# Startups

Legal Considerations for Startups: Intellectual Property, Contracts and Compliance

Red Rocket TeamNov 26, 20244 min read

Sometimes, even the smallest and strangest ideas eventually turn into successful cases that are discussed all over the world. Today, there are many examples of large organizations with multi-million dollar revenues that started as small startups. What helped them grow and actually become successful?

Obviously, success is influenced by many factors, including management, marketing, technology, and more. However, there are some things that no startup can scale without. We're referring to the legal considerations that every aspiring entrepreneur should be aware of. Why is it necessary? Such a question may interest a lot of people who are planning to start their own business.

Imagine that you have developed your own technology, which has no analogs in the whole world. However, if you have not registered it as intellectual property, other companies can easily use it for free or even take all the glory for themselves. This is just one example of why you should know more about legal considerations. We are here to share with you legal advice for business startups that will safely protect your investment and efforts.

Legal Considerations for Startups-min.jpg

Protecting Your Startup’s Intellectual Property (IP)

Every aspiring entrepreneur dreams of having the whole world hear about his or her idea and find funding sources. However, you should immediately realize that there are a lot of potential risks waiting for you. To avoid them, you must create a proper intellectual property (IP) strategy. So, it's time to talk about what intellectual property in the context of startups actually is. Intellectual property is a statutory right to own intangible things. In our case, it's an invented startup that you want to trademark.

Imagine the normal purchase of a car or an apartment. The first thing you do after the purchase is to officially register your property to legally own it. Startups, technology, and other modern digital goods are no exception, so you should also secure ownership of them. Intellectual property is a fairly broad term that can include patents, trademarks, confidentiality agreements, trade secrets, and more.

According to recent statistics, the global digital software market has been growing at a rapid pace in recent years. That is why startups need to know how to copyright computer software. Here's what you need to know about it:

If you create a creative work, including software, images, videos, movies, and more, you are automatically granted copyright status for that work.
Automatic copyrights last for the life of the creator and for another 70 years after death.
Infringers, piracy, and theft of ideas are common problems in today's world where thousands of digital goods appear every day.
You need to officially register your software and assert your copyright. You can do this with the United States Copyright Office (USCO).
In case of any infringement by other parties, you will have proof that the product is your intellectual property.

Certainly, each country has its own rules and laws, so some things may be different in your case. However, most countries have signed a copyright document, which you can read in detail here.

Common Intellectual Property Mistakes

Digital intellectual property is a complicated topic for many business owners, especially newcomers. That is why they often make mistakes that can cause legal problems or financial risks in the future. We have collected a few mistakes that you should keep in mind:

Business name/trademark. You have to think about legal considerations long before scaling and gaining market success. What do we mean by that? Some entrepreneurs come up with startup names without checking them beforehand. Someone may have already officially registered a company with the same name, which could be a problem for you in the future.
Not all things need to be patented. As we said above, the concept of intellectual property is big and covers many aspects. One of them is patenting. A common mistake is to send patent requests for every item. Check to see if perhaps some technologies or creations do not require patenting. This will save you money, time, and nerves.
Improper drafting of labor contracts. Imagine your organization is expanding, and there are several new employee-creators on the team. Their job is to invent new technologies and digital software. A serious mistake is that entrepreneurs do not specify in the employment contract who owns the copyright of the created product. Thus, employees can become the full owner of intellectual property instead of you.

Another mistake we've noticed among budding startups is ignoring to apply for copyrights for their products with the USCO. Some people just think it's a complicated and expensive process, but that's not the case at all. Usually, the fee to officially get a copyright for a digital product is around 50-70 dollars. This is an amount that is affordable for any business.

Drafting and Managing Startup Contracts

The next thing you need to know about software license protection is contracts. Of course, you cannot successfully exist on your own, so you have to interact with different parties. This can include potential employees, partners, suppliers, freelancers, clients, banks, and so on. First, you need to know what contracts you will need to draw up.

Memorandum of Association

This foundational document outlines the startup's structure, objectives, and shareholder responsibilities. It ensures clarity in ownership and decision-making processes.

Contracts with Employees

Employee contracts define roles, responsibilities, compensation, and confidentiality terms. They protect the startup’s intellectual property and establish clear expectations.

Contracts with Freelancers

Freelancer agreements specify project deliverables, payment terms, and deadlines. These contracts safeguard both parties and prevent disputes over intellectual property rights.

License Agreements

If the startup uses or grants intellectual property licenses, these agreements define usage rights, restrictions, and royalties. They are vital for protecting proprietary assets.

Partnership Contracts

Agreements with business partners outline mutual obligations, profit-sharing terms, and conflict-resolution mechanisms. These contracts promote trust and collaboration while mitigating risks.

Specifics of Investor Relations

Legal support for startups is needed in many matters that relate to operations, product development, commerce, and even investors. Relations with investors in startups must be managed carefully, and one must stay on top of negotiations in order to have the issue solved in a way that is right for the company. To this end, the founding team has to first set its goals, then produce coherent terms for potential contributors, strike fair bargains, and turn to real legal advisors for help.

First, founders shall always identify what they want to achieve and what is most important. Knowledge of the startup's vision and development plan will help make the correct decision when selecting investors and determining the conditions of the contract. It also assists in finding the proper expectations for growth as well as funding.

It is suggested that founders should put the terms they would like to offer the investors on paper. In this way, they can set those boundaries and amplify their odds of attracting investors who share ideas. It will assist in maintaining control of the destiny of the company while at the same time guaranteeing that the investor’s input will be strategic for the organization.

Finally, consulting with real legal advisors guarantees the investor contracts are legally correct. Legal professionals are aware of the traps laid all over the place in business negotiations. They are usually in a position to advise the founders on how they can retain control while at the same time sourcing for funds.

Consequences of Non-Compliance: Legal and Financial Risks

In this article, we have already mentioned the mistakes that entrepreneurs often make when it comes to copyright laws for software. Some mistakes or complete disregard of legal considerations can become serious problems for startups. You may ask what points cover «serious problems.» Usually, experts divide two groups, including legal and financial risks.

Legal risks

The lack or violation of key contracts can lead to litigation. Example: improperly executed agreements with employees or partners can lead to disputes over intellectual property rights. Also, non-compliance with license or partnership agreements can result in fines and even a ban on the use of the technology or brand.

Financial risks

Sometimes, legal disputes and participation in courts can provoke large financial losses. This is especially true when the case is lost in court, and the company is obliged to pay compensation or a fine. Example: a startup did not formalize a cooperation agreement with a freelancer. Later, the freelancer filed a claim, claiming that the copyright to the developed software belonged to him. As a result, the startup had to pay significant compensation for the use of the software.

Actually, ignoring legal considerations in the context of startups can turn into huge financial losses for you. That is why we recommend that you familiarize yourself in detail with all the basic concepts of intellectual property, copyrights and employment contracts.

Final thoughts

Now you know how you can protect intellectual property to avoid any legal problems in the future. Remember that you should take care of your digital products so that no one can steal them or use them without your permission. In any case, when planning to launch a startup, it is recommended to contact professional lawyers for advice on trademark registration and future patents.