Covering A Startup’s Legal Bases

March 20, 2018

With the spirit of entrepreneurialism rising in our area, attorneys are providing more and more advice to clients jumping into the business arena for the first time.  These clients are often at the helm of fledgling companies with scant resources, leading to higher price-sensitivity than many other clients.  With these clients, most attorneys tend to focus on basic incorporation and liability protection, and tend to rely heavily on the use of forms to keep the cost of their services down. 

While the importance of basic incorporation cannot be overstated, the drive to perform in a cost-effective manner can lead clients and attorneys to overlook other important considerations that need to be discussed with entrepreneurs early on in their venture.

One issue that requires thorough exploration is governance and the relationship between the subject venture and its stakeholders.  Oftentimes, entrepreneurs, in their push to get their venture off the ground, will take partners, early stage (and sometimes unsophisticated) investors, or barter interest in their venture for in-kind services.  These decisions can lead to conflict and often result in stakeholders that do not share a common vision for a venture’s future.  Generally speaking, entrepreneurs that start a business with multiple stakeholders don’t envision what could happen in the event a disagreement between the parties arises.  Sometimes, lingering conflicts between the stakeholders will be buried rather than discussed, and awkward conversations avoided for the sake of perceived harmony.  Often, the forms of organizational documents, which have been developed and relied upon by an attorney over a period of years, will not adequately address these dynamics.  Attorneys are well advised to spend time exploring the dynamics between a venture’s stakeholder and their expectations, and on the roles, responsibilities and rights of each party.  Spending time and resources on these issues now may be more costly in the short run, but will likely save significant time, money, and frustration over the long haul.

Another issue that is often overlooked is protecting a start-up’s tradename, words, or symbols.  This is especially true when the business in question does not have a patentable process or product, and is compounded by the fact that many lay people confuse the basics of trademark and copyright law.

One of the first things an entrepreneur will do when pursing a venture, especially a  tech venture, is search for an internet domain that fits their desired business. If the entrepreneur has a company name in mind, they may search for the availability of a particular domain, or test multiple names.  When an acceptable domain name is located, many will simply purchase the domain and move on to the next task on their to-do list.  Once a domain is secured, many believe that they are safe to conduct business under the name by virtue of their purchase.  However, registering a domain does not equate to trademark or service mark protection.  Likewise, a client or attorney may search the state’s database to determine if a particular company name is available.  Again, many will assume that if an entity can be formed under the name that a business person would like to operate, that the they are safe to operate under that name.  However, a state’s authorization to form a business under a certain name also fails to rise to the level of trademark or service mark protection.

Further complicating matters are common but incorrect assumptions that individuals make concerning trademark protection.  Despite popular belief, whether or not a mark may be used does not solely depend on how a particular mark is spelled.  A mark can be infringing on another’s use based upon the sound, appearance, meaning, and commercial impression.  Oftentimes, entrepreneurs will do a perfunctory search of the U. S. Patent & Trademark Office’s (“USPTO”) electronic database (“TESS”), but will not use search terms with different spellings or that sound the same, or similar.  Many times this leads to a false sense of security that can lead to disaster down the road.

Spending a comparatively small amount of time and money on doing a proper trademark search early can often save a company enormous sums later on.  Early stage companies will often discover that the name they have invested substantial time and resources into promoting, infringes on another party’s trademark.  This discovery can be fatal to a young company.  In some instances, the young company will be forced to discontinue the use of an offending name and, in some cases, even be forced to surrender a domain name that may lead to confusion or face a lawsuit.  Attorneys should provide their clients with information relating to trademark protection early on in the process of beginning an enterprise.  Clients should be advised to expend resources early on to properly search TESS to see if anyone has trademarked their proposed name; make sure their proposed name is a strong mark; and apply to register their mark with the USPTO or the applicable state’s trademark office.  Following these simple steps can prevent costly litigation in the future, and significant reinvestment in new marks.

There are many issues and potential pitfalls that new companies and entrepreneurs will face when starting their business.  It is crucial that attorneys work together with their clients to tailor organizational documents to match the clients’ specific needs and concerns.  Additionally, measures should be taken to protect intellectual property, including the name of the business and other matters, which could be covered by state and/or federal trademarks or service marks. A company’s best course of action may be to incur slightly more startup expenses to properly address each of these matters, rather than risking significant harm in the future.

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