How do we avoid getting into legal trouble?

1. Your Legal Checklist

  • We have decided where to our work and understand the legal ramifications of this choice

  • We have an understanding of the privacy laws that apply to as as we launch our idea 

  • We know our intellectual property rights 

  • We are set up to pay taxes on any income we generate 

 

2.  How do we approach the legal components of our venture/idea?

Early on you will want to think about what sort of organization you want to form. 

 

We are not going to go into a lot of detail here because plenty has been written on this and the decision about the legal structure of your idea will be very specific to what you want to do and where you are doing it. 

 

There may be good reasons to incorporate your entity sooner rather than later, perhaps you are an international student and it makes sense for visa reasons or you need to formalize your organization to raise and receive funds.

 

If you do decide to create a legal entity, there are a range of business structures you might create depending on your organization’s purpose, team, and goals. Example: I want to form a sole proprietorship to maintain control of my organization. This might be a helpful resource out there for getting across types of businesses and the pros and cons of each. 

 

Another big consideration is the ownership and employment status of people who work with you. It is a good idea to be explicit about who the founding team is and beyond that, how you want to engage with people who join your idea. There have been instances where there has been confusion over who owns what idea (one big name tech company he started at Harvard College dorms springs to mind!). Be sure to have these difficult conversations upfront and seek external advice if you run into problems.

Questions to ask yourself:

  • Do we have a good reason to create a legal entity?

  • What type of legal structure would suit our business needs? 

  • Where can we go to get advice and in particular, formal legal advice on the legal form of my organization?

  • What is the legal and idea ownership status of the people in the team?

 

3. What are some legal issues we should be considering?

Once you have decided where to base your organization, you will know the jurisdiction you will be operating in and can determine some of the legal considerations that apply. 

 

Consider that if you operate an online business and serve customers globally, you will be subject to laws in those jurisdictions - be sure to ask your legal advisor about this if you have questions. 

 

Intellectual property rights are worth considering from two perspectives. First, how might you protect your own intellectual property to ensure that you retain the rights to what you build. Secondly, you need to ensure that you respect the intellectual property rights of others. Some things to think about:

 

Protecting your own intellectual property rights 
  • If you are taking on funding, are there any terms in the agreement that suggest a third party is to own any of your intellectual property?

  • Is there any particularly unique and innovative aspect of your product that could be registered, trademarked, or patented? 

 

Respecting the intellectual property rights of others
  • Are you being intellectually honest about how you acknowledge the work of others?

  • Have you checked to see if you business name is in use?  

 

These issues tend to get very complex and specific to each idea, very quickly. Please seek advice from the channels below if you are in any doubt. 

 

Privacy legislation in the United States exists at the federal and state levels. The privacy of children (under 18 years old) is strictly regulated and teams should be careful about how they collect and use data. At the point that you come to want to collect data from users, please ensure you are well-versed on users’ privacy rights. Here is a great place to start thinking about user privacy in the education context and this is probably one of the most helpful documents for those thinking of serving schools. 

 

Tax obligations apply to both US and non-US citizens and tax is paid at both the state and federal levels. You should file personal  taxes as well as company taxes if you have created a company. Page 11 of this Massachusetts Guide to Starting a Small Business has a useful summary of tax obligations and some helpful links. 

Questions to ask yourself:

  • Have we stopped to consider the value of my intellectual property and are we clear on the impact any contract I enter into will have on them? 

  • Are we aware of the privacy regulation around the data we are collecting and using to build this idea? 

  • Are we thinking about tax obligations?

 

4. What do we need to know about equity and ownership?

Equity and ownership describes your legal stake in the organisation that you are founding or joining. For example, if you found the organization, you would be the owner of the business and, as such, you would have a 100% equity stake. If you co-found the organization you along with your co-founder would need to agree on the ownership split.  Equity describes the level ownership interest in a company.

