The often used lawyer phrase, you can “pay me a little now, or pay me a lot more later” is no more true than when advising start-up businesses. Many entrepreneurs are so anxious to open the doors, they simply focus on generating sales without worrying about legal issues. However, failing to address legal issues at the outset, can lead to significant conflict with employees, vendors, suppliers, and even investors. Here are the top five (though there are many more) legal issues startups must address.
1. Make Sure You Actually Own all Company IP and It’s Adequately Protected. In today’s knowledge economy, most value of companies is found not on hard assets, but rather on the intangible assets of branding, technology, and even Facebook and Instagram followers. And much of this is not even developed by company employees. So, your first act is to make sure any person who is working on IP for you, signs a Work for Hire agreement assigning their work product to your company.
Next, make sure company name, brand and product names, tagline for your company, your marketing collateral and pictures, unique technology have the proper trademark, copyright and patent protection. If not, others will use SEO manipulation, typo-squatting, PPC/Click Fraud, and counterfeiting to steal your brand and your products.
It’s important to have a great business attorney, but also a specialized intellectual property attorney. The IP attorney can tell you whether you even need IP protection, the type of protection, and when you should get it. And, because we live in a global economy, they also advise you on IP protection in foreign countries.
2. Misclassifying Employees As Independent Contractors. I get it. Every business would rather classify their workers as independent contractors to avoid paying employee benefits, payroll taxes, Workers’ Comp insurance, and other employee costs. However, if you misclassify workers as contractors instead of employees, as the owner, you will be personally liable for payroll taxes not paid to the IRS. You will also be liable for unpaid employee benefits, including health insurance and 401(k) contributions. Finally, depending on your state’s laws, the terms of your employee handbook (including non-solicitation or non-competition terms) may not even be enforceable against contractors.
3. Failing To Properly Document Your Contracts. Startup businesses are so anxious to generate sales, they are afraid to offend the customer or complicate the deal. This is no excuse. Every contract should be specific as to, among other items, (1) how the contract can be terminated; (2) the damages or remedies for termination or violation of the contract; (3) where and how disputes are resolved (i.e., the state law that applies, and whether arbitration or court will decide); and (4) what you are giving and what you are getting in return.
Also, don’t believe the rumor that all contracts have to be in writing. That is simply not the case. Verbal agreements can be just as enforceable as a written agreement. And once you have a contract, they can even be modified by verbal agreement. Because of this, it’s even more important that all important contract terms are in writing and clear.
Finally, please don’t use an online contract. You’ve never met the person who wrote the document, they don’t know your business, and you don’t even know if they drafted the contract in compliance with your state’s laws.
4. Failing To Hire An Attorney And Accountant With A Growth Mindset. No doubt many attorneys and accountants can handle the rudimentary aspects of a new business. However, an attorney and accountant are most valuable when they share experiences they’ve had with other client and other business situations. You should lean on and use the experience of your advisers, so you don’t make the same mistakes as other startups.
Many people also think it’s important to have an adviser who specializes in your industry. However, I think having an adviser who has clients in many different industries is more effective. A significant benefit is that the adviser can apply concepts and practices from other industries to your business. This avoids you falling into the trap of simply focusing on what is happening in your industry, without thinking how business practices of other industries could apply to your business.
Another important question to ask your attorney or accountant, what are the most recent books or blogs she/he has read, or podcasts they’ve listened to? Continuous intellectual growth and business curiosity are the hallmark of an outstanding adviser. You don’t want someone who is advising clients the same way they learned 20 years ago. The business world has changed, the economy has changed, the law has changed, and you want to make sure your advisers are up to date and growing.
There you have it. Five legal issues that you are now aware of. Of course, there are many other issues, but we hope this information provides you a head-start in your entrepreneurial venture and more importantly helps to protect you as you go forward.
I leave you with a final word of advice (and I’m sure I’m plagiarizing your doctor and mother): “An ounce of prevention is worth a pound of cure.” Taking proactive steps now will save you many, many dollars and headaches in the futures.