Startups: Plan ahead to avoid costly legal disputes
Facebook v Winklevoss
Uber v its “contractor” drivers
Innocent Drinks v Deepend
The above are examples of cumbersome and potentially avoidable legal battles that notable Startups have had to deal with. The Innocent Drinks case in particular stands out as a glaring example of a Startup being so keen to get the product out to market, that the legalities and contracts in the background became merely words on a page.
So what went wrong?
Innocent put in place an agreement with a firm called Deepend to design Innocent’s logo. Apparently Innocent thought that having the words assembled in print was enough and so it was never signed. As most of you will know, Innocent went on to achieve great success with their healthy snacks and drinks range. Good news for Innocent.
Deepend did not fare too well though and its intellectual property (IP) in respect of the Innocent logo was eventually bought from its liquidator, seemingly for the purpose of bringing an IP claim against Innocent. Not so good news. Eventually after a long drawn out legal battle, Innocent won the case but it lost much in the process, money and oh so precious time.
I use the following 5 key development stages to help Startups think about the legal issues they face:
Stage 1: Forming your idea
Stage 2: Developing your idea
Stage 3: Incorporating a company
Stage 4: Developing and launching the product
Stage 5: Growing your client base and your team
Over the next week or so, I’ll look at each of those stages in turn, I’ll consider what are the usual workplace related issues that arise in those stages and suggest how you you Startups out there can deal with such issues and protect your business and ideas. So here goes…
Stage 1: Forming your idea
Eureka! You’ve found a hole that needs filling and have just conceived of your breakthrough idea. You may have thought of a way to use Bitcoin to alleviate world poverty or maybe you have created a new way for lawyers to reach more clients, all great stuff. But before you plough ahead and materialise those thoughts into a plan of action or any initial prototype, stop and have a think about whether you are bound by any current obligations that might affect how you develop your idea.
Employment or consultancy obligations
You may currently work for an employer or be engaged as a consultant by a principal. In either of those cases you may have signed up to an agreement which restricts what outside work you can do and which may transfer any IP you create to your employer or principal. Even if your employer has not provided you with a written agreement, any IP you create which is relevant to its business might belong to it anyway (consultants on the other hand usually own the IP they create unless there is a specific assignment in place).
You will want to check any relevant confidentiality clauses, IP provisions, outside interest clauses and post-termination restrictions — which could prevent you operating in the same space as your employer or principal, dealing with their clients or working with particular people for a certain period of time after you break out on your own. That is all important stuff that should be considered before you turn your idea into reality.
Obligations to your University
If you develop any part of your business because of or incidental to your University course and you use University equipment or know-how to do so, the University might have claim to your IP. So it is worth checking through any materials or policies provided by your University.
3 Key Tips to avoid legal battles at this stage
1. Keep your new venture separate from your 9–5
In respect of protecting any IP you create at this early stage, it is advisable that you do any work outside of your normal hours for your employer/principal/University, that you do not use their equipment or confidential information and overall that you keep your new business idea as separate as possible from your 9–5.
Also, you don’t want to end up getting sacked before it’s your time to leave, so be careful not to breach any outside interests clauses — the amount of times I have come of across people working on their own projects on their employer’s time and money is astounding. Stick to creating your empire from your bedroom, not your cubicle at work!
2. If you can’t avoiding competing, get out quick
Ideally your plans would not compete with your employer’s/principal’s business, but if they do you may want to think about resigning/ending the consultancy before starting your new venture in earnest. If you start to compete (or even take steps to compete in future) with your employer/principal in breach of contract, you and your new business could be on the hook for damages and you might face possible court injunctions to stop your business operating for a period of time!
Getting out quick also means that the clock on any relevant post-termination restrictions starts to tick and you’ll be free of them sooner rather than later.
That said, you might work for an innovative employer or principal that is happy to partner with your disruptive prospect and if so, maybe it’s worth raising the idea with them as a business proposal. In most cases though, this is likely a dangerous move!!
3. Manage your way around post-termination restrictions
Post-termination restrictions issues can be complex. If they are relevant, it is recommended to take specific legal advice on whether the restrictions are enforceable, the likelihood of them being enforced and ways that you might be able to skirt the edges of the restrictions without being in breach.
Tune in on Monday as I move on to Stage 2 — developing your idea.
The above is intended as guidance only and is not legal advice. Please feel free to get in touch if you need specific legal advice on such issues.