Which legal services do I need first for my startup?
Updated: 2 December 2022
Do you have a great business idea you want to bring to the world? Fantastic. But launching a startup can be overwhelming. You may not know where to start and worry about finding the time and money to get everything set up from the beginning.
Worry no more. There is good news. When it comes to the legal work for your startup, you do not always have to prepare everything at once.
There are some essentials you need before launching and non-essentials that can wait.
Here are our recommendations, in order of importance, to help you best manage your time and costs for legal work before and during the take-off of your startup.
1. Your business structure
Deciding your structure is an important first step so let’s start here. The business structures you can choose from are either:
- Sole trader. Sole traders have total control of the business and it is the simplest form of business structure.
- Partnership. A partnership has two or more people who receive income from the business and share in the losses.
- Trust. Where the business is set up as a trust then a trustee becomes responsible for its operations.
- Company. Setting up a company is more complex. It is a separate legal identity so it limits your liability. Limited liability means you are only liable for up to the value of the company’s assets. Legally your personal assets are treated as being separate to those of the company.
Factors such as tax, setup costs and simplicity to operate and maintain the structure will influence the structure you choose for your startup. You may need to get tax advice from your accountant before making a decision.
Why start with structure?
An important reason is business agreements that you decide to enter in to.
In particular, if you have chosen a company structure, then you will want to start entering into agreements as a company as soon as possible. You may also need to:
- Register an Australian Company Number
- Register an Australian Business Number
- Register for goods and services tax collection
- Apply for a Company Tax File Number
- Consider Pay-as-you-go registration.
Tip. Talk to your lawyer or accountant if you do not which business structure is best for your startup.
2. Founder's agreement
If you are working with others on your startup, then a co-founder’s agreement is useful. It defines the boundaries of working together and helps with future proofing healthy founders.
So who is a founder?
A founder helps you to bring the initial business idea to life. When working with other founders, it is important to set clear roles and expectations from the outset to minimise disputes.
When setting up your startup it can be hard to foresee anything going wrong. But planning for unforeseeable circumstances makes good business sense. Set out how you and your founders will make business decisions, everyone’s responsibilities, capital contributions and the equity ownership of the business at a bare minimum. This sets clear expectations and minimises any disputes if they arise.
A founder’s agreement will usually cover:
- Duties and responsibilities.
- Resource contributions including repayment for personal contributions.
- Conflict of interest (if you have any other jobs that could create a conflict of interest).
- Restraints; for example, not working for competitors.
- Confidentiality.
- Intellectual property.
- Mediation to resolve disputes should they arise.
- Variation which is particularly important for role descriptions. This gives parties the flexibility to alter the founders agreement; for example, changing a founder’s duties if required.
3. Shareholder's agreements
A shareholder’s agreement is important if you have allocated shares to other people such as co-founders and investors.
You can give each shareholder a different class of shares. And each class of shares can have different rights attached ; for example:
- Class A. Class A may include:
- Attending and voting at all meetings. One vote for every share held.
- Participation in dividends.
- Receive repayment of capital and share in the division of surplus assets or profits of the company on winding up of the company.
- Class B. Class B may include:
- Attending and voting at all meetings. One vote for every share held.
- Fixed non-cumulative preferential dividend at the rate of 7% per annum on the capital paid.
- A right to repayment of capital when winding up the company. There is no right to share in the profits or assets of the company.
- Class C. Class C may include:
- The right to participate in dividends.
- No voting rights.
- Repayment of capital. There is no right to share in the profits or assets of the company when winding it up.
A shareholder agreement outlines the roles, rights and responsibilities of each shareholder and usually covers:
- Business and management of company
- Financing the company
- Transferring the registration of shares
- Tag along and drag along rights
- Intellectual property
- Confidential information
- Non-compete clauses
- Dispute resolution.
Tip. Ask your lawyer for advice about shareholder agreements if you are going to have shareholders.
4. Worker agreements
Depending on whether you bring on a contractor or employee, you will need a contractor agreement or an employment agreement drafted when hiring workers.
Hiring people is a complex area and is a minefield if you do not understand your responsibilities. Sure you can make a verbal contract with someone but this is not wise. It is super important to have everything set out in writing whether it is an employee or a contractor. This will avoid any disputes and everyone knows their rights and responsibilities.
Worker’s agreements include:
- Work classification — part rime, full time, casual or contractor
- Pay
- Entitlements — leave, sick pay etc
- Workers obligations
- Expenses
- Redundancy
- Overtime
- Termination
- Confidential information.
While you can prepare these in advance, it is a good idea to get them drafted just before you engage a worker so the agreement is up to date.
Tip. Talk to your lawyer about worker’s agreements to make sure they are legally binding and nothing is left out.
5. Stakeholder Agreements
Stakeholder agreements are those you have with other businesses.
What if you are dealing with an established business that has their own terms and conditions?
An established business that you want to work with is likely to have their own terms and conditions. It is wise to have your lawyer review them before you accept them.
And if you are considering or working with a business that is not willing to negotiate terms, tread with caution.
Businesses not willing to behave reasonably from the outset could cause you headaches down the track, particularly if you need some flexibility later on.
Tip. Make sure your lawyer reviews any stakeholder agreement with another company before accepting its terms and conditions.
Key Takeaways
Prioritising the legal work for your startup not only helps your cash flow but also saves you time providing instructions to a lawyer during the intense launch period when you have many other competing priorities.
The most urgent legal work is defining your business structure, founder’s and shareholder’s agreements before you launch. But if you need help, contact your lawyer or accountant.
Leave your questions or comments below, or contact me to set up an appointment.
As always I wish you every success in your ventures.