So you think you’re ready to launch a startup. You’ve honed your idea, shopped it around, and begun developing your product or service. You even have a name. And it’s a good one. You’re excited to bring your product or service to the market, develop your brand, and hire a team member or two. That’s a great start! But how do you know when it’s time to form a company? Is it too soon to do so before your product is fully developed? Or is it too late after you’ve built a team of three?
Of course what’s right for each company is different, and there are different types of companies one can form (your lawyer can help you decide which one is right for you), but generally speaking, there are a few milestones in a startup’s lifecycle that indicate it might be time to put an entity behind all the hard work you and your co-founders have been doing. So for founders who are cautious about spending the time, energy and money to form a company, here are a few things to watch out for. When these things happen, it’s probably a good time to talk to your lawyer about forming a company.
- When there are multiple founders involved - Most co-founders start off working really well together. Otherwise they wouldn’t have become co-founders, right? But it doesn’t always stay that way. So it’s best to have a clear understanding up front of who owns what portion of the company and what each person’s role is, so if trouble arises down the road, additional disputes about jobs and ownership can be avoided.
- When intellectual property has been developed - It’s best for the company’s valuable stuff — software, hardware, etc. — to be owned by the company rather than the people who developed it. That way there’s no confusion about what valuable materials belong to which individual founder. Rather, the company owns all the intellectual property that’s been developed, and the founders own the company.
- Before signing an agreement with a third party - Signing an agreement as an individual can open you up to liability, meaning that if something goes wrong, your personal assets could be at stake. In most cases, if a company has a dispute, the individual owners of the company aren’t held liable. So while disputes aren’t great, and certainly no company wants to deal with a lawsuit, in the event that one should take place, at least the individual founders don’t have to worry about losing their savings.
- Before launching a product or service into the market - As you can imagine, once a product is out in the wild, or once people start utilizing a service, things can go wrong. Things break, people get upset, and problems ensue. This, too, can mean lawsuits, which a company is much better equipped to handle than an individual. Additionally, if you’re planning to apply for a patent, your ability to do so may depend on you and your team having kept quiet about what you’re building. In these cases, your lawyer may advise you to form your company and apply for your patent shortly thereafter, so you’ll really appreciate having spoken with him or her!
No two startups are exactly alike, so each one has a different motivation for going through the process of forming a company. The list above offers some general guidance, and your lawyer can help you decide if the fact that you’ve hit one of those milestones means it’s time for you to get started!
Gesmer Updegrove LLP | https://www.gesmer.com/ Gesmer Updegrove LLP is a law firm committed to the success of your company.
