In most other articles about navigating legal challenges, you’ll find countless laws and comprehensive lists of all potential legal risks – which will undoubtedly overwhelm you.
But we don’t write like most other articles.
Let’s be honest, no one wants to do ANY more legal work than absolutely necessary. We’ll try our very best to give you the most fundamental knowledge and way of thinking you need, so you can focus on growing your startup.
Let’s get right down to business.
Okay, disclaimer time (because lawyers, am I right?): If anyone asks, I did not say what I’m about to say. Okay? This is NOT a recommendation. You do you boo.
Consider this as my Liability Limitation Clause. I’m not responsible for how you interpret my words and what you do in your business. Oh, and read about the Liability Limitation below.
So. Sometimes, when you start a new business, you just need basic coverage, nothing more. You can follow the 80/20 rule. Just implement quick minimal improvements to gain most of the basic legal protection.
For example, you can design your basic Terms and Conditions document with an AI, or you can use a service that you can easily google (and that costs less than feeding your latte addiction).
When you become rich and visible (fingers, toes, and other appendages crossed), then you can improve it.
But once again, you do you. If you highly prioritize legal risks right now – go find a lawyer and cover them ASAP.
Also, founder to founder – don’t place too much trust in the advice and opinions of people who have never invested their own money.
Yes, consultants and advisors can provide valuable insights.
However, their perspectives might not be… how do I put it… the same as from someone who has firsthand experience and who can provide you battle-tested advice.
When you create contracts with your clients, employees, freelancers, or vendors, be careful. If you don’t elaborate on certain clauses well, the other party can put you in serious trouble.
That’s why I want to give you a list of the most common (not all possible!) clauses that you need to know about as a founder. And don’t worry, it’s all in plain English – not Legalese. You can relax your brain cells.
Here’s how to not encounter a “got ya” moment and lose valuable time and money:
Widely known as ‘NDA’. Protects sensitive information shared during the relationship.
Usually, many parties start their relationships with a separate NDA signed. This formal step is required to guarantee that the further information shared mutually will stay between the parties.
But the NDA clauses can also be included in the further contracts signed.
Specifies what constitutes confidential information, the permitted uses, and the duration of confidentiality.
Tip: Make sure the clause excludes publicly available information or knowledge acquired independently.
A non-compete clause prevents a party from working with competitors or starting a competing business for a specific period and within a defined geographic area after leaving the company.
If you include this clause in your contract, but don’t describe the restrictions specifically enough, they might be unenforceable in many jurisdictions. On the other side, if you make it too unfair for the other party, you might get some karma. Let me give you an example.
In 2016, the sandwich chain Jimmy John’s got sued for barring low-wage workers from working at ANY restaurant selling similar items within three miles or two years. This is unfair and very broad.
Actionable tips: Narrow the scope of the non-compete. Offer adequate compensation if the clause really puts the other party in a bad position. Check local laws, as some states (like Cali) straight up prohibit non-competes.
This bad boy protects you against those cheeky employees who want to ‘steal’ your employees, clients, or suppliers.
The motivation behind this clause is pretty reasonable. Companies spend tons of money and time finding, hiring, and teaching their employees. Obtaining loyal clients and choosing reliable partners is hard. It’s natural that companies want to protect these networks of connections in the Non-Solicit clauses.
They don’t want anyone (clients, partners, or other employees) to easily hunt for their team members, clients, or suppliers. So, if the fact of solicitation becomes clear – the party who broke this clause may be seriously fined.
Tip: Usually, the non-solicit clauses only apply for a certain period of time, not forever. Negotiate reasonable timeframes to avoid unnecessary restrictions.
An intellectual property clause secures the ownership of work produced by freelancers or contractors. When you pay for work, it should be your ownership. You… paid for it, you know?
To this end, include “work-for-hire” clauses to put it in writing that your company owns all creations produced by the agreement.
Really-quick-storytime: In 2012, a former designer sued Pinterest, claiming he contributed significant early design work but was never compensated or recognized.
The payment clause is quite obvious. It specifies how and when payments will be made, including payment terms (e.g., net 30, net 60), methods, and penalties for late payment.
Tip: Be clear and thorough there. Shift towards tougher payment terms (earlier or upfront payments) – for new clients. Give more flexibility to those that you trust well.
Not a lot of rocket science here.
The indemnity clause basically says that if something goes wrong (like a lawsuit or a big mistake), the party who caused the issue has to pay for the damages or losses. It’s like a mutual safety net that makes parties protect each other from legal risks.
Example: You sign a deal with a contractor to build your website. Later, they use copyrighted images without permission. The copyright owner sues you for using their images.
With an indemnity clause, your contractor has to pay for all the costs of the lawsuit since it was their mistake.
Tip: Narrow the scope of indemnity to avoid unexpected liabilities. You don’t want to be responsible for the issues that were not under your control.
The liability clause limits how much a party can be held responsible for if things go wrong, so they don’t face unlimited or unfair damages.
Usually, it excludes liability for indirect, special, or consequential damages by saying “Even if something bad happens, I won’t be responsible for paying unlimited amounts of money.”
