Considering an ecommerce startup? As a startup lawyer, I provide advice to founders designed to get you up and running as quickly as possible.
Most founders are looking for a simple outline to follow when launching an online business. While every business has different requirements, the following list of legal steps is common to nearly every Internet venture and ecommerce startup. Okay, let’s get to it.
- Business Entity
- Liability Insurance
- Design Contract
- Beta Testing
- Content Creation
- Trademark and Content Registration
- Terms and Conditions
A business entity acts as a shield between your personal assets and the liabilities of the company. You must organize the company correctly to gain this protection. You should address decision-making powers, voting rights, intellectual property ownership, and other critical issues in a written agreement.
Internet-focused startups run into one problem that is so common that it is worth mentioning here. The problem involves bringing in a “partner” who does a bit of programming for the venture before a company is formed and founder agreements are negotiated. The informal partner then leaves, but the company continues to use the programming. Who owns the intellectual property rights to the programming? Don’t make this mistake. It can lead to crippling litigation down the road. You can read about how a certain Mr. Zuckerberg at a nondescript startup known as Facebook ran into this very problem. Roll pennies. Check the couch cushions. Do whatever it takes to rally sufficient funds to form a business entity and negotiate the appropriate legal documents detailing IP transfers and other critical decisions.
Your online startup is only going to go as far as the funding. While venture capitalists and angel investors exist, most clients launch businesses with founder savings or by borrowing from such esteemed financial institutions as the Bank of Mom & Dad. Whatever your funding source, the important thing is to create a budget for the project with a projection of the total outlay necessary to reach profitability. Now double that figure. As any startup attorney will tell you, this second number is the accurate figure.
Why do you pay for car insurance? So you have protection if legal issues arise. Liability insurance serves the same purpose for businesses. Every ecommerce startup should have a policy in place to guard against lawsuits. The policy will pay for your attorney’s fees and any settlement or damage verdict against your company. The ugly truth is most startups fail. Don’t be discouraged. Just make sure you have insurance protection in place.
Web Development Contracts
Most ecommerce startups hire freelance programmers and web designers to assist with the creation of the target website and/or app. Under copyright law, these freelancers are considered the creators of such “work” and are automatically assigned the copyright ownership to their work. Startups should always own the IP associated with paid for work product. The solution to this problem is to enter into contracts with all freelancers containing a clause transferring all created intellectual property to the startup. Fail to obtain such a transfer, and you invite serious conflict with the freelancers and your investors down the road if the startup is successful.
New websites must go through a “beta test” period prior to launch. Third parties are given early access to the site in exchange for reporting glitches and suggesting improvements. Changes made to the site based on these recommendations can result in future royalty claims by the third parties if the startup becomes successful. Every ecommerce startup should employ a beta test agreement containing language to prevent such claims.
A new website needs written content. Hiring a freelance writer to generate the necessary content is a common tactic. Copyright ownership, however, is again an issue. Contracts detailing the work to be done, the compensation, and the transfer of all copyrights are the solution.
Trademark and Copyright Registration
Every ecommerce startup should move to trademark and copyright content, brands, software and logos as appropriate. Companies registering intellectual property in a timely manner gain significant advantages under the law. Add trademark and copyright registration to your startup workflow schedule, preferably in an early slot.
Terms and Conditions
- Pricing policies,
- Refund policies,
- Ownership rights to the content uploaded by users,
- What users can and cannot say or post,
- Prohibitions against users copying your content,
- Prohibitions against copyright infringement,
- Minimum age of users,
- Whether the site is directed at an audience 12 or younger,
- Disclosure of information to law enforcement authorities,
- Choice of state and county forums for disputes,
- Warranty disclaimers, and
- Limitations of liability.
Terms and conditions are incredibly important. Every website or app should have a custom set prepared by a knowledgeable attorney. If you doubt this, just consider how many times Apple makes you agree to its terms when using its services.
Disclaimers are used to define and limit a statement, service or offer being made to potential customers. For example, one might guarantee any customer order will be delivered within five business days. This guarantee would obviously not be valid for customers located in a remote area such as Mongolia, so the disclaimer would limit the guarantee to a defined space such as the continental United States. Disclaimers are written on a site-by-site basis.
The Digital Millennium Copyright Act of 1998 was enacted to address the issue of copyright infringement in the online environment. If a startup allows users to upload comments, photos, graphics, text, videos, or audio recordings to an online property, DMCA compliance is an absolute must. By complying with the law, companies are granted immunity from any copyright infringement lawsuits based on content uploaded by users. YouTube, Facebook, and other large user-generated content sites use this immunity to avoid being overwhelmed by a tsunami of copyright infringement lawsuits. In many ways, the DMCA makes much of the modern Internet environment viable. Startups should always take advantage of the benefits provided under the law.
Startup businesses regularly suffer from cash flow and capital constraints. We recognize as much and offer different fee options designed to give you relief from legal fees. In some cases, we spread the charges out across time to avoid causing you cash flow issues while in other cases we may reduce fees in exchange for an ownership position in your venture. Contact us to learn more.
Just Say Yes
Founders almost universally report frustration with their startup lawyer for a single reason – the attorney just says “no” to any new strategy. This criticism is completely valid. Lawyers tend to be risk-averse while launching a startup requires an attitude that is anything but. As your startup lawyer, we believe the answer to most questions should not be “no” unless such an answer is absolutely necessary. [“No, you cannot hire ninjas to take out the CEO of the major competitor.”] Instead, we strive to identify creative strategies for overcoming legal hurdles while providing risk-benefit analysis founders can use as part of the decision-making process. In short, we work hard to “just say yes” whenever possible.
Representing Internet and ecommerce startups is undoubtedly the highlight of our practice. Contact us today to learn more about getting your legal ducks in order so you can focus on turning that brilliant idea into a successful business.
Richard A. Chapo, Esq.