1. You Haven’t Lawyered Up.
OK, that may be a little dramatic, but the worst case scenario is that you have a handshake deal with your co-founders. After all, we are all buds, this won’t go wrong. Even if it never goes wrong, you need to have your agreements done and done correctly. Too many times, people come see us because there is a fight about who owns what or some software or web developer claims they own a piece of the company based on a conversation at the bar. Having proper shareholder or operating agreements is not a pleasant experience because sometimes it is the equivalent of a prenuptial agreement for an engaged couple – not exactly the romantic way to start things. The old adage, however, is often true . . . you can pay me a little now to get this done right or pay me a lot later to help try and clean up the mess. Once you grant an interest in the company and it vests to the co-founder, it is his forever without the proper agreements. The co-founder decides to chase his dreams of being a professional fisherman in Cabo and you are stuck slaving away trying to create value for him. You can easily avoid this with vesting and repurchase agreements.
2. Don’t over lawyer.
I know I just told you to lawyer up, but this is the internet so I can contradict myself with impunity. If you are a sole founder without any partners and are still at the stage of trying to figure out if you have a marketable product or idea, then go to a website and set up your company on the cheap (don’t tell anyone I said that was OK). Even if you have partners, you don’t need overly-complicated documents and financing as if you were already a multi-national company. You don’t need employee handbooks and agreements, complex vesting structures, ESOPs. If you are bootstrapping, get your product on the market first and then decide whether all this other stuff will be needed. The odds that you are the next Facebook are slim – you don’t need to act as if you will be attracting millions of VC money three months from set up. If it looks like that is a possibility, it is not that expensive to put the shine on your corporate documents and structure. Don’t pay for that until you need it.
3. Protect Your IP.
Just because the Secretary of State said you could use the name and the domain name was available does not mean you are free and clear. You may be infringing on someone’s trademark. You may need to take additional steps to protect your own trademarks. The last thing you want to do is invest in product launch only to get the cease and desist letter a few months later. If you are doing this on the cheap, Google the name and several close variations. Don’t use a generic or geographic name. Do your own search on the USPTO TESS search found at www.uspto.gov. This should help you sleep a little better at night although it is not foolproof. Also, if you can’t afford to get a patent (timing is important so don’t wait too long to visit with a patent lawyer if you have truly novel product) or you are not eligible for patent protections, don’t forget about trade secrets. If you keep the secret sauce from being disclosed contractually, you may get all of the protection you need.
Is all the IP owned by the company or the individuals who created it before the company was formed? Do the contract web designers or coders own the IP? Do the founders’ prior employers have any rights to the IP? If you don’t know the answers to those questions, you need to find out–now.
4. Don’t Over Protect Your IP.
I know, I did it again. Most start-ups do not really have earth-shattering IP. If you are approaching serious investors or VC’s, you are often only going to have one shot with them. Take it. Don’t demand a non-disclosure agreement unless there is really some secret sauce worthy of protection and be prepared to explain it. Investors don’t sign blanket generic nondisclosure agreements. You can still talk about the business, what it does and protect the secret technology or algorithm. Truth be told, you are probably not the only person to think of the idea and not the only one working on it. Your job is to be first to market and be the best. Demanding nondisclosures from investors may prevent any investors from showing any interest.
5. Don’t Go Asking Everyone For Money.
Despite what you may have heard about crowdfunding, general solicitation of anyone and everyone is not legal. Even if it becomes legally acceptable, it may not be the best idea for your company. There are securities laws and they can get complicated. Before you start seeking investors, visit with counsel and do it right.
6. Don’t Turn Away Good Money.
Are you sensing a pattern? The friends and family that want to support you really want to support YOU. They will often entertain convertible notes so you don’t have to value the company early on or invest in large legal fees. Having ten friends and family invest in you (preferably accredited ones; hence the “good money”) should not turn off future investors.
7. Don’t Go Chasing Money.
I don’t know how many times I have seen the entrepreneur spending all of their time chasing money rather than improving the product. Yes, some companies thrive in a very short time frame and there is a financially rewarding exit. You read about the latest one in the newspaper, right? You read about it, because it does not happen often. It is not likely to happen to you and most investors are turned off by the entrepreneur who thinks they are going to sell off in three to five years and move on to the next thing. Unless you are someone who has already sold off a handful of start-ups for millions, investors want someone that is passionate about the project they are investing in—not someone looking for the early exit. While not exactly legal advice, this misguided mindset can cloud your legal strategies. I’ve heard numerous entrepreneurs tell me they have to be Delaware corporations because that is what the venture capital firms want. If you are good enough, your state of incorporation won’t matter and if the money is right, it is something you can fix. In the meantime, you have made your start-up costs more expensive and your administrative burden worse. Others disagree with me, but don’t let the one-in-a-million chance take you away from focusing on your product and overcomplicate matters. You don’t plan your life on winning the lottery, you should not plan your business life on winning the lottery either.
8. Get a good accountant.
A lot of the times I tell entrepreneurs to ask their accountants. Lawyers deal with risk mitigation, accountants are more attuned to tax and accounting advantages. The right accountant can help with vesting strategies and 83(b) elections. The accountant should be one the primary persons to decide whether you should form a corporation, an LLC or limited partnership and what the effect and cost of conversions down the road and the administrative cost of each is in the meantime. You have probably figured out by now that just because you read online that Silicon Valley VCs prefer Delaware corporations, it does not mean it is the right fit for you. If your company and idea are strong, you will find money. If you are told no because you are not a Delaware corporation, that is simply a cop out.
9. Get your e-commerce protections in place.
If you are primarily an e-commerce site, get your terms of service in order and make them enforceable through a click-wrap agreement. You may think many of that is boiler-plate, but when it is applied to a dispute, it very well may save your company. Make sure you are DMCA compliant so that you don’t get sued because someone violated copyrights when they posted comments to your site. Make sure you are complying with any applicable FTC or other regulations. While this sounds expensive, experienced counsel can easily spot the issues and has probably handled them before.
10. Take Your Lawyers/Accountant to Lunch.
I didn’t include this because I am hungry or lonely. It is the little-known industry secret. Lawyers have to eat lunch. I would rather eat lunch with you than by myself and it is a convenient time “off the clock” to hear about everything that is going on in the company and get the quick diagnosis. We really are interested in you and the company and enjoy these conversations without having account for every minute.