Do You Make These 7 Legal Mistakes? Legal Guide & Tips for Startups

Most of the businesses are started by entrepreneurs who leave their jobs, which is great for the startup ecosystem, but it may cause serious problems when employments contracts are ignored. There are certain crucial provisions that may hamper the startup journey, if not tackled in advance. Therefore, it is very important to avoid legal mistakes before starting a new business, most of which affect startups and entrepreneurs when their venture creates conflicts with their previous employers. Generally, there exists 4 crucial clauses of an employment contract, which may cause potential problems for startups and entrepreneurs. These include Confidentiality, Non-Competition, Non-Solicitation and Intellectual Property Rights.

So, if you have recently started a new business after leaving your job, or you plan to do so in near future, following 7 legal mistakes should be avoided at all cost:

1. Do Not Ignore Your Legal Docs, Read & Review Carefully

At any time during the course of employment, employees are bound by various legal documents, including, offer letter (letter of hire), employment agreement, and other agreements that the employee may have executed during the tenure of his job. All these documents should be carefully read and reviewed with a view to identify potential restrictions that will not allow the entrepreneur to launch a new business smoothly.

It is true that most of these legal agreements and documents are too long and boilerplate to read, so instead of ignoring these, you should hire a lawyer and ask him to explain all the relevant clauses and terms.

2. Do Not Disclose Confidential Information

As a common practice, all employees are bound by confidentiality obligations included in almost all the employment contracts. In accordance with such clauses, employees are required to maintain trade secrets and confidential information of the employer, and a disclosure of such trade secrets and confidential information without employer’s consent, or usage of such trade secrets and confidential information without employer’s consent for launching (or running) a new business may result in legal action against the entrepreneur and / or the startup. In case you wish to use any such trade secrets and confidential information for your new business, getting employer’s consent in writing or obtaining a waiver of such clauses from the employer is highly advisable.

3. Do Not Compete Directly with the Employer

Among all the crucial provisions of an employment contract, Non-Compete clause is very important. Generally, such a provision prohibits the employees from starting a business that will compete directly with the employer.

Generally, employment agreements with Non-compete clauses (or separate Non-compete agreements) are time bound, and often extend for a specific time period after the employment ends, which may be anytime in between 1 year – 5 years.

With a view to ensure that non-compete clauses are not breached, the entrepreneurs and startups should first determine whether there exists a scenario of direct competition or not. Various factors that determine competition include, category of business, category of customers, use of knowledge or technology. If these factors turn out to be in conflict with the employer, it is better to address those concerns in advance before launching the business.

4. Do Not Infringe Intellectual Property Rights (IPR)

Issues related to assignment of IPR to employers and infringement of IPR by entrepreneurs and startups require utmost attention, as any lawsuit related to IP issues may easily run up to millions of dollars in damages, which can only be avoided by taking pre-emptive measures and following best practices.

All the employment agreements require the employees to assign all the intellectual property to the employer, wherein employee agrees that any work product, business idea, invention, or development conceived or authored by the employee during the course of employment

will be legally owned by the employer. This may create serious issues when a new business launched by entrepreneur is any way related to, or dependent on, the work performed for the previous employer. Accordingly, such IP issues are crucial not only for entrepreneurs and startups, but also for potential investors, and investors always perform IP & Legal Due Diligence of a business to ensure that such issues will not arise.

5. Do Not Solicit Previous Employer’s Customers & Employees

Most of the employment agreements also include provisions that restrict the employee to solicit employees, customers or vendors of the employer for a fixed period of time after the employment is terminated. However, in case you are leaving the job on a positive note with the employer, it is highly advisable to discuss such issues with employer in a transparent manner, make him aware of your business plans, and obtain the required waiver in writing. This approach generally works and as a general rule, it is always better to think a step ahead in case of potential legal issues and prevent litigation at a later stage.

6. Do Not Use Employer’s Resources for Your Business Idea

This is the most simple mistake made by lot of entrepreneurs while they are still employed, and this can easily snowball into a big legal hassle for startups and early stage companies. Many employees work on the new business during their working hours, use their work email to communicate with outsiders regarding their new business idea, use company’s laptop for planning a new business, which may be intentional or unintentional, but it may result in legal issues related to non-performance, as during such working hours, employees are expected (and paid) to perform work duties for the employer. Such mistakes can easily be traced later, as once employees leave, they leave behind a trail of data, including e-mails, documents, presentations, and other electronic evidence, that can easily be recovered to determine the extent of non-performance by the employees.

7. Do Not Use Conflicting Name for New Business

Well, this is one mistake every startup and entrepreneur should avoid. Everyone thinks passionately about naming their new business, but while doing so, due consideration should be given to the following two points:

(a) Unique & Novel: The name should be new and unique
(b) Non-conflicting: The name should be not conflicting with existing names

Mostly, all business names, brand names, logos and taglines are protected legally by way of trademarks, and in case of conflicting names, it might result in a trademark infringement suit.

A good example to highlight the importance of naming a business properly is that of Zomato, which was earlier named Foodiebay. As per this news article, Foodiebay was renamed as Zomato during last week of November 2010. It is interesting to note that on November 25, 2010, Ebay initiated legal proceedings against Foodiebay before Indian Trademark Office for opposition of trademark. As per the information available to general public, the legal proceedings are still pending while Foodiebay has been renamed to Zomato. Various public documents may be accessed by checking the status of trademark no. 1813054 at Indian Trademark office website: http://www.ipindia.nic.in/. Alternatively, a copy of legal notice of trademark opposition as filed by Ebay with the Indian Trademark Office may be accessed by clicking here.

Therefore, as may be observed from the above case study, selecting a unique business name and legally protecting it by way of trademarks is very important. In case a business involves multiple brands, a strong trademark strategy is crucial to manage them, and it is highly advisable to use keep business name different from brand name. To read more about this, please click here.

In accordance with Indian Trademark Law, it is not mandatory to file for a trademark, but it is highly advisable to register a trade mark for the name of your business as well as for the brand names of your products and services. The registration of trademark provides legal right to prevent the unauthorized use of not only an identical or confusingly similar trade mark, but also an identical or confusingly similar company name, trading name and domain name. Accordingly, it is highly advisable to seek assistance from a Trademark Attorney.

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