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4 Tips From a Lawyer For Your 9 to 5 to Startup Move

By Vivian Michael | Startup Contracts

If you are thinking about leaving your 9 to 5 for a startup, here are some handy tips from a lawyer to consider before you move.

While it is important to plan, thinking about every step and planning for a year or more at once can be daunting.

Let’s take things one step at a time.

1. Post employment restraints in your employment contract

Your employment contract may have a post employment restraint that says you cannot work for a competitor or set up a competing business. They can also cover confidential information.

What’s a reasonable post employment work restraint ?

The court’s don’t like restraints that are too long because they should only exist to protect the employer’s legitimate business interests. That is, they cannot be so onerous to the point of going beyond protecting business interests and stopping a worker from earning a living.

Similarly, a restraint that bars you from working in the country may also be considered too wide and onerous.

What about confidential information ?

Understandably, employer’s like to keep their trade secrets, client lists and business strategy confidential and safe from competitors. This means that after you finish working for an employer, you will have an obligation to keep this information confidential.

What happens if you breach a post employment restraint ?

Usually the employer will start by sending you a ‘cease and desist’ letter that reminds you of your contractual obligations, asks you to hand up or destroy any confidential information that you hold and stop working for a competitor.

A well drafted response could stop any further action by the employer.

Legal proceedings

If the employer is not satisfied with your response, they may start proceedings in court to seek an injunction: a court order that stops you from working for a competitor or setting up your own business.

If the employer is also claiming that you profited from their confidential information, they may also seek an account of profits, that is, an order that they receive the profits you earned from breaching the post employment restraints. An example could be using customer lists, calling former clients up and telling them to purchase from you instead.

There may be an option to negotiate a reduced post employment restraint so you may want to consider getting some legal advice about this option.

Once you have completed a check of your employment contract and considered your options, you can then look at your business structure options.

2. Your business structure

In Australia, a business entity can be set up as a sole trader, company, partnership or trust. Yes, you can always change your business structure but you may want to avoid the hassle by setting up with the most suitable structure from the outset.

Sole trader

A sole trader structure is simple and cost effective. Legally, it means that as an individual, you are personally accountable for the business including any losses.

Company

Setting up as a company provides the benefit of limited liability. Generally, this means that as a director, you are not liable for company debts. The company is a seperate legal entity that can incur debts, sue and be sued.  The exception to this is when you enter a company contract as a a personal guarantor. This is a legal document that makes you personally liable for company debts if there is a default. If you receive a document e.g. lease or franchise agreement asking you to sign off as a personal guarantor, it's a good idea to get advice about this. 

Trust
Trust

A trust is another option and is an attractive option for tax planning purposes. The trustee of the trust holds assets, in this case, business assets on behalf of others (the beneficiary). A lawyer can prepare a trust deed that sets out the powers of the trustee. It's also a good idea to get advice about tax implications of a trust from an accountant. 

Partnership

A partnership is a group of people carrying on a business with a common view to profit. Different partnership laws apply depending on which Australian state you are setting up the partnership. There are also different partnership types: (1) a partnership "normal" (2) limited partnership, and (3) incorporated limited partnership. Both limited and incorporated limited partnerships need to be registered with Fair Trading in New South Wales. 

​A lawyer can draft up a partnership agreement to set clear expectations for your business and help you minimise disputes. 

3. Understanding and working with your stakeholders

Even if you have set up as a sole trader, sole director and secretary of a company, chances are, you won't always work as a lone ranger, you will need to interact with a range of stakeholders, here are some important ones: 

ATO

Regardless of your structure type, you have taxation obligations including monthly, quarterly or yearly reporting on items such as GST, PAYG.

Australian Securities and Investments Commission (ASIC)

If you have set up a company, you are accountable to the regulator ASIC. You must notify ASIC of certain company changes such as appointing a new director, changing your business address, issuing shares and the resignation of a director or secretary.

Fair Work Commission (FWC)

The FWC is Australia's national workplace relations tribunal. They set minimum national employment standards (NES) and minimum wages in awards. If you have a dispute with an employee that involves a dismissal, that worker may be entitled to seek a remedy from FWC amongst other places.

Health and safety regulators

SafeWork is New South Wales' health and safety regulator. SafeWork provides advice on improving work health and safety, provide licences and registrations for dangerous work and they also investigate workplace incidents and enforce work health and safety laws.

Insurers

You may need to contact insurers to comply with your lease or any other another legal contract. Insurance may include public liability, professional indemnity, glass, contents and plant and equipment.

Suppliers

Anyone that supplies any product or service to your startup - IT, advisors, manufacturers, contractors and sub contractors. Larger organisations

Should I accept another party's contract or draft my own ?

Larger organisations including advisory firms that you deal with may supply you with a contract or terms and conditions. You can review these and have them revised or request additional terms. A lawyer can help you do this.​

4. Contracts

Business contracts are useful to set clear expectations and minimise the risk of legal proceedings against your business. Here's a list of some useful contracts to have drafted early on:

  • Shareholder agreement: If you have set up a company and have allocated shares, a shareholder agreement is useful to outline shareholder rights and responsibilities, transfer and sale triggers, voting procedures and more. 
  • Founder's agreement: this agreement is used by 2 or more founders to outline roles and responsibilities, dispute resolution procedures, IP ownership, confidentiality and more.
  • Contractor agreement: this agreement sets out the work relationship, expectations, roles, responsibilities, dispute resolution, IP and more.  
  • Employment agreement: similar to the contractor agreement, sets out work expectations and can help you minimise disputes with workers. 
  • Advisor agreement: suitable if you have someone providing advice to your startup and you want to clarify duties, IP ownership and ensure confidentiality.  
  • Confidentiality agreements: protect your business secrets and are useful when you are speaking to advisors, prospective business partners or collaboration partners.
Bringing it all together

Checking your existing employment contract for post employment restraints and discussing any uncertainties about these with a lawyer can help you get off to a stress-free launch of your startup.

After this, you can start looking at the best possible business structure from a legal and tax perspective. 

Knowing your stakeholders is essential to running a business that is compliant with local laws and regulations. 

Once you have decided on a structure and have set it up, you can start to enter contracts. Contracts may include supply agreements, employment, contractor agreements, lease, equipment rental and ​business purchase contracts. At this stage you may want to either have these contracts either drafted or reviewed if they have been provided to you e.g. a lease.

Do you know someone that's considering leaving their 9 to 5 to launch a startup ? Feel free to share this article. 

 

 

 

About the Author

In October 2014 I founded Michael Law Group to make legal services accessible to startups that would otherwise DIY, rely on legacy contracts or go without.

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