Wilson Sonsini has 19 offices in technology and business hubs worldwide.

For more information, visit wsgr.com/offices.

Legal Landmines Every Startup Should Avoid

Legal issues are the last thing most founders want to think about when forming a new company. One of the biggest mistakes that startups

and their founders often make is not involving counsel early in the life of the business to navigate a variety of difficult and sometimes

complex legal obstacles, including company formation, equity grants, capital raising, intellectual property protection, securities laws

compliance, and labor and employment law compliance. The following high-level summary (i) identifies many of these legal landmines,

any of which can delay or complicate business operations, and/or negatively impact the company’s ability to raise capital and, ultimately,

its prospects, and (ii) suggests ways to help manage and mitigate the risks associated with those issues.

Piercing the corporate veil. This legal doctrine applies when a plaintiff is allowed to look beyond the business entity to recover

damages from the business’s owners. Minimize such risk by adequately capitalizing the entity, ensuring that there is no co-mingling

of personal and entity funds in a single bank account and conducting all business activities through the entity (e.g., the entity should

be party to agreements).

3. Failing to Appropriately Address Equity

Properly approve and document all equity issuances and grants. All equity issuances and grants have to be approved by the board of

directors (or equivalent) to be valid. All oral agreements need to be properly documented.

Create and maintain a capitalization table. Record ownership percentages among the founders and any other owners of the business.

Founders’ stock and employee equity. Founders’ stock is usually issued at a nominal price and subject to vesting (a repurchase right

by the company that lapses over time). Companies that plan to offer stock options to employees need 409A valuations. A 409A

dilution.

Fundraising is all-consuming. Raising capital distracts the founder(s)/management team from just focusing on growing the business.

Spend money wisely. Hire conservatively and purposefully. Consider equity compensation (with vesting). Keep in mind that things

tend to cost twice as much and take twice as long as expected.

5. Failing to Protect Intellectual Property (IP)

Use IP assignments. Ensure that IP contributed by founders, employees, consultants, advisors, or any other service providers is

owned by (or securely licensed to) the business.

Develop and implement a comprehensive IP strategy. An IP strategy should cover IP creation, acquisition, and protection, and should

anticipate growth. IP includes utility patents, design patents, plant patents, trade secrets, trademarks and copyrights.

Use confidentiality & non-disclosure agreements. Before sharing or discussing the company’s IP or confidential information with any

Put key documents in place. At a minimum, the following key documents should be in place at the beginning among founders and

with any employee or service provider:

Among Founders:

 IP Assignment Agreements

 Key Corporate Documents

All Employees or Other Service Providers:

 Offer letter or employment agreement

 Properly drafted bonus and commission plans, if offering such incentive compensation

 Proprietary information and inventions assignment agreement, including protection for confidential and proprietary

determine whether each individual is properly classified as exempt or non-exempt from overtime and is properly paid under state

and federal law. Once the proper classification has been determined, all service providers must sign formal agreements assigning all

IP rights to the company and agreeing to keep the company’s IP confidential.

9. Misunderstanding the Scope of Restrictive Covenants

Know the scope of restrictive covenants and how they can impact the business. First and foremost, any business, especially startups,

should be aware of, to the extent possible, restrictions on service providers the business intends to hire or may have employed,

especially founders and key personnel. These restrictions can include, in addition to IP assignment, non-compete, non-solicitation,

no-hire, non-interference, and related provisions. Ignoring these can potentially result in costly litigation and potential injunctive

relief prohibiting the use of an employee, product sales, and distribution as well as disputes over lost profits.

10. Failing to Understand and Abide by Applicable Wage and Hour Rules

Be careful in the use of social media, especially in the hiring or termination of an employee. While informative, using social media

during the hiring process may lead to failure to hire claims, as well as unintended harm based on learning that an employee is in a

protected category. Similarly, when terminating an employee, use of social media may lead to a variety of other legal pitfalls, especially

if posts and use of such social media by the employee is the reason or becomes one of the reasons for terminating the employee.

12. Assuming all States Have the Same Laws and Legal Standards

Before branching into other states, be sure you know the ground rules for doing business there, including on each of the issues in this

summary. Importantly, there are multiple overlapping rules and regulations relating to business operations, which create many

variations between state and federal government, between two states, and even between cities. Accordingly, do not assume, for

example, that you can use forms or policies for Texas employees for employees in other states (or countries for that matter).

For more information, please contact:

Wilson Sonsini has 19 offices in technology and business hubs worldwide.

For more information, visit wsgr.com/offices.