In a recent posting on Jumpstart Foundry’s website, Chris Sloan highlights some legal pitfalls that new businesses should avoid. While Jumpstart Foundry tends to focus on emerging technologies and the inevitable VC-funding (Venture Capitalist) that that arena tends to attract, Sloan, an attorney does bring up interesting points for any business to consider:
1) Protecting the interests of the founding members
2) Entity selection
3) Protection of your Intellectual Property
4) The Importance of good Contracts
Please see my thoughts below on the subject-
1) Founding Members- I find with a majority of our small business clients that involve some sort of partnership that there is a mutual admiration between the parties and that they share similar goals and visions for the company – but they do not always start on equitable footing. That is, one may have the idea and the other the money. Especially with my younger adult clients I lean on the side of caution when they say that they have had a conversation with “someone they look up to in business who has offered to finance the business.” This is generally a red flag to me that there is a disparity among the parties. We need to insure that all parties involved get out of the company not only what they put into but also what they expected to get out of it. I ask all of my new business clients this- a) tell me your business model now, b) tell what the business looks like in 2, 5, and 10 years, and c) tell me how you want to exit the business. We accomplish these needs by paying attention to item #4 above – Good Contracts.
2) Entity selection – It is crucial to take not only the interest of the founding members but also – sources of funding, type of product(s) to be sold, the states in which you will operate, etc. when you and your attorney (and perhaps your accountant – see my three-legged stool blog) decide on which type of entity to create and where to register your business entity.
3) IP protection – the beauty of the internet is that it is very affordable for most small business to get their “widget” into the stream of commerce. The curse of the internet is that it is very difficult for small business to hold on to their ideas. It is crucial that you sit down with a competent business attorney and a trademark, copyright, intellectual property (and perhaps patent) attorney to insure that your new app, song, luggage design, etc. is protected sufficiently not only in your local market but nationally and internationally.
4) Good contracts- It is difficult sometimes for attorneys to fully get the idea of the importance of good contracts to our clients. We are dealing with a day and age in which a potential business client can check a few boxes on a web page and voila they have a new company and, supposedly, everything they need. The problem is, those few check boxes and the sudden withdrawal of funds do not fully protect you. The website never took the time to learn about the subtle nuances of your business- what makes it different than all the other faceless businesses filling out the same form. Good contracts will be the foundation upon which your budding relationships with your partners, funding sources, employees, subcontractors, and, don’t forget, your customers will rely. Simply put, contracts that are tailored to fit your situation may become not only the shield that protects you from possible litigation but more importantly the benchmark for how your business is perceived by the parties that interact with it.
Questions? Good. Call us or your attorney for more information.