Everyone talks about being your own boss and starting your own business—being master of your own fate, an indomitable force, the captain of your soul. All of that is beautiful and fantastic! But how do you go from your 9-to-5 to your first day as CEO…while still owning your idea and being ready to catch fire?
Meet Morgan and Alex. They are data scientists who work on coding and technology for a large tech company. They wake up every morning at 7 a.m., make a strong cup of coffee, and reheat their meal prep. Morgan knows they’re meant for bigger things, so Morgan and Alex are getting ready to start their own company (empowered by the new non-compete rule).
But they have to ask themselves, "How do I start? Do I form a company now or later? How do I protect my IP? Do I need a lawyer right away?"
Let's start from the beginning. Let’s start while our protagonists’ idea is still just a light bulb above their head.
“My Boss is in My Head”
No, seriously. Morgan and Alex’s employer may own the ideas or at least control which ones they can talk about publicly. We aren’t talking about some X-Men thing here. We are talking about ownership of intellectual property (IP). Let’s see how this impacts Morgan and Alex.
When they get in a flow with the right dose of single origin coffee they’re unstoppable, and they’ve written code at their job that reduced processing time of financial data by 70%. After work hours, on their work computer, they made notes about a way to reduce processing time even further. Over the weekend, on their own computer, they implemented a new version of the code that works on health data. To try it out, they wrangled a sleek data set for analyzing anonymized personal health data. (sweat emoji)
Can they use any of this to launch their own business? There is a high chance that the answer is NO. It could be possible but risky, or maybe they’re lucky to be in the clear. Companies usually make you sign contracts that safeguard the intellectual property created by their employees, often called “Assignments of IP." The scope could be narrow. The scope of the assignment could be broad. It’s a bit of a thicket.
Look into your situation early in the process. Identify what you’re assigning to your employer and what you keep for yourself. Think about what will be considered competitive to your employer or what they might not care about if you pursue. This will affect how motivated they are to claim what they might think is theirs.
Ready to Become a Real Business
The soon–to-be partners read through their employment agreements and are ready to start their own business. It’s time to decide whether to create a corporate entity, like an LLC or a corporation.
This is usually a good idea. They would be owners and co-founders, but this separate entity would shield them from liability for their business activity and provide the basis for adding people and resources to their endeavor. If that million-dollar idea is already showing signs of life, maybe it’s time to start a real company that will own the idea, build brand recognition, and form the basis for growth.
The reasons why forming an entity might not make sense are taxes and administrative burden. This separate entity will affect their tax filings, and it requires upkeep - accounting, annual fees paid to the government, and plenty of forms to fill out to go with the fees. If they aren’t sure what the growth plan is - maybe they are just tinkering with the new idea - then maybe it’s not time to form the company.
In future posts, we’ll dive into entity choices and how to create the entity of your choice. (Spoiler Alert! It’s totally feasible to DIY this step.)
What’s in a Name?
A lot. Too much. Morgan and Alex have a bunch of names they like for their new company. They can’t decide which to go with. It seems crazy to dwell on this. It’s just the name. It’s the product that should matter, right? I mean “Google” is a nonsense word. Here’s why Morgan and Alex are worrying about the name of his company so much.
Choosing a name can be a thicket of interdependent considerations, legal and otherwise. This is possibly the one thing we, as lawyers, recommend spending the most time analyzing before you move forward. Here’s a few of the legitimate questions to mull:
Will the state you’re incorporating in allow the name?
Can it be trademarked?
Will someone else object?
Is it easy to say? Will it be mispronounced?
Is it easy to write? Fit on a website?
Does it help identify what your company does?
Does it help with SEO?
Changing the company name later will be a pain. You won't want to, even if you know you need to. Pause, do your research, and sleep on it, before rolling with your name choice.
Sharing is Caring, but Don’t Overshare.
All the sleepless nights writing code and a business plan are about to pay off. Now there’s the delicate topic of Morgan and Alex’s business partnership. Morgan and Alex know each other well as colleagues at this point, but they’ve never argued over more than semicolons and commas in the code. They’ve got to decide how to divide up ownership and responsibility for their company.
A business partnership is like a marriage. So, Morgan and Alex date, so to speak. They discuss their notions and feelings. They let it marinate. They talk to trusted friends and advisors. It’s ok to end a coffee meeting without a decision.
When they’re ready to commit, they should write down what the deal is going to be. The agreement doesn’t need to resolve every detail, but it should get the important stuff in black and white to rely on later, under stress.
Don’t let assumptions and good vibes prevail over a true shared understanding with your prospective partner.
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