4 tips from a lawyer for your 9 to 5 to startup move
Updated: 22 January 2021
If you're thinking about leaving your 9 to 5 for the adventure of startup life, here are some handy tips from a business lawyer to consider before you make your move.
While it is important to be prepared, thinking about the detail for each step and planning for a year or more at once before you leave your 9 to 5 can be daunting.
This article will help you focus on what's important for your move and eliminate that daunting feeling of figuring it all out on your own.
So let’s take things one step at a time and discuss the important stuff.
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.
Alternatively, it may have a non-compete which stops you from working for or being involved with a competitor.
Here's an example of a non-compete clause that might be in your contract:
The Employee agrees that, during the period they are an Employee and for a period of:
(a) 12 months; or if that period is held to be invalid
(b) 6 months; or if that period is held to be invalid
(c) 3 months,
(the “Restricted Period”), the Employee will not either directly or indirectly render services or give advice to, or affiliate with, directly or indirectly through one or more of any of their respective affiliates, own, manage, operate, control or participate in the ownership, management, operation or control of, any competitor or any division or business segment of any competitor in:
(a) Australia; or if that area is held to be invalid
(b) New South Wales; or if that area is held to be invalid
(c) Strawberry Hills.
What’s a reasonable post employment work restraint?
What's reasonable is going to depend on the court's findings.
Generally, court’s don’t like restraint periods that are too long because they should only exist to protect the employer’s legitimate business interests.
That is, a restraint cannot go beyond protecting business interests and stopping a worker from earning a living.
Similarly, a restraint that bars a worker from working in the country may also be considered too wide and onerous.
What about confidential information?
Employer’s like to keep their trade secrets, client lists and business strategy confidential and safe from competitors - collectively, confidential information.
So, this means that during and after you finish working for an employer, you have an obligation to keep this information confidential.
What happens if you breach a post employment restraint?
If you breach a post employment restraint, usually the employer will send you a cease and desist letter.
The cease and desist letter will remind you of your contract obligations like keeping information confidential and may ask you to hand up or destroy any confidential information that you hold and stop working for a competitor.
A well drafted response letter could stop any further action against you by the employer so make sure you get advice if you do get a cease and desist letter.
If the employer is not satisfied with your cease and desist letter response, they may take further legal action such as seeking an injunction.
An injunction is simply a court order to stop you from doing something, for example, working for a competitor or setting up your own business.
Also, if the employer claims you are profiting from using their confidential information, they may also seek an account of profits (that is, the profits you earned from breaching the post employment restraints).
You may have an option to negotiate a reduced post employment restraint so you may want to consider getting some legal advice about this option.
Now, once you have completed a check of your employment contract for any restraints and considered your options, you can then look at your business structure options.
2. Your business structure options
In Australia, a business entity can be set up as a sole trader, company, partnership or trust.
Now, while you can always change your business structure later, you may want to avoid this hassle by setting up with the most suitable structure from the outset.
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.
Setting up as a company provides you with the benefit of limited liability.
Generally, this means that as a director, you are not liable for company debts.
So this means, the company is a separate 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.
As a guarantor, you will be personally liable for company debts if there is a default by the company.
If you receive a document such as a lease or franchise agreement asking you to sign off as a personal guarantor, it's a good idea to get advice about this before you sign so you can be 100% sure of the consequences.
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.
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.
Also, there are 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.
So how can a lawyer help you with a partnership ? 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:
Regardless of your structure type, you have taxation obligations including monthly, quarterly or yearly reporting on items such as GST, PAYG so make sure you set up your structure correctly with an accountant. Most lawyers can give you some good recommendations, we do this for our clients.
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.
FWC sets the 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 guidance on improving work health and safety, licences and registrations for dangerous work and they also investigate workplace incidents and enforce work health and safety laws.
You may need to contact insurers to comply with your lease or any other legal contract. Insurance may include public liability, professional indemnity, glass, contents, plant and equipment and management liability aka directors insurance which most client's don't consider.
Also, you may need to list your financier or your landlord as an interested party on your insurance premium. Both can give you guidance about this.
Suppliers include anyone that supplies any product or service to your startup - IT, advisors, manufacturers, contractors and sub contractors.
Should I accept another party's contract or draft my own?
Larger organisations 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.
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
These are the key points to keep in mind for your 9 to 5 move to startup:
- check your existing employment contract for post employment restraints and discuss with a lawyer if you are unsure
- after this, you can start looking at the best possible business structure from a legal and tax perspective.
- also, knowing your stakeholders is important so you can run a business that is compliant with local laws; and
- finally, 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 drafted or reviewed if they have been provided to you e.g. a lease.
Got questions or comments about making the move to a startup? Leave them below.
I wish you success in all your ventures!