It also protects a party from being held responsible for things outside their control.
Tip: Make sure though that the liability limitation does not exclude liability for being extremely careless like ignoring the safety or security rules or intentional misconduct.
The dispute resolution clause defines how disputes will be handled—through litigation, arbitration, or mediation. It also specifies the governing law and jurisdiction.
Alright. What are litigation, arbitration, and mediation in Legalese?
In simple words:
Tip: Choose a dispute resolution method and location that minimizes costs and delays. Be realistic: you won’t go to court if the contract sum is just a hundred (or two) bucks.
A termination clause tells both parties how and when you can terminate the freelancer end the contract. Here’s what you automatically turn into once you sign it:
See how we linked the image source? You are currently witnessing a master at avoiding legal pitfalls.
A problem you could run into with these clauses is being vague about whether the termination was justified. You need to have clear exit terms if you don’t love financial and/or operational problems.
Also, include provisions for notice periods and penalties, if any, for early termination. This way, you make sure people don’t leave you hanging out of the blue. If you include a clause that states a 30-day notice period, you’ll have some time to find a replacement.
An operating agreement is pretty much a founders’ playbook. It helps you define many, many important things.
First, you use it to define who owns what percentage of the company. Never fight your co-founders like your dad and uncle fight over that one plot of land ever again!
Second, it helps you define specific roles and responsibilities. When you clearly assign tasks and roles to each co-founder, the workflow will be much smoother.
Third, you can use it to establish how decisions are made – unanimous vote, majority vote, merciless 20th-century dictatorship… (the dictatorship one doesn’t exist, it’s called ‘specific founder authority’)
Seventy-fifth… yeah, this agreement can help you with many things. The point I want to make is that it’s really important to CLEARLY establish boundaries, responsibilities, and benefits between cofounders.
An operating agreement can help you with that, but not quite like getting our Make it CLEAR Course. If you want to learn more about building unbreakable co-founder relationships, that’s the place to be.
“Patenting is for the weak”, said Elon Musk, the CEO of Tesla and SpaceX, probably leaning forward and slamming his fist against a wooden table.
Elon doesn’t focus on protecting his technologies through patents – he aims to be so unbelievably innovative that his competition wouldn’t get anything from copying his stuff.
Is this approach controversial? Come on, it’s Elon Musk. But does it also highlight a crucial aspect of intellectual property strategy? Ab-so-lu-te-ly.
While patents offer legal protection, they can also slow down the innovation cycle and create barriers to entry for smaller companies. As a startup founder, you’re agile, you’re quick. You could benefit from focusing on rapid iteration and market validation rather than getting bogged down in the complexities of patent law.
While legal protection is essential, it shouldn’t come at the cost of speed and innovation. Sometimes, a focus on speed and execution can be a more effective strategy than relying solely on patents.
If you’re a small startup founder and you decide not to use patents, it’s important you understand some “alternatives”:
Listen up. I know what I’m talking about here. In 2008, when I was young and silly, I had my first startup – the face-swapping technology for videos, with user-generated content. Now I don’t know why, but back then we decided it was an awesome idea to patent the thing, first things first, and THEN build and validate the product.
So, we spent thousands of dollars and months of our time to do the patent research and get the paper. Then we started to build and test the product.
It became an absolute disaster due to poor user research, and dramatically slow and complicated technology (yeah, back then in 2008 you had to wait hours to render a video on your desktop, and your mobile phones were as powerful as calculators).
That technology was never used. There was no need to patent it at that stage of our business.
Result: We burned our money! We wasted our time. But hey, at least we obtained an awesome patent, right? *cue the sad violin music*
I didn’t make such mistakes after that.
Now I’d go for an expensive patent research procedure only after I get enough proof that the technology I designed will actually be used.
Same with the trademarks. I’ve been registering some trademarks lately, but only after I understood that the thing is actually viable.
The question you should always be asking yourself is “Why are we doing this?” If you simply ask yourself that question, you can avoid making mistakes while caught up in the excitement of launching a new product or service. Is the patent really required at your stage?
You can read our “Why Launch a Startup” Article for more advice on market research and idea validations.
If you plan to sell your business or leave it, you need to think about the legal side of things.
Buyers might have specific demands, like making sure all contracts are in order or ensuring there are no hidden legal problems. By preparing for these requirements early, you can avoid surprises or legal troubles during the further sale or exit process.
And then, completely unexpectedly – the famous operating agreement comes in and saves the day. Include a clear exit strategy in the agreement and have a smooth and conflict-free exit. It’s very important.
When seeking investments, you navigate complex securities laws to avoid legal issues. You got this, don’t worry. For starters, understand the differences between SAFEs, convertible notes, and series seed preferred stock.
One last thing I’d like to tell you about is performing regular legal check-ups or ‘legal health checks’. Just periodically review contracts, compliances with regulations, and updates on intellectual property protections. The more proactive you are, the more you can avoid costly legal issues.
There’s a lot of very specific information you can find online. In this article, I wanted to share my thoughts on navigating the legal ‘stuff’, from founder to founder. Here’s a quick overview of what I’d like you to remember after you click on the next blog or YouTube video:
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