Legal basics for startups

Dominique Kunz
Jul 30, 2019 · 7 min read

As an entrepreneur, you want to focus on building your product, closing deals and scaling your company. Legal is often a distracting and time-consuming challenge for first time founders. To help you navigate the maze, we talked to Christian Meisser, CEO at ​LEXR​, about legal basics for startups. Here are the areas you need to have covered for a sound legal setup of your company:

You can listen to the full interview with Christian ​here​.

Contract law — Know what you agree to

Sales Contracts

Things you should have covered in your sales contract:

1) The scope of exactly what you owe and how much you will be paid for it. Be very specific here. Even if you feel you have a common understanding with your negotiation partner, you are signing the contract not with him or her personally, but with a company. Your counterpart may be replaced and another person may not see eye to eye with you anymore.

2) Include a liability cap for the damages that you can exclude under applicable law. If your product causes unexpected harm to the client, the liability may break your company’s neck. Therefore, cap the liability at an appropriate value.

Purchasing Contracts

HR Law — Keep your employees happy and protect your business

Consider a stock option plan or phantom stock options as part of your hiring package to incentivize your employees. The decision between the two options should be driven by the tax policies of the Cantons where your company and employees are domiciled as well as the expected value increase of the shares that could eventually be taxed.

  • Employee stock options: The advantage of stock option plans is that the capital gain of the shares will be tax free for employees. On the downside, having additional shareholders will put a larger administrative burden on the company. ​
  • Phantom stock options: Phantom stock options are an alternative to regular stock option plans. They don’t confer actual shares to the employee but rather “mirror” the share’s price development. In case of an exit, the value of the “hypothetical” share is paid to the employee as a lump sum payment. Phantom stocks place less of an administrative burden on the company. The payments resulting from phantom stocks will however be taxed as income at the employee level.

Specify the handling of any IP produced by the employee and make sure it is transferred to your company automatically.

Ensure post-contractual confidentiality is part of the contract, so that employees cannot disclose your secrets to competitors. Such clauses are more effective than non-compete clauses, which are usually difficult to enforce due to a lack of specificity.

Corporate law — The money and power structure of your company

Corporate law & cofounders

Vesting schedules ​are one important point to this. In general, you want vesting schedules to be as fair as possible, however they shouldn’t be too much administrative effort either. In Switzerland you see a move towards the American model, which is typically 4 years vesting with a one year cliff (after one year you get a fourth of your allocated shares and then on a quarterly basis you’ll vest your additional shares until you have your full stake).

Corporate law & investors

When it comes to shareholders, especially be wary of ​liquidation preference clauses ​in shareholders agreements. Often they’re set-up in a way that in case of an exit, your investors will receive their payout first, potentially leaving you and your co-founders with little to no money left over.

To get an idea of how a term sheet, an investment agreement, a shareholder’s agreement, articles of association and board regulations looks like, check out free templates, e.g. from Swiss Private Equity & Corporate Finance Association. These can help you get prepared for upcoming negotiations and manage expectations. Be aware however that these templates tend to favor the investor side and might need to be adapted to your startup’s needs.

Regulations — Know the regulatory framework of your sector

Most other regulatory matters are very sector specific. If you’re operating in a regulated industry, knowing the law is crucial. As a first step, talk to founders in the same industry or check out what regulatory hurdles competitors had to overcome. Once you have a clear business idea, it is advisable to talk to a lawyer. For businesses in highly regulated industries (e.g. finance, healthcare) it may also be worth having a lawyer in the founding team to avoid skyrocketing legal costs.

Intellectual Property Law — Protect your ideas

  • Software is generally difficult to protect legally. While it’s protected under copyright law, it’s often the idea behind that’s valuable and not the exact code itself. Thus, the same idea could be executed with different code and copyright doesn’t necessarily help you in this case. Therefore, the only way to protect your source code is to make sure you own it and not to disclose it.
  • An invention — typically a physical good or hardware ​can be protected under patent law. In this area, filing patents and making sure you’re not infringing any can be important. Patent law is a rather challenging field, so consulting a lawyer may be advisable.
  • Brand names ​can be protected under trade mark law. If your business is heavily dependent on your brand name, secure the trademark. If your brand name is not vital and you’re on a tight budget, a Google search, checking the commercial- and the Swiss trademark register might be enough to start. Be aware that if you don’t register your brand, you might need to change your brand name later if someone else claims it.

How to find the right legal partner

  • Ask for a free half hour chat with your prospective partner to find out whether they have enough expertise in your particular business area.
  • Get references from other startups to find out how they work and if they’re competent.
  • Ask for fee caps, to ensure that costs for a certain task will not exceed a pre-agreed budget.
  • Check out law firms that offer flat-fees. LEXR for example develops more and more flat-fee packages that cover specific services on a transparent fix price. This means you know exactly what you’re getting, and the package has usually been tested and improved with other startups before yours and services can be delivered fast.
  • You can find flat-fee packages which cover documents and advice in the five areas (HR, Corporate, Contracts, IP and Regulatory) for CHF 2500.

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