Most people start their first company while they still have a day job. It makes sense: You don’t need loans. You don’t need funding. And if you “fail,” all you’ve lost is time.

But you’ve also placed yourself in a hazardous – potentially legally ambiguous – situation. If managed improperly, you’re unnecessarily risking lawsuits and worse.

I’ve been on both sides of the table: I’ve done a startup while working and I’ve employed people who either were or are very capable of having their own startup on the side. And I’ve known people who were sued because of it, and not all of them won.

Recognizing in advance that I’m not a lawyer – and that none of this qualifies as legal advice – here are my tips for how to pull off the balancing act:

Pick a business that can thrive within your constraints – Your side venture has constraints a “normal” business doesn’t have:

  • You can’t answer the phone during normal business hours.
  • You can’t answer emails during normal business hours.
  • You can’t afford to hire three developers to add features and bugs.
  • You have to work in fits and spurts.

Your natural tendency is to fight these constraints, but that’s the wrong approach. For example, you know that to avoid social media shitstorms you’re supposed to have stupendous customer service, so you claim as much on your website. But then you don’t have a phone number and emails sent to you at 10:00am don’t get answered until that night (which means they’re not viewed until the following day).

That’s called a “missed expectation.” It’s also called pissing in the wind — it’s just going to come right back at you.

The right attitude is not only to work inside your constraints, but to turn them into competitive advantages.

For example, your regular income affords you the luxury of underpricing your service. So if anyone complains that there’s no phone number, you can just point out that for $5/mo you can’t afford a phone staff. Or pick a product in which simplicity and having very few features is an advantage. “We do only one thing and we do it better than anyone” is a great marketing slogan. You don’t have the time to make a Microsoft Excel knock-off, so don’t!

Embrace slow growth – We all have dreams of stratospheric growth, but it’s not a “plan,” especially not for a business you’re running in your spare time. In fact, any bootstrapped company should be aiming for slow, consistent growth rather than explosive growth.

This is not a bad thing. Slow growth maximizes your chance for success. Slow means your success is not dependent on some unlikely, massive event that’s totally outside your control. Slow means you can change drastically during the early days without sinking the company. You have a job, so you don’t require explosive growth to be successful anyway.

Remember, your immediate goal isn’t to make millions of dollars, it’s to build a business just solid enough to quit your day job. That might mean enough profits that you can already live (frugally) off the company. Or it might mean you have enough customers to have “proved” you have a viable business model, so now you can raise money with sensible terms.

Don’t lie at work – The best way to avoid a lawsuit is to prove that your employer knows you have a side project.

I know, you really really want to ignore me and operate in secret. You’re afraid to tell them because they’re might do something — fire you, distrust you, or look at you funny at lunch.

That might happen, but what’s worse — one of those things or a lawsuit? If you don’t think they’ll sue you, then you shouldn’t be afraid of telling them, because they are ultimately going to find out anyway. Better to tell them on your own terms.

Write a simple document explaining what you’re doing. Here’s my template:

To Whom it may Concern:

I have a hobby which does not in any way conflict with work. I’m writing this letter to make sure you’re aware of it so there’s no misunderstanding.

My hobby is ….

I work on my hobby only at home and on my own time; it is not in conflict with my employee agreement. I own it; [Company] has no ownership or rights to it. Like any hobby, it could generate a small amount of income.

Although I don’t anticipate it, I understand that if my hobby ever became in conflict with my job that it’s my responsibility to notify you immediately.

Thank you.

Then you get this letter signed by someone with authority. “Authority” means someone who can legally represent the company. This will of course depend on the company, but typically C*Os or the company’s legal council is a good bet. Getting a supportive boss to sign it isn’t good enough. He can’t speak for the company.

Check your employment agreement – Employment agreements are typically biased in favor of the employer, sometimes with outrageous clauses saying that anything you do, even at home and on your own time and unrelated to anything at work, is automatically owned by the company. Furthermore, you’re responsible for identifying and reporting on those things.

Courts have thrown out some of these egregious contracts, but that’s unusual, and you can’t depend on that. You don’t want to go to court at all. Besides, you signed it.

Read over your agreement and make sure it’s legal to have the side business. If it isn’t, you mustwrite a letter like the one above specifically stating that this is a valid exception to your employment agreement.

Don’t use company property or Internet, ever – Another clause in most employment agreements is that anything you do physically at work, or on software and equipment owned by the company (e.g. laptop, customer lists, Photoshop) is automatically the property of the company.

This clause is fair. If your project is really on the side, you have no business doing business at work.

When it comes to company property, be paranoid. Assume every laptop has a secret program that records all keystrokes, mouse clicks, screen shots, web sites and emails you read or write. Assume everything you do on the Internet is recorded, cataloged, tagged, and monitored continuously.

Now I realize you’re super clever. You want to sneak in some tech support emails during the day, so you use a cocktail of  Anonymizer plus GMail-over-SSL to confound the network admin. Because, of course, covering up your activity is a sure sign you’re doing something legal.

Even that is not enough. If they decide to sue, they get to look through your email records (it’s called “discovery”). Then they have 100 emails you sent during work hours. You lose.

Just don’t do it.

Time management is critical – I’m naturally awful at personal time management. I procrastinate, I’m disorganized, and if I’m not careful I’ll burn two hours at FailBlog with nothing to show for it but tears of laughter puddled under my keyboard.

A startup already generates an infinite amount of work. It takes all your time, which for you is 40 hours/week less than it ought to be. You can’t afford to waste time, whether that means bad habits or working on the wrong tasks.

Photo by Cayusa via Flickr

Jason Cohen is an angel investor and the founder of Smart Bear Software. This story originally appeared on his blog.