Having taken stock of the main legal documents and actions involved in forming and operating a new startup, let’s crack open the “case” (disregarding the warnings about voiding your warranty) and examine a few of the steps, documents and key decisions to be made in getting a new startup ready for business.
Most startup lawyers have checklists (at least in their heads) and will interview a new client to gather a wide range of relevant information before moving forward with business entity formation, documentation and so forth. Sometimes this is done in the form of a questionnaire. I prefer a hybrid approach because founders come from all kinds of backgrounds, and while some may have a strong point of view on every question in the startup questionnaire, others want or need more guidance in answering the questions that call for decisions to be made.
I. What’s in a Name?
Let’s start with your name. Most new startups have a name in mind, or have even taken various steps to secure rights to the name, but some are on the fence or still developing a brand name when we first meet. Don’t let naming issues stop you from incorporating and taking care of other legal housekeeping; a corporate name change is a simple matter that can be handled inexpensively, at least in business-friendly states like Delaware.
It bears mentioning that a startup’s corporate name doesn’t necessarily have to be identical or even similar to the product or domain name. Historically, most bricks-and-mortar businesses were named after their founders, and large corporations often have a publicly traded parent company that holds all of the stock in many operating units that have familiar or famous names (e.g., AMR as holding company for American Airlines). Even technology companies followed this tradition in the early years; for every IBM, Intel or Microsoft there was a Fairchild, Hewlett-Packard or Wang.Nevertheless, in the era of Internet and mobile services, in which companies tend to have a very direct relationship with end users, most founders want to name the company after the first (or only) product or service around which the startup is built. Building brand awareness is a key challenge for most startups. For a startup that becomes a successful growth company, the name becomes its core identity as it “crosses the chasm” to mainstream adoption. This comes in handy for things like business press coverage, corporate PR, and ticker symbol if and when the company goes public. It also has its downsides if the primary product or service is such a powerful brand that consumers wrongly associate the corporate name with only that product. For example, during my tenure at eHarmony, Inc., we gave considerable thought to branding issues as the company branched out from its flagship eHarmony online dating service, adding other services under names like Compatible Partners and Jazzed.
Assuming the company will be named after the product, the most common step founders have taken before we meet is to acquire one or more domain names. As the consumer Internet has matured, it can be a major victory to acquire any decent-sounding name in the core .com top-level domain. Nevertheless, many startups launch under a different (less expensive) domain such as .co, .ly or .to, deferring the expense of acquiring the coveted .com name until after a funding event.
It can be a painful and expensive mistake to acquire a highly valuable domain name intending to use it as the foundation for your startup’s new brand, only to discover that there are show-stopping legal conflicts. In fact, some domains for which brokers would charge a fortune are virtually worthless, as I’ll explain below.