6 Legal Considerations for Life Sciences and Healthcare Startups

Life science and healthcare professionals are no strangers to rules and regulations. However, starting your own business as an entrepreneur introduces a whole new level of bureaucracy.

Legal issues not only affect startups once they reach commercialization, but are also important in the early 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 life of your business. Here are six ways to get started.

  1. Get industry-specific legal advice

Life sciences and healthcare companies face unique regulatory and legal needs. They also tend to have a much longer time to market than startups in other industries that aren’t as tightly regulated.

For this reason, it is wise to find a lawyer who has extensive experience and connections in the life sciences ecosystem. The same way Silicon Valley Bank understands your career in life sciences, a lawyer specializing in the sector is well placed to support you. They will likely offer the prospect of forecasting specific risks in the biopharmaceuticals, health technologies, medical devices and diagnostics/tools sub-sectors.

Industry-specific lawyers can also share connections and resources within their network, such as:

  • Acceleration programs

  • Venture capitalists

  • Angel investor networks

  • Business and Legal Advisors

  • Regulatory Advisors

Access to these specialized contacts can be beneficial. For example, a founder might focus on pitching to investors who already understand the industry and show a commitment to its growth. Greater specificity within your professional network can mean more targeted opportunities for your business.

In this highly regulated field, the benefits of hiring an experienced lawyer are often well worth the initial budget allocation. To offset costs at a time when you may not even have your first investor, you can request deferred payments. Some law firms specializing in life science and healthcare startups may offer payment plans for attorney fees. Experienced lawyers with expertise in the area can also help you develop a budget and schedule that meets your financial, practical and legal needs.

  1. Setting up the right business structure

Your business structure will affect how you and your business are taxed and your risk of personal liability for legal issues arising from corporate actions. This also affects your reporting requirements.

Most life science and healthcare startups need significant funding from investors, which is why you may choose to set up a C-Corp. Likewise, it is also important to choose where to incorporate. Some states, like New York and Texas, promote entrepreneurship through tax advantages, talent ecosystems and multiple financing options. Ultimately, it’s important to think beyond the current stage of your business to imagine how you want it to grow.

To learn more about the benefits of C-Corps and alternative options, read Types of companies and how to incorporate your startup.

  1. Priority to the protection of your intellectual property

The last thing you want to see as a founder is someone else bringing your idea and technology to market. Protect your intellectual property (IP) is paramount. Intellectual property protection can protect your core innovation, such as a medical device design or 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 make sure patents, licenses and trade secrets are in order. Depending on your situation, it might be a good idea to assess your IP strategy before you even hire your first employee.

Protecting intellectual property is an ongoing process. As you refine your business through research, testing, or clinical trials, you may review your intellectual property portfolio from time to time. Your attorney will likely help you create a strategy to detect third-party infringement of your intellectual property and enforce your intellectual property rights.

  1. Having difficult conversations with your co-founders

Founders often wonder how to protect themselves – and their capital – from future problems. Sharing a vision is exciting, but each partner will bring their own aspirations, ideas and expectations. That’s why being on the same page now can help prevent issues that could eventually turn into legal disputes later.

Founders often wonder how to protect themselves – and their capital – from future problems.

But contrary to what some new founders might think, creating a formal co-founder agreement might be overkill at some early stages. “With a formal agreement, founders can sometimes paralyze themselves,” says Eric Hsu, partner at Wilson Sonsini Goodrich & Rosati. “Limitations and restrictions can end up handcuffing you.” Early investors might even view a founder’s agreement as a sign of underlying conflict. 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 new founders. But an honest conversation about how to split equity, limiting dilution and distributing roles can save you from conflicts later.

Think about who will bring the most value in each phase. Who brings vital medical, scientific or research expertise to the original idea? Who is engaged in long-term practical leadership? These questions can be difficult at a time when it is difficult to see far ahead. While it’s impossible to account for every unknown variable, this discussion can still help you come to an understanding with your partners.

  1. Empower your employees to protect your ideas

Breakthrough innovation needs a talented team to bring science to life. Your employees need access to proprietary information to do their jobs. But what if they take a job with a competitor or decide to start their own business? What if they openly talk about your startup concepts on social media, in a newspaper, or in another publication?

Even passionate, well-meaning employees can pose an increased risk unless you have sufficient protection. Work with your attorney to create appropriate employment contracts, including nondisclosure and invention assignment terms. Depending on the jurisdiction of your agreement, you may also include non-competition clauses. Consider similar contractual protections for third-party vendors and suppliers, who may have access to the inner workings of your business.

Additionally, communicate clear expectations to your employees and partners about what they can and cannot share publicly. As your workforce grows, a dedicated HR professional or department can create manuals, policies, training, and other methods to protect your sensitive information.

  1. Don’t set it and forget it – incorporate a long-term strategy

Legal strategy shouldn’t be a one-time item on your startup checklist. You can create a solid foundation for growth, but you must also follow it with good legal hygiene. Continued efforts could help save time and costs later. They can prepare your startup for filings, audits, and key events.

Because the life sciences and healthcare industry is highly specialized, also consider customizing your strategy beyond the basics. Ask your law firm how they can help you with challenges such as:

Working with your attorney early on and throughout the process can help you decide how to best serve your company’s interests at all times. “It is very difficult to provide advice if a client has already completed negotiations of their legal agreements before coming to see us and then asks for our automatic approval,” says Eric Hsu. “The more our clients involve us, the better we can help them assess the risks and understand if they are making an informed decision.”

Reflect on your trajectory and surround yourself with legal and financial supports who are equipped to guide you for the long haul as new risks and opportunities arise unexpectedly. Whatever the future holds, a well-crafted strategy can keep you ready for anything.

Running a startup is tough. Visit our Startup Insights for more tips and information on the different stages of starting your startup. And, for the latest trends in the life sciences and healthcare economy, check out our healthcare investment and exit 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.

Eric Y. Hsu | Wilson Sonsini

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