 

Example:  For example, former Harvard student Mark Zuckerberg owns 29.3% equity of Facebook’s B shares. Facebook also has A shares that are publicly traded.  Facebook B shares are held by Facebook insiders like Zuckerberg. The Facebook B shares have 10 times the voting power as Facebook A Shares. Although  Zuckerberg only owns 29.3% equity, he has the majority percentage of the voting power. 

 

When launching your organization, it is important to think about what percentage do you want to own of your company. As with the Zuckerberg example, your percent ownership can directly correlate to the control you have over your new organization.

Questions to ask yourself:

  • What percent of ownership are we willing to give to my cofounders and/or investors?

  • Have we spoken to a legal expert about how we might sort out ownership stakes?

  • Has the team detailed in our partnership agreement how we will divide our equity?

 

5. What is a partnership agreement?

Partnership agreement is a legally binding document that outlines the terms of the partnership between founders. The terms can include roles and responsibilities, ways of working, decision making protocols, and equity stakes. It is encouraged that cofounders enter into a partnership agreement to ensure that there is transparency around expectations. Here is a sample partnership agreement.

 

Example: One of our Pilot Fund awardees had three co-founders. They decided to enter a partnership agreement to detail conversation they had in terms of how they would work together and what would happen after graduation. The partnership agreement included their roles and responsibilities, along with the ownership stake that each cofounder had in the company.

 

When developing a partnership, it is important to not only consider what matters in terms of division of labor and decision making protocols, but also to consider what your longer term goals and future aspirations.  For example, if one partner decides to leave the organization in 3 years, it is important to know what happens to their ownership stake Will they be required to sell it or maintain ownership? There is no right or wrong answer; what is most important is that cofounders think about what matters most to them and ensure that it is detailed in the document.  The more details, the better. It can feel awkward to talk about these things so early on. Many people have the visceral reaction of, wait… why should we talk about how we’ll break up if we’ve hardly even done anything yet? This may be true, but circumstances change, especially in entrepreneurship and especially when it comes to working with fellow students who often have changing plans and aspirations. Consider this: it may be awkward to talk about these nitty gritty details now, but this conversation will become even more awkward in the future if you find yourself having a disagreement over something of value.

 

There are many Harvard resources to help.  Consider meeting with an legal expert at the ilab, or Harvard Law School’s Transactional Law Clinic.  

Questions to ask yourself:

  • What are the details around the working relationship between cofounders matter the most?

  • Have we reviewed the sample partnership agreement and began to note the terms are most relevant to our partnership?

  • Have we spoken to a legal expert at the Harvard Ilab or the Harvard Law School Transactional Law Clinic about our partnership?

 

Resources at Harvard

A word of caution: be careful about distinguishing between regular advice and formal legal advice. Only a qualified attorney can give you legal advice! Here are some resources to help you: 

The Harvard Law Entrpreneurship Project offers legal advice and support to Harvard initiatives. This can be a great way to get localized legal advice and also broaden your network.  Here are some tips from the Harvard Law Entrepreneurship Project:

  1. Cooley Go: http://www.cooleygo.com/
    Free helpful guidance, generation of important legal documents (e.g, incorporation documents, advising and employment agreements, terms of use, and privacy policy), and information on trends in the venture industry.Created by the law firm Cooley LLP, an HLEP sponsor firm and advisor law firm.​
     

  2. Founders Workbench: http://www.foundersworkbench.com/
    Free “document driver” that allows production of basic documents for forming corporations and LLCs (e.g., certificate of incorporation, bylaws, 83(b) election, stock certificate), as well as resources and information for founders. Created by the law firm Goodwin Procter.

  3. WilmerHale Launch: https://launch.wilmerhale.com
    Free online resource covering every step of the start-up life cycle, from formation to exit. Includes articles, a document generator, an equity calculator, and more. Created by the law firm WilmerHale.: Series Seed Term Sheet generator; a basic DIY term sheet (investment contract) for a seed-round investment.

Other resources at Harvard:  The advisors at the Harvard iLab are able to provide advice and have worked with many early stage Harvard teams. Additionally, the iLab is full of teams who have worked through these questions and may be able to share their experiences. 

Know of more resources?

 

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