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6 Legal Considerations for Working With Incubators and Accelerators 

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New Zealand’s startup ecosystem has been rapidly evolving. The evolution in NZ’s startup ecosystem is partly attributable to the invaluable support provided by startup incubators and startup accelerators. These entities play a pivotal role in helping startups grow in their early stages. That being said, if you are a startup founder, you must bear in mind the legal considerations before you rely on an incubator or accelerator. This article will take you through six legal considerations relating to incubators and accelerators in New Zealand’s startup landscape.

1. Understand Incubators and Accelerators

It is important that you understand the differences between startup incubators and startup accelerators. Incubators are organisations created to support the development of early-stage businesses. They do this by providing:

  • resources; 
  • mentorship; and 
  • workspaces.

Business Incubators usually focus their work on startups in their infancy. They provide a space for startups to solidify their business model and business strategy.

On the other hand, accelerators primarily focus on scaling existing startups. This usually means hosting programs for a fixed term. Accelerators and accelerator programs provide you, a startup founder, with mentorship from industry experts through these programs. In some cases, accelerators will provide your startup with funding in exchange for an equity stake.

2. Intellectual Property Rights

Intellectual property (IP) is perhaps one of a startup’s most valuable assets. Some key components of IP that must be addressed include:

  • Confidentiality agreements: Your startup must ensure that any sensitive information shared with incubators and business accelerators is protected through confidentiality agreements. This prohibits the incubator or accelerator you have relied on from engaging in any unauthorised use of private information.
  • IP Ownership: You should have clear agreements which outline who owns the IP developed during the incubation or acceleration period. Crucially, you must ensure your startup maintains ownership of its core IP. That said, your startup may develop IP with your incubator or accelerator during the course of the relationship. If this is the case, you both will need to determine the appropriate ownership and usage rights of this IP. 
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3. Investment and Funding

Incubators and accelerators may provide your startup with seed funding or invest in your startup in some other manner. Some key legal considerations for this include:

  • Equity terms: Your incubator or accelerator may wish to obtain an equity stake in your startup. If so, your agreement with the organisation, needs to have clear equity terms. These terms should outline the percentage of equity your incubator or accelerator will receive. You should make sure the equity stake is conditional on the support or funding they will provide your startup. 
  • Investment Agreements: If your incubator or accelerator wishes to invest in your startup, clear and formal investment agreements should be in place. These agreements govern how the investment in your startup will operate. Further, these agreements will include conditions, warranties and exit strategies for the investment. 
  • Compliance: Both your startup and the relevant support organisation must comply with New Zealand’s financial regulations. Your incubator or accelerator may have a lawyer who can help ensure these regulations are complied with.

4. Management Structures

When selecting an incubator or accelerator to assist your startup, you should ensure the support business has an effective governance structure. Particularly, you should ensure the support business has a solid board composition. If your support organisation has an advisory board this is a good sign. The advisory board will give guidance to the support organisation to ensure that your startup gets the best guidance possible. Further, if your support organisation has an advisory board, this will encourage accountability within the organisation.

5. Regulatory Compliance

As mentioned above, both your startup and your support organisation must comply with the relevant laws and regulations. Some of the areas of focus that you and your support organisation must consider include:

  • Employment law: Both you and your support organisation need to be conscious of employment law regulations. These regulations are particularly relevant when you discuss hiring staff, employment and salaries for your startup’s personnel. Further, both you and your support organisation need to be cognisant of workplace health and safety (WHS) obligations. When taking on board advice or implementing any programs or policies, you must consider your WHS obligations. 
  • Tax: Understanding your tax obligations is an important part of financial management. This includes standard taxes like income tax and goods and services tax (GST). However, your startup should also look into tax incentives provided under NZ’s tax laws. 
  • Data Protection: There is an increasing emphasis on data privacy. As such, you need to ensure your startup’s practices comply with New Zealand’s privacy laws. Your incubator or accelerator support organisation is also bound by these laws.

6. Exit Strategies

Devising exit strategies is a critical component of business planning. You must make sure you have a exit strategy for when your startup no longer requires the needs of a incubator or accelerator. This provides both you and your support organisation will clarity and confidence about how your working relationship will come to an end. 

Your agreement, with your support organisation, should contain relevant provisions that enable you to terminate the working relationship. It is likely you will need to rely on these provisions when your startup is successful. Having these provisions allows you to avoid any legal issues that may otherwise arise.

Further, the termination clause in your agreement, should discuss the ownership and transfer of intellectual property. In essence, you and your support organisation should know, at the completion of the agreement what IP each of you retain. Also, both of you should know what IP you need to transfer to the other. This protects not only your interests but your support organisation’s interests as well.  You are well advised to seek legal advice from legal experts when it comes to the potential legal risks arising from the retention and transfer of IP. 

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Key Takeaways

Incubators and accelerators play an important part in helping early-stage businesses grow. However, it is important that you have regard to the legal considerations before you engage an incubator or accelerator to assist you. First and foremost, you need to understand the difference between an incubator and an accelerator. Several other key considerations that you need to bear in mind relate to: 

  • intellectual property rights;
  • investment and funding;
  • management structures;
  • regulatory compliance; and
  • exit strategies.

If you need help understanding how your startup can effectively collaborate with incubators and accelerators, contact our experienced startup lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page

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Emily Young

Emily Young

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