Australia: 4 legal issues that early-stage entrepreneurs should consider

You have an early-stage start-up.

You're ready to start implementing your vision – building the initial prototype, pitching to angel investors, and spreading the word on social media.

But have you stopped to consider matters such as how you're going to set up and fund your business, protect your intellectual property and manage your team?

Here are four key legal issues you need to be considering while your start-up is still in its early stages:

  1. Protecting your intellectual property

It is vitally important that you think about how best to protect your IP early, particularly if it is a key asset for your business. And you should think about 'IP' in broad terms – it may not just be about traditional forms of intellectual property such as copyright, trademarks and patents; it could also be confidential information, 'big data', licensed-in rights, know-how, supply networks, customer lists and relationships.

Once you have identified the IP of relevance, the next step is to ensure that your business owns or controls (and will own or control) that IP. In some cases, such as copyright, this can arise by operation of the legislation. In other cases, such as patentable inventions, this is best addressed in express terms of a contract.

Employees and contractors should be dealt with separately as different rules apply. It is also important to consider various types of restraints, in particular when it comes to some of the non-traditional types of IP, although restraints have to be drafted carefully to remain enforceable. If the business is dealing with personal information, it is also advisable to understand the legal requirements regulating data protection and best practices accordingly.

While the term 'intellectual property' or IP is often used, in reality, the different forms of intangible property which make up this collection of rights are developed at different times and for different economic reasons. There are also different international conventions applicable to different types.

It is advisable to seek advice on:

  • how and when the different rights come into existence;
  • how best to conduct your business so as not to jeopardise the validity of such rights (particularly in the case of patentable inventions);
  • how best to protect your rights, including by way of registration if available; and
  • contractual means to commercialise the IP and endeavour to avoid infringement.

It is also worthwhile giving some thought as to which entity will hold the IP in the business. A common structure is where one entity actually holds the IP while another entity's function is to act as the operating entity for the business. That first entity would then license it to the operating entity for nominal consideration. The effect of this arrangement is that, if in the unfortunate event the operating entity is wound up, the IP will be 'quarantined' in the first entity and hence be protected. It does however add complexity to your business structure.

  1. Structuring your business

Another important thing to consider when starting out is your business structure. You are probably already aware of the common business structures – partnership, limited liability company, sole proprietorship and so on.

The choice of your business structure is one of the most important decisions you will make about your start-up. It will significantly affect your business' legal liability, asset protection and operational risk (among other things). Careful consideration should also be given to the future funding of your business (discussed in more detail below) and the level of control you wish to retain over the business if new investors come on board.

The choice of business structures is generally a tax and accounting-driven exercise, but appropriate legal advice should be obtained for the drafting of your business' constituent documents (such as constitutions and partnership and shareholders agreements). By having well drafted documents in place you can avoid some common pitfalls, such as one of the founders leaving the business after a few months without any right for the company to claw back part of their significant shareholding. These types of issues can be a major deterrent for later stage investors.

  1. Contractors vs employees

How does your start-up want to build your team? Do you want to take on independent contractors (which may have more flexible arrangements) or employees?

Whether a person is an employee or independent contractor at law is significant. Among other things, it is relevant for tax, superannuation, employment entitlements and claims under the relevant employment legislation. It also affects certain duties persons have towards your start-up – for example, duties of fidelity and good faith depend upon an employment relationship. Employees may also have additional rights, such as notice requirements and redundancy entitlements.

In this context, the courts have colourfully observed that "parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody call it a duck." With the shift away from traditional working arrangements, there will be ongoing contests about whether a given working arrangement is a 'rooster' or 'duck' – it will be increasingly important to ensure that the correct mechanisms are in place to support the distinction between whether an individual is in fact an independent contractor or an employee.

The penalties for getting it wrong are significant and include substantial underpayment claims (including minimum pay rates, penalty rates and allowances). If your business model is predicated on engaging independent contractors rather than employees, you need to get this right from the start. Simple mistakes early on can be costly down the track.

  1. Funding your business

The fourth issue you need to consider carefully when starting out is how you are going to fund your business.

Generally speaking, there are two ways for companies to raise funds: equity or debt financing (or hybrids such as convertible notes). Equity financing involves the issue of new shares, while debt financing involves borrowing funds.

For most start-ups, particularly those which are not yet cash-flow positive, equity financing will usually be the more viable fundraising option. Existing investors are typically given the right to take up new shares in the company on a pro-rata basis proportional to their existing interest in the company, however companies will often raise money through a private placement where shares are issued to new investors (usually with existing shareholders also participating in the raising).

New investors are sometimes issued preferred shares or have certain rights embedded into the shareholders agreement or constitution of the company (for example, to give themselves the right to appoint directors). Accordingly, you need to be careful to ensure a situation doesn't arise where you lose the ability to control the company you have worked so hard to create.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions