5 tips for more legal security at start-ups

Especially at the beginning many founders commit legal mistakes. That’s even understandable. Nevertheless, legal security is essential right from the beginning.Because mistakes made here can sometimes lead to extremely unpleasant or even fatal consequences.

Founders can make many mistakes.

For legal certainty, in my experience, the errors in the choice of the legal form, lack of trademark protection, too many shareholders with too few shares, the owner of intellectual property rights and the restriction of options for action in the dispute are crucial.

Nevertheless, they are not only the most common. In addition, these are the mistakes that can be easily avoided.

1. Wrong corporate form

The company civil law (GbR) and other forms of company without limitation of liability such as the OHG or the KG are not the right ones, especially for risky business models. At KG at least one shareholder is liable without limitation.

In both forms, it is not only the society itself, but also all or certain partners, personally and unrestrictedly, with its entire private assets.

Since most start-ups fail, founders often have to bear some of the claims against the company in this case. They do not even have to have a guarantee or something similar. Particularly regrettable is that this problem many founders is not aware.

For more legal certainty, it therefore makes sense to clarify precisely what kind of requirements have to be made of the company form before it is founded. If there is a risk of liability, the founders should consider limited liability companies such as the GmbH, but also the AG or the GmbH & Co. KG.

This recommendation applies even though these forms are more demanding in terms of start-up costs and capital requirements.

2. No trademark inspection of company or product names

The names of a company or a product often represent a not inconsiderable value of a start-up. Therefore, founders are well advised to consider potential violations before using a name.

If other rightholders object to the use of the product, service or company name, this can lead to costly litigation and procedures.

But even worse: The ban on the use of an already established brand often does not only cause damage to the image. It can also have further financial consequences if another product name is used and needs to be placed on the market.

In order to guarantee the legal security, specialists should always carry out a so-called trademark search before using a designation. It is important to ensure that a so-called similarity search and not just an identity search is carried out.

3. Many shareholders with small shares

Another common mistake made by founders is that they involve a large number of investors – business angels or friends – in the initial phase of their start-up, with small shares. Participations of three to five percent of the shares are only advisable if there are good reasons for doing so.

Founders should be aware: In spite of the small share, each of these shareholders basically has all shareholder rights. This gives him a strong position.

It can therefore be unfavorable situations when a shareholder with a small share in a round of financing or at the exit attempts to massively improve his position by blocking.

The situation becomes even more complicated if this shareholder has strengthened his position with favorable arrangements in the articles of association and this has not attracted the attention of the other shareholders because they did not recognize the importance of these provisions.

If there must already be shareholders with small shares, the shareholders should pay special attention to the articles of association. As a result, they can largely prevent blockades and thus increase legal security.

And another practical note: Even professional investors usually do not want to deal with a large number of shareholders with minority interests.

4. Property rights in the wrong hands

From the start, founders should ensure that property rights are transferred to their business. The reason is simple. As a rule, these rights do not arise with the company, but with the persons involved (graphic designer, author or inventor).

At the latest in a round of financing, a due diligence will be carried out to find out who owns property rights. Decisive here are the contracts for the transfer or the automatic transfer from the inventor or author to the company.

If no contracts with transfer clauses have been concluded – for example with freelancers – or the property rights have been automatically transferred by legal regulations – for example for employees, but not for managing directors – one should subsequently conclude corresponding agreements for the transfer of property rights with the employees and other parties.

Incidentally, for even more legal security, there should always be a separate regulation for managing directors in the management contract for the obligation to transfer an invention.

Founders should keep in mind that the longer the right of protection exists, the more difficult it becomes to conclude transfer agreements. After all, employees may no longer work for the company. In the worst case one has separated in the dispute.

One should not forget that not only the employees, but also the founding shareholders themselves have to transfer their property rights to the company.

One more note: there are situations in which it makes sense, in contrast to the predicted, if certain property rights are not in the company. This can be the case, for example, so that a particular property right does not fall into the insolvency estate in the event of insolvency.

However, this then requires separate considerations and planning. In particular investors are regularly not particularly pleased when they hear that the most important protection right for the enterprise of the enterprise does not belong at all to the enterprise.

5. Dispute and Dispute Resolution

In the beginning, everything is mostly vain sunshine with the partners. Closing problems and disagreements are suppressed. In many cases, founders are therefore not concerned with the question of how to deal with it, if it comes between the partners to the dispute.

Consequently, social contracts often contain no provisions on a shareholder dispute and, above all, on its dissolution. However, founders are well advised to assume that there is usually a dispute between the partners in each start-up.

For more legal security in the company there should therefore always be a contract that contains rules on the dispute, the place, the procedure, the termination, the removal of shares and the exclusion of shareholders – if it can not be otherwise.

An argument is very stressful on a regular basis. Probably the start-up in which a dispute can be ended quickly.

Conclusion

For many founders, these challenges are very large and sometimes overwhelming. It is therefore popular to simply ignore the issues involved in these challenges.

However, the consequences can be fatal and threaten the existence of the young company.

Founders should be aware that the challenges mentioned above can all be managed. It just requires a bit of work and careful planning. So that you can then turn back to the latest marketing strategy or product improvement.

Also interesting:

  • The right legal form: If the GmbH is not the best choice
  • This minimum information needs your social contract
  • These tips will help you make better contracts
  • These are the top 15 start-ups from Germany

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