Key Takeaways
- Choose a lawyer who specializes in your sector and offers long-term partnership.
- Create a strategy to protect your intellectual property.
- Incorporate legal hygiene into your daily business operations.
Life science and healthcare professionals are no strangers to rules and regulations. Starting your own business as an entrepreneur, however, introduces a whole new level of red tape.
Legal issues don’t only affect startups once they reach commercialization, but they also matter at the earliest stages. From your first day as a founder, your actions could have lasting implications.
Despite the high stakes, your startup’s legal plan doesn’t have to be overwhelming. By creating a strategy now to protect your ideas, finances and opportunities, you’ll be better prepared throughout the lifespan of your company. Here are six ways to get started.
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Get sector-specific legal counsel
Life science and healthcare businesses face unique legal needs and regulations. They also tend to have a significantly longer time to market than startups in other industries that are not as rigorously regulated.
For that reason, it’s wise to find an attorney who has deep experience and connections in the life science ecosystem. Similarly to how Silicon Valley Bank understands your path within the life sciences, a sector-specific attorney is well positioned to support you. They will likely offer the perspective to forecast specific risks in the biopharma, healthtech, medical devices and diagnostics/tools subsectors.
Sector-specific attorneys may also share connections and resources within their network, such as:
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Accelerator programs
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Venture capital investors
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Angel investor networks
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Business and legal advisors
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Regulatory consultants
Access to these specialized contacts can be beneficial. For instance, a founder could focus on pitching to investors who already understand the industry and show a commitment to its growth. More specificity within your professional network can mean more targeted opportunities for your business.
In this highly regulated field, the benefits of hiring an experienced attorney are often well worth the early budget allocation. To offset costs at a time when you might not even have your first investor, you can ask about deferred payments. Some law firms specializing in life science and healthcare startups may offer payment plans for attorney fees. Experienced attorneys with expertise in the field will also be able to help you develop a budget and timeline that meets your financing, practical and legal needs.
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Set up the right corporate structure
Your corporate structure will affect how you and your company are taxed and your risk of personal liability for legal issues resulting from corporate actions. It also affects your reporting requirements.
Most life science and healthcare startups need significant funding from investors, which is why you might choose to set up a C corporation (C-Corp). Likewise, it’s also important to choose where to incorporate. Some states, such as New York and Texas, promote entrepreneurship through tax benefits, talent ecosystems and multiple funding options. Ultimately, it’s important to think beyond your company’s current stage to envision how you want it to grow.
To learn about the advantages of C-Corps and alternative options, read Types of corporations and how to incorporate your startup.
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Prioritize protecting your intellectual property
The last thing you want to see as a founder is someone else bringing your idea and technology to market. Protecting your intellectual property (IP) is paramount. IP protection can shield your core innovation, such as a medical device design or a drug formulation. It can also help preserve your startup’s brand identity and, by extension, your level of control over its reputation.
Protecting your IP is paramount.
Work with your attorney to ensure patents, licenses and trade secrets are in order. Depending on your circumstances, it could be smart to evaluate your IP strategy even before you hire your first employee.
IP protection is an ongoing process. As you refine your business through research, testing or clinical trials, you may revisit your IP portfolio from time to time. Your lawyer will likely help create a strategy for detecting third-party infringements of your IP and enforcing your IP rights.
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Have tough conversations with your co-founders
Founders often wonder how to protect themselves — and their equity — from future problems. Sharing a vision is exciting, but each partner will bring their own aspirations, ideas and expectations to the table. That's why getting on the same page now can help prevent issues that could eventually become legal disputes down the road.
Founders often wonder how to protect themselves — and their equity — from future problems.
But contrary to what some new founders might think, creating a formal agreement among co-founders could be overkill at certain early stages. “With a formal agreement, founders can sometimes hamstring themselves,” says Eric Hsu, partner at Wilson Sonsini Goodrich & Rosati. “The limitations and restrictions can end up handcuffing you.” Early investors could even view a founder agreement as a sign of underlying contention. They may wonder why you would need to have that level of control over co-founders.
Instead, the early stage is a good opportunity to learn how to make big decisions as partners. This topic can be awkward, especially for first-time founders. But an honest conversation about how to split equity, limit dilution and divvy up roles can spare you from conflict later.
Think about who will bring the most value at each phase. Who is contributing vital medical, scientific or research expertise to the original idea? Who is committed to hands-on leadership for the long haul? These can be difficult questions at a time when it’s hard to see far ahead. While it's impossible to account for every unknown variable, this discussion can still help you reach an understanding with your partners.
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Empower employees to protect your ideas
A breakthrough innovation needs a talented team to bring the science to life. Your employees need to have access to exclusive information to complete their work. But what happens if they take a job with a competitor or decide to start their own venture? What happens if they openly talk about your startup’s concepts on social media, in a journal or in another publication?
Even passionate, well-meaning employees could pose a heightened risk unless you have ample protection. Work with your attorney to create proper employment agreements, including nondisclosure and invention assignment terms. Depending on the jurisdiction of your agreement, you may also include noncompete terms. Consider similar contractual protections for third-party vendors and suppliers, which may have access to the inner workings of your business.
Furthermore, communicate clear expectations with your employees and partners about what they can and cannot share publicly. As your headcount rises, a dedicated human resources professional or department can create handbooks, policies, training and other methods to keep your sensitive information safe.
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Don’t set it and forget it — integrate a long-term strategy
Legal strategy should not be a one-time item on your startup checklist. You can create a strong foundation for growth, but you should also follow it up with good legal hygiene. Ongoing efforts could help save time and costs later. They can prepare your startup for filings, audits and key events.
Because the life science and health care industry is highly specialized, also think about customizing your strategy beyond the basics. Ask your law firm about how they can help with challenges such as:
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Regulatory affairs
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Clinical trials
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Government approvals
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Patient privacy or data security
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Institutional partnerships
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Shifting market trends
Collaborating with your lawyer early on and throughout the process can help you decide how to best serve your company’s interests at every turn. “It’s very difficult to provide guidance if a client has already completed negotiations for their legal agreements before coming to us and then seeks our rubber stamp of approval,” says Eric Hsu. “The more our clients get us involved, the better we can help them evaluate risks and understand whether they’re making a fully informed decision."
Think about your trajectory and surround yourself with legal and financial supporters who are equipped to guide you for the long term as new risks and opportunities sprout unexpectedly. Whatever the future brings, a well-developed strategy can keep you prepared for any eventuality.
Running a startup is hard. Visit our Startup Insights for more advice and information on the different stages of your startup’s early life. And, for the latest trends in the life science and healthcare economy, check out our Healthcare Investments & Exits report.
Contributed by:
Eric Hsu
Eric is a corporate and securities partner in the life sciences practice at Wilson Sonsini Goodrich & Rosati. He represents emerging growth companies in areas such as medical devices, digital health, and biotechnology.
