Entrepreneur

4 ways to keep your startup out of legal trouble

I used to work as a startup attorney and now I’ve co-founded a startup that in part helps entrepreneurs get legal services, so I’ve seen startups make a lot of legal mistakes over the years, and there are a few that I keep seeing repeated. These mistakes are almost always the result of a simple failure in common sense; I’ve seen entrepreneurs of all pedigrees make them. Here are the top four:

Mistake 1: Not having every founder sign up to a vesting schedule and an intellectual property assignment agreement.

If a founder leaves early on, it is a sour note when the remaining team continues to pour their soul into the company while the departing founder holds a large ownership stake. Putting vesting on an founder’s ownership means that the company has the right to repurchase part or all of a founder’s ownership should a founder choose to leave prior to a certain date. This incentivizes each founder to stay with the company during the crucial first years. When each founder is given ownership in the company, make sure to include a vesting clause in the agreements allocating founder ownership such as stock purchase agreements.

Another sore point, and potentially fatal result of a departing founder, is when founders leave with important intellectual property assets of the company. Intellectual property can include patents, software code, logos, customer lists, and recipes. By having each founder assign their intellectual property to the company, they are further committing themselves to the company’s success. You can easily accomplish this by having each founder sign an Intellectual Property Assignment Agreement with the company that lists all the intellectual property the founder will assign to the company.

Mistake 2: Signing agreements without fully understanding the consequences of key clauses.

For one reason or another, entrepreneurs fail to read, let alone understand, the agreements they sign. Whether out of naivety or misunderstanding, entrepreneurs are often caught off guard by clauses in agreements well after signing them.

By not fully understanding the agreement you are signing, you undermine the opportunity to negotiate key terms and end up paying more money than you originally anticipated. A prime example of this is termination clauses and the consequences of ending a relationship early. These type of clauses are often overlooked and can involve heavy fines or payments when a contract is prematurely terminated.

When you sit down to sign any agreement on behalf of your company, make sure you fully understand the following and you will be 95% of the way there. First, understand completely what you are getting or giving up under the contract. Second, determine,what, if any, are the additional payments that could be required under the contract (i.e. termination clauses) or if there are circumstances that limit what you get under the contract. Finally, completely understand who owns what as the relationship persists, especially in the case of intellectual property.

Mistake 3: Failing to quickly fire disrespectful and destructive employees.

Nothing is more poisonous to a young company than an employee who doesn’t fit, especially jerks. Hiring people who help to create a great culture and quickly firing those who don’t is crucial. Being firm and expecting results is one thing, but destructive people who disrespect and bring down others are undesirable.

These people also tend to be the ones who get the company into legal trouble. They take small disagreements and blow them up into contentious legal situations.

Spotting jerks can be tough, especially ones who have a track record of success. Often, their destructive ways do not appear until well after they are hired. If you have a jerk iin your midst, make sure to record every instance of insubordination and then fire them ASAP. Letting them linger can tear your company apart and increases your chances of legal problems.

Mistake 4: Failing to put important business relationships into writing.

One of the most important facets of successful business relationship is clear expectations of all the parties involved. This is why contracts are so important — they set the expectations of the parties in writing. The most common relationships entered into by early founders are those with contractors. While contractors can perform critical tasks for your organization, so many founders fail to put these relationships into writing. This occurs often with advisors. Failing to put these critical relationships into writing only increases the chances of a misalignment of expectations and a failed relationship.

Every business relationship should have a contract. Even the smallest relationships should have something in writing. Any time anyone will be doing something for your company or you will be doing something for them, get it into writing. Almost all of the relationships you will enter into as an entrepreneur are well paved and there are plenty of resources to assist you — use them.

A little common sense can take you a long way in business. It can also help you avoid the problems that so many entrepreneurs face — especially with the law. While you should always have your lawyer on your speed dial, you can avoid so many legal issues by just using the practical thinking that helped you build your business in the first place.

Matthew Faustman  is co-founder and CEO of UpCounsel.com — a marketplace for legal services. You can follow his blog at blog.upcounsel.com.

[Top image credit: Jason Patrick Ross/Shutterstock]


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