Startups: 10 tips for avoiding litigation - 19 October 2016

Working capital and funding are crucial assets for any startup organisation.  Litigation and commercial disputes can quickly become expensive exercises.  Litigation can also be very time intensive, and take you away from a “hands on” role in running your business.  Here are some tips for startups to reduce the likelihood of disputes and litigation arising:

  • Ensure that you prepare documents at the beginning of the venture which clearly set out the arrangements between founders, investors and shareholders.  These agreements will depend upon the nature of the entity which is used to run the business, but often include shareholders’ agreements, subscription agreements and loan agreements.  These documents should also make it clear how investors or shareholders can exit the business, in order to minimise the chances of a dispute at a later time. 
  • Obtain legal and accounting advice about the right entity in which to run your business, before you start.  This may seem like an unnecessary cost, but obtaining financial, taxation and legal advice before your business entity is set up can allow your business to grow in a manner which minimises surprises, difficulties and unwanted liabilities as the business grows.
  • Make sure that you conduct intellectual property clearance searches to confirm that
    • you won’t be infringing anyone else’s intellectual property rights when running your business; and
    • you can apply to register your intellectual property rights without conflicting with another party’s rights, such as the trade marks used in your business.  
  • You should also register the trade marks used in your business.  Giving early thought to these matters and obtaining registrations will cut down on the prospects of another business trading off your business name and reputation. 
  • Written contracts should be entered into with your employees and contractors, which clearly set out their roles, relevant KPI’s and the conditions upon which employees or contractors provide services.  Any equity entitlements in the business should also be agreed and clearly documented. 
  • Prepare a set of terms and conditions for common transactions.  While you may not be able to impose your terms and conditions on all transactions, if you have a set of standard terms and conditions they will be useful in setting out important terms such as times for payment, the passing of title etc.  Having written terms and conditions will also assist in the recovery of payments which are owing to your business.
  • Consider including mandatory dispute resolution clauses in significant contracts.  For example, your contracts could include a dispute resolution clause which requires the parties to meet, participate in mediation, or engage in an expert determination process as dispute resolution options, each of which may well be quicker or cheaper than litigation.  These types of clauses can provide you with the opportunity to resolve disputes at an early stage, and potentially without the need for the involvement of lawyers and the courts.
  • Document important meetings and telephone discussions.  For example, prepare written minutes of meetings, take file notes of important telephone conversations or confirm oral agreements or other arrangements in writing after they occur (e.g. by an email to the other party).  Each of those steps will assist in ensuring there is clarity as to arrangements, so that it is less likely that transactions will be misunderstood by other parties.  The preparation of these documents can also serve as evidence in your favour, should a dispute arise at a later point in time.
  • Protect ownership of your intellectual property. It is important that you retain control of intellectual property created by your employees and contractors.  You should ensure that your employment, service and contractor agreements contain sufficient provisions in that regard.  It is also crucial to have a well drafted confidentiality agreement in respect of sensitive commercial matters, to retain control of information which may be critical to your business.
  • Comply with regulatory matters that relate to your industry.  Regulations and legislation which can be relevant to a broad spectrum of businesses include the Privacy Act, taxation and GST laws, the unfair contract terms legislation (which will apply as from 12 November 2016) and various provisions of the Corporations Act.  Failure to comply with regulatory requirements can lead to fines, prosecutions and the loss of essential licences and permissions, in addition to disputes with third parties.
  • As your business matures and develops, remember to seek financial and legal advice as to your crucial business documents (such as terms and conditions, employment agreements and privacy policies) to ensure that they continue to reflect the needs of your business, as well as new developments in business and the law.

HopgoodGanim Lawyers offer a wide range of services to assist startups.  We also have an experienced Litigation & Dispute Resolution team which is focused on providing commercial and practical advice.  At the end of the day, taking proactive steps in the early stages of your business is likely to cut down the prospect of common disputes, which can quickly head towards litigation and unwanted burdens on your organisation. 

HopgoodGanim Lawyers is a full commercial law firm. Our firm has 41 partners and more than 280 staff. We operate nationally and internationally with a focus on Asia from our two key locations of Brisbane and Perth. We offer highly skilled and agile legal teams across key sectors and areas of practice. In all of our areas of speciality, our lawyers are recognised by legal publications as leaders in their fields.