MHC Tech Law: 5 legal pitfalls for high potential start-ups


12 Dec 201636 Shares

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For high potential start-ups, there’s a lot of murky water in the legal world. Mason Hayes & Curran explore the five most common mistakes they see and how start-ups can overcome them.

The global technology sector is experiencing considerable growth at present. Companies like Uber, Airbnb and Spotify – that were start-ups only a few years ago – are now reaching the status of ‘unicorns’, having a valuation of €1bn or more.

In Ireland, government and state agencies and the various incubators and accelerators are providing vital support to entrepreneurs to help grow the tech sector. It can be tempting for a high potential start-up (HPSU) to prioritise its service offering over governance and compliance.

This is one of the most common mistakes we see. We examine five common legal mistakes and suggest practical ways that scaling HPSUs can identify them early and overcome them.

1. Solve strategic issues at the beginning

A HPSU with plans to scale should prepare appropriately by addressing a number of strategic issues at the beginning of its journey. These include choosing the right corporate structure to enable continued growth and attract funding, preparing appropriate shareholder agreements that clearly define share ownership, and obtaining tax advice to employ an efficient tax structure.

Other important tasks include drafting employee share plans that incentivise the retention of key staff and getting essential supply chain contracts in order.

Having these items in place will show potential investors that the company has considered the various legal and operational issues that are often at the core of why so many HPSUs fail.

2. Protect confidential information

Before disclosing its valuable confidential information, intellectual property and trade secrets, a HPSU should require potential business partners, suppliers, funders and staff to sign a confidentiality agreement, also known as a non-disclosure agreement (NDA).

Ideally, the HPSU will instruct its legal advisers to draft a robust NDA that it can repurpose for different engagements, rather than having to be redrafted from scratch each time.

3. Pre-empt the consequences of exiting employees

For many HPSUs, losing a key member of staff can cause significant disruption to its operations. However, it can avoid many of these issues if the template employee, consultant or shareholder agreement used by the HPSU readily addresses what happens in relation to key matters like intellectual property, shares and confidential information, if a member of staff leaves the organisation.

4. Intellectual property chain of title

A large portion of the value in a HPSU relates to its technology and brand. The core intellectual property, which can often be software-based, needs to vest in the company. A HPSU, therefore, needs a clear chain of title for all of the intellectual property (IP) that it owns.

Putting in place licensing, contractor and employment agreements that contain suitable IP provisions can help achieve this. For example, if any contractors or consultants have assisted in the development of IP, there should be a written agreement transferring this IP to the company on completion of a project.

In addition, a HPSU should adequately protect all IP that it owns or licenses. Where necessary, it should file patent or trademark protection for the company’s IP. It should also ensure that all relevant website addresses and social media sites are secured for its brand.

5. Create a paper trail for due diligence

As is generally true for all emerging companies, funding is critical to the continued growth of a HPSU. Creating a due diligence paper trail is the perfect way to make the HPSU more attractive for future investors and help navigate potential legal pitfalls. To achieve this, the HPSU should document in writing, and keep in a safe place all of its:

  • contractual arrangements, whether with business partners, suppliers or staff
  • IP registrations
  • IP licence and assignment agreements
  • audited financial statements and management accounts
  • any correspondence about legal claims against the company, both threatened or actual. It is also prudent to ensure that its statutory books and records in the Irish Companies Registration Office are up to date.

Tech Law is a weekly series brought to you by Irish law firm Mason Hayes & Curran, whose legal tech team advises the world’s top social media organisations and emerging start-ups. Contact a member of the MHC Technology team or visit www.mhc.ie for more information.

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