NDA protects it. It should be accurately defined what is company secret, define under what conditions confidential information can be used and what will happen when the other party violates these terms. Here, it is a good idea to stipulate contractual penalties in the case of using the original knowledge of a given startup. In my opinion, it is worth signing such agreements in the form of a safeguard for a business idea.