When founding a company, decisions are made early on that can significantly shape the startup’s future development. For founders, it is therefore crucial to keep the essential legal framework in mind right from the start and clarify fundamental questions early. In particular, this includes choosing the legal form, collaboration within the founding team, allocating intellectual property rights to work results, and drafting the first contracts.
The diverse legal questions accompanying the founding of a company will be explored in more depth in my upcoming articles. This first article contextualizes the most important topics and is intended to provide an overview of the legal fundamentals.
The legal form must fit the business model
A sole proprietorship or a civil law partnership (GbR) can generally be established with little effort. When choosing a legal form, however, there is more to consider than just a quick and cost-effective start. Key factors include personal liability, the required capitalization, organizational effort, and the company’s future development.
In a GbR, the partners are personally, jointly, and severally liable for the partnership’s liabilities. In a UG or GmbH, the shareholders are generally only liable up to the company’s assets. However, incorporation requires notarized articles of association and entry into the commercial register. Prior to registration, personal liability risks can arise for individuals who already act on behalf of the company.
Which legal form is suitable therefore depends primarily on the business risk, the number of founders, available capitalization, and planned financing. The question of whether investors are to be brought on board later should also already be taken into account during founding.
Founding teams need rules for difficult days
As long as everyone is pursuing the same goal, detailed regulations quickly seem redundant. However, a good articles of association is designed precisely for situations where there is a lack of agreement. It is also advisable to enter into a shareholders’ agreement that governs the internal relationship among the shareholders.
Roles, managerial authority, voting majorities, veto rights, additional financing contributions, and how to handle deadlocks should all be clarified. It is equally important to define what happens if someone leaves, is absent for an extended period, stops contributing, or wants to sell shares. Therefore, vesting, good leaver and bad leaver provisions, severance payments, and share transfers should not wait until the first financing round.
A 50/50 ownership split is not fundamentally wrong. However, without a mechanism to resolve a deadlock, it can bring the company to a standstill.
The startup must be legally permitted to use its ideas
Code, website, product design, texts, photos, databases, trademarks, and technical developments often represent the actual value of a startup. Nevertheless, it frequently remains unclear who legally owns these assets.
Copyright fundamentally originates with the person who created the work. Therefore, the company requires effectively granted rights of use. For computer programs created by employees as part of their duties, there is a special regulation in favor of the employer.
Contracts should specify which rights the company receives and whether these are exclusive, transferable, and sublicensable. In the case of software, source code, documentation, access permissions, and open-source components must also be taken into account. Furthermore, trade secrets require appropriate protective measures, such as access rules and confidentiality agreements.
The first customer contract
Especially in pilot projects, business partners often work with brief quotes or email confirmations. This leaves key questions unanswered: What is owed? When is the service rendered? Who must provide what information? When can invoicing take place? What happens in the event of change requests?
A solid contract governs the scope of services, milestones, remuneration, payment terms, acceptance or other success criteria, duties to cooperate, warranty, liability, termination, rights of use, and confidentiality. Exclusivity, reference use, and the handling of customer data should also be deliberately regulated. Terms and conditions should fit your product, sales model, and customer base.
Data protection starts with the very first record
Anyone using contact forms, newsletters, CRM systems, analytics tools, cloud services, or AI applications is usually processing personal data. Every instance of processing requires a legal basis. Data subjects must be informed. External service providers may act as data processors and require a contract pursuant to Art. 28 GDPR. Added to this are appropriate technical and organizational measures as well as rules on deletion and retention.
Diana B. Haidari is an attorney and founder of Haidari Legal in Munich. She advises founders, startups, and young companies particularly on corporate and contract law issues and supports them in legal matters surrounding incorporation and growth.
As a Munich Startup Expert, she delves into the key legal topics that founders and startups should know step by step in her article series.
Freelancers are not automatically self-employed
Whether someone is genuinely self-employed is not determined by the title of the contract. What matters are the actual circumstances. Being subject to instructions and integrated into the work organization are clear indicators of regular employment.
The contract and day-to-day practice must therefore align. In cases of doubt, a status determination procedure (Statusfeststellungsverfahren) with the German Pension Insurance (Deutsche Rentenversicherung) can provide clarity. For employees, compensation, working hours, vacation, place of work, probationary period, termination, confidentiality, data protection, and rights to work results should be clearly defined.
Financing negotiations
In financing negotiations, the focus is often initially on company valuation. For founders, however, it is just as crucial to understand which rights investors receive and how the equity stake will affect future decisions and subsequent financing rounds.
Loans and convertible loans can also shape entrepreneurial leeway over the long term. Their economic consequences and the terms of any subsequent equity conversion should therefore be carefully examined.
A clear ownership structure, clarified intellectual property rights, and well-organized company records also facilitate the due diligence process for potential investors.
Crisis obligations begin before insolvency
Managing directors of legal entities must monitor developments that could jeopardize the company’s continued existence. This includes reliable liquidity planning, an overview of due liabilities, and a realistic assessment of how long the available financial resources will last.
If illiquidity or over-indebtedness occurs, strict filing obligations apply. The insolvency application must be filed without culpable delay, at the latest three weeks after the occurrence of illiquidity and six weeks after the occurrence of over-indebtedness. Furthermore, once grounds for insolvency exist, payments are only permitted to a limited extent.
What does this mean in practice?
Founders do not need to resolve every legal detail once and for all right from the start. What matters is identifying the key issues early on and documenting any agreements made in a clear and traceable manner. This includes clear arrangements within the founding team, a suitable legal form, secured intellectual property rights to work results, and reliable agreements for collaborating with clients, freelancers, and investors.
Data protection, liability issues, and ongoing commercial developments should also be considered from the outset. Legal clarity thus creates a solid foundation for the company’s further development and makes it easier to prepare for growth, new business partners, and financing rounds.
The upcoming articles in this series will explore these individual topics and explain what founders should pay particular attention to.
