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I see a lot of people who are at the very early stages of planning a new business. As a result, I’ve developed an informal standard ‘laundry list’ of cautions to pass along to these clients in the first call I have with them.

Many people are surprised to learn that there are legal steps they should be taking toward their new business before they start building it. But there are, and they’re important, and dealing with these issues can be difficult and expensive if they’re left until some later time. (In a recent example, problems in this area cost a new client months of time in the market and a lot of money in legal fees for a litigator).

Summary

In brief, before you start you need to ensure that (i) any intellectual property and confidential information you create for your new business will be your own; (ii) you comply with any obligations you have in agreements with your current employer or with clients.

Background

Here’s the background on why these issues come up:

(1) The default rule in Ontario, absent a written agreement, is that if you’re an employee, the copyright to any work you create in the course of your employment belongs to your employer – but this is subject to any specific agreement with the employer. If you’re not an employee (we generally call these people “independent contractors”) the copyright belongs to you unless there’s a written agreement that says it belongs to your client. (Patent ownership rules are different, and unfortunately, somewhat murky. Heenan Blaikie’s site has a good short summary. I covered these issues in a post a while ago.

(2) In addition, whether or not there is a written agreement, employees and contractors can have confidentiality obligations (and in some cases, other obligations as well) to their employers / clients.

(3) In any event, in the technology world, written employment and independent contractor agreements are the norm. As a practical matter, these always say that the employer, and almost always say that the client, owns the creative output of the relationship (all kinds – not just copyright), and these agreements typically also contain an array of other protections for the employer / client that are, at least in the employment context, almost always biased strongly in the employer’s favour. (And, frankly, these agreements often contain drafting mistakes that can make it very difficult to know just what they mean.)

As a result, if you have a job or are an independent contractor when you start your startup, there are a variety of potential pitfalls. Be aware of them, and plan for them.

Avoiding Problems

What should you do you do to avoid these situations? First, when you join a new employer or take on clients, you should read the fine print in the agreements, and make sure you understand it. Try to resolve uncertainties before you’re stuck with them.

Next, when you’re starting to gear up for your new startup, keep in mind the checklist that U.S. lawyer Yokum Tatu has on his blog. It’s a really great post written by a lawyer who genuinely knows what he’s talking about, and it’s a generally fair statement of the situation here in Ontario (there are differences between the law in California and in Ontario, but at a high level the approach is similar).

Last, as you start up, make sure you have good documentation in place between co-founders and with any contractors and employees you have working with you. For the most part, these documents are simple, and any lawyer familiar with startups should have them for your free or very inexpensive use. I’ll be posting on these in the not-too-distant future. (Note: there are various forms on this site – you can see them all here).

These are probably the single best things you can do to help launch your new project; a little attention when you join your new employer or take on clients and also when you first get the itch to start something on your own could save you a lot of aggravation down the road.