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To succeed with your startup, you have to find ways to monetize your ideas that comply with the law and use the law to protect your business, all without letting it become a distraction.
Here are five startup law issues that you need to know about, at least at some level:
1. Business Formation
There are many reasons you should form a business entity for your startup rather than operate as a sole proprietorship. In Hong Kong, in most instances, that will mean a limited company. Limited companies can protect the founders and investors from corporate liability, own property, open bank accounts, have different types of shareholders (holding common and preferred shares), sue and be sued, and carry on business both in and outside of Hong Kong.
It is important to form your company early and to document the formation, the ownership, and the agreed arrangements among the shareholders. All of this can be done cheaply by professional corporate service providers but if you want to make sure that it is done properly, taking into account the current and future needs of the business, as well as the preferences of the founders (and investors), you should speak to a startup lawyer first.
2. Intellectual Property & Confidentiality
As a startup, your most valuable asset will likely be your intellectual property Trademarks protect your name and branding, trade secrets protect certain kinds of confidential business information, and patents protect any inventions your startup will use. All of these require registration to enjoy protection from outsiders. Copyrights protect creative works such as songs, literary works and computer code but are automatically protected and normally do not need to be registered.
If you like most startups, you will also need to design a website and register a domain name for it. Like the other intellectual property created for the startup, steps will need to be taken to transfer ownership of your domain name to the startup itself and you will need to seek advice from a startup lawyer on this.
There is no one-size-fits-all time for registering IP but as a rule, before settling on a name for the startup, you should have a trademark search and companies search carried out to ensure that no one else is already using the name.
To avoid disputes and ensure everyone knows what their role and responsibilities are, you will need suitable written agreements in place with all of your co-founders, employees, and contractors, that make it expressly clear that the startup owns all IP and not the individual creating the IP. In addition, you should have a standard non-disclosure agreement (“NDA”) for third parties to sign that prohibits them from disclosing and/or using your confidential information.
3. Securities Law
Although crowdfunding laws in the US may eventually evolve to the point that it is relatively easy to approach investors funding, here in Hong Kong, there are longstanding legal restrictions on raising capital from “members of the public” and these can make it illegal for you to approach potential investors for funding. However, there are exceptions that allow startups to raise money without breaking the law.
You should know that the most popular and useful exceptions require you to only raise money on a private placement basis or from professional investors (a narrowly defined group of individuals). You should always speak to a startup lawyer before raising money for your startup, even if you are just raising money from family and friends. This can avoid unrealistic expectations on the part of investors and unwittingly tying an unrealistically low valuation to the startup.
4. Employment Law & Commercial Law
Employees and contractors are treated differently under the law, with employees given greater protection.
Before engaging individuals and/or vendors to perform services for your company (eg: app developers), you need to speak to a startup lawyer about what they are going to do, who is responsible for what, how they will be remunerated and, most importantly, who will own any IP they might create in the process. You can then work with your startup lawyer to create a suitable agreement to govern the relationship. In all likelihood the startup will only need a few of these to begin with.
5. Contract Law
Wherever possible, you should use written contracts when dealing with third parties. Oral agreements are normally enforceable in Hong Kong but proving what was agreed on can be complicated (read: expensive).
If limited time or resources prevent you from preparing written contracts, send out a binding letter of intent or, at the very least, a follow up email and send it to all everyone concerned to document the key terms of your agreement. That way, if a dispute arises, you will have some evidence of what was agreed.
These are the basics. For any given startup, a dozen or more legal issues may surface within months of launching but failure to obtain sound legal advice on any of these could lead the startup down the wrong track.
If you need advice in relation to these or any other legal issues, please feel free to contact our startup Partner Stephen Chan