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Although starting a new business is an exciting journey, the seed stage is a crucial phase that requires various legal considerations. During this phase, you will focus on creating a business plan and developing a minimum viable product (MVP). Additionally, you will inevitably start attracting customers and seek methods to raise capital. Thus, developing a solid legal framework is essential. This article will explain the seed stage of startup financing and explore essential legal considerations as well as best practices.
1. Business Structure
Choosing the most suitable business structure is one of your first legal decisions. Options include:
- sole proprietary (also known as a sole trader);
- a business partnership;
- a limited company; or
- a limited liability partnership.
Each structure has different implications for liability, tax and governance. For example, if you set up a limited company, you can protect your personal assets from business liabilities. Unlike a sole trader, your personal and business liabilities are not intertwined.
2. Founders’ Agreement
A founders’ agreement outlines each founder’s roles, responsibilities and ownership stakes. It should cover aspects such as:
- equity distribution;
- decision-making processes; and
- dispute resolution mechanisms.
This agreement helps prevent disputes and ensures all founders are on the same page. For example, if you and your co-founder agree to split equity 60/40 based on your initial investment and ongoing contributions, you should detail this in your founders’ agreement.
As this agreement is a binding document that forms the legal basis of your relationship with your co-founders, it is crucial that you carefully draft and review it. Your lawyer can help you complete this review and ensure that it sufficiently protects your interests.
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3. Intellectual Property Protection
At the seed stage, you are likely to begin developing innovations, branding, and other assets that fall into the category of intellectual property (IP). This includes aspects such as trade marks, patents, and trade secrets. It is vital that you secure your IP as early as possible. Doing so helps prevent competitors from copying your ideas and products or imitating your brand.
For example, if you start a tech startup that develops unique software, you should apply to register the patent for the software with the Intellectual Property Office (IPO). This step ensures you retain exclusive rights to your innovations, protecting your startup’s product offering and overall value.
Moreover, you can protect your trade secrets by requiring employees, co-founders and third parties you work with to sign non-disclosure agreements. These agreements help protect the valuable, commercially sensitive information that will give your developing startup its competitive advantage.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
4. Seeking Investment
Securing investment during the seed stage can be pivotal in turning your business idea into reality. You might use the capital to fund product development, market research, or efforts to attract early customers. To set your startup up for the best chances of securing investment, you should:
- create a robust business plan;
- develop a strong pitch deck;
- build a minimum viable product (MVP);
- network and build connections with other entrepreneurs and potential investors; and
- prepare for investors to conduct due diligence on your startup.
Different types of investors provide startup funding to early-stage businesses. At this point, you should evaluate the various sources of financing, such as angel investors, venture capitalists, and crowdfunding platforms. Each offers distinct advantages and expectations. You should choose the option that best aligns with your business’s needs and goals.
5. Seek Legal Advice
It is a great idea to seek legal advice as early as possible. Engaging with a startup lawyer can help you navigate legal requirements and draft and review critical documentation. Early legal advice can help you avoid costly errors and ensure you set up your startup correctly.
6. Good Record Keeping
Keeping detailed records of all legal and financial documents is crucial. These records can also be essential in resolving any disputes that may arise and will ease your preparation for each subsequent funding round.
Key Takeaways
When starting your business, there are many legal considerations to prevent common pitfalls. Especially for seed stage startups, key legal considerations include:
- choosing the most suitable business structure for your startup;
- drafting a founders’ agreement if you have co-founders;
- protecting your intellectual property;
- deciding on the most appropriate form of investment for your business;
- seeking legal advice; and
- keeping good legal and financial records.
If you would like legal advice about funding your startup, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The seed stage is an important early stage in a startup’s lifecycle. During this stage, you will focus on creating a business plan and developing a minimum viable product (MVP). You might begin to attract customers and seek initial funding from angel investors, family, friends, seed venture capitalists or financial institutions.
Seed stage startups are very early in their development. The early stage follows the seed stage. In the early stage, founders refine their product, expand their market, and potentially scale their operations.
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