Startup Law · Mistakes

What startup legal mistakes have you experienced or observed?

Mike Cavaretta Co-founder and Member at The Startup Coalition

October 3rd, 2016

I'm moderating a panel on mistakes commonly made by startups and how they can be avoided. I'd like to discuss real-world anecdotes, rather than just talk about issues in the abstract.

If you have experienced or observed any startup legal issues, I would appreciate it if you would share them  - to the extent you can do so without disclosing confidential information, of course.

Many thanks.

Josh Kirschner Founder & CEO at Techlicious

October 3rd, 2016

One if the mistakes I've seen is failure to buy insurance that would cover legal cosys/settlements on a lawsuit. A company I know we'll was sued by a former contractor, completly frivolous, in my opinion, yet companies paid tens of thousands in legal costs out of its own pocket, then additional as a settlement just to make it go away, because it didn't have E&O insurance to cover it. In more serious circumstances, this could easily bankrupt a startup. 

Jeffrey Pearl Entrepreneur, CEO and Sales Leader

October 3rd, 2016

Mike,

The biggest mistake is not to focus on sales. As a start up, you need real customers paying for product or services as quickly as possible.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

October 3rd, 2016

Mike. The biggest legal mistake is not having a good lawyer and not getting everything down in writing. FD is full of people with problems in HR, patents, financing etc. that could resolved if they had good counsel. FD especially, is populated by people seeking legal advice and non-lawyers giving it. Its a clear recipe for disaster, especially given the number of lawyers who will work for start-ups at a reduced rate.  

Kristi Bodin Western Massachusetts Attorney for small businesses, individuals, and municipalities.

October 3rd, 2016

Failing to anticipate a lawsuit for misappropriation of trade secrets brought by a former employer. Although the case had little merit, and ultimately settled, the legal fees and costs really hurt my clients. They might have been able to avoid the litigation by addressing these issues with their former employer before they left.

Dane Madsen Organizational and Operational Strategy Consultant

October 3rd, 2016

I spent 2.5 years as a consultant to salvage a business for the investors (all angels) because, at the core, they used the wrong specialty legal help. They, being in real estate, used a RE attorney they were comfortable with that should have been sued for malpractice given what he did. It allowed the founder to essentially carve the IP out of the plan into another organization while all the investment was in the first entity with no real rights except to sell the end product. To compound the matter, when changes were made to the agreements, the distaste for legal fees caused the investors to make those changes themselves instead of using a lawyer and without proper documentation. This lesson caused them to lose 2.5 years, $300,000 in fees, and force them to buy back the IP they had financed from the founder at a cost of $700,000.

Jeffrey Pearl Entrepreneur, CEO and Sales Leader

October 3rd, 2016

Minimizing focus on revenue acquisition. Is your company grows, the need for revenue increases. Always Be Selling!!! 

Kenneth Jones

October 3rd, 2016

@Kristi Bodin 

What are some easy things that employees can do before they leave their former employer to reduce the likelihood of litigation? Also, should employees be upfront about their startup pursuits with their employers on their way out the door or more coy?

Rob G

October 3rd, 2016

@ Mike C, Here's a related FD thread that might be of interest: http://members.founderdating.com/discuss/6288/How-do-you-know-if-your-startup-lawyer-sucks
1. Experienced: This example is a legal and practical issue (as most 'legal' issues are): not having a proper IP assignment provision/agreement in place before paying for SW development - i should have known better, but then again, if i had one in place, so what?  Would the results have been any different? I started a venture as more of a passion project/side project and therefor took some shortcuts in the upfront paperwork... as in there wasn't any.   A software developer (a complete stranger) overheard me talking about what, at the time, was little more than an idea and asked if he could join me and do the dev work.  How could i say no?  I soon found out he could only work part time as he needed to continue other paying work.  We agreed that i would pay him at 50% of his 'normal' rate if he would work full time - the other 1/2 was his sweat equity.  we agreed.  i paid him.  I had an email trail of our conversations and agreement.  What i didn't get was an explicit IP assignment agreement and daily commits of source code.  After a few months it became clear we couldn't work well together.  He held the source code ransom for 'back pay' - the other 1/2 of his 'normal' rate.  One option would have been to take him to court to get an order to turn over the product i had paid him to build. That, of course, would take months or years and tens of thousands in legal fees.  As it was, it took 5 months to negotiate an agreement that included an IP assignment and a large check. I think it's common to believe that you should own what you pay someone to produce - good assumption except when it comes to software development.  The larger lesson learned was, even with a seemingly inconsequential project it is best to have ALL assumptions and agreements in writing. The larger mistake was more opperational than legal - not having control over current source. 

2. Observed: not managing lawyers properly:  This is a general observation gathered over working with many startups. From paying for services they just don't need to drafting agreements with terms that are far too draconian given the startup's 'clout' (or lack thereof) with the other party, to simply bad/wrong advice.  Bad advice, of course, is not unique to lawyers, but it is often the most expensive bad advice you can get... which leads to questions like this: http://members.founderdating.com/discuss/6288/How-do-you-know-if-your-startup-lawyer-sucks

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

October 4th, 2016

Assuming you can hand all the law to a lawyer.  Lawyers are like car mechanics.  You can't change a transmission by yourself, but not knowing the basics of how a car works is a recipe for disaster if you want to get something fixed.

A good startup lawyer turns out to be a small business law teacher and coach.

Ziv Rotenberg Founder and managing partner at Group8 Consultants

October 4th, 2016

Well, if it's a tech startup, the biggest mistake is thinking that IP is not a management issue and postponing it to later stages - when you discover you've neglected IP it can be very costly (and sometimes impossible) to correct - and don't assume your corporate lawyer know what there is to know about IP... it's a highly specialized field.