Top Ten Legal Mistakes Made by Entrepreneurs
#1:
Thinking any legal problems can be solved later.
Excellent legal talent can be retained for relatively little money up front at
the early stages. It will cost much less to get it right at the beginning than
to try to sort it all out later and correct it.
#2:
Promising more in the business plan than can be delivered and failing to comply
with state and federal securities laws. If
someone promises to do something and knows that they can't perform that
promise, that's considered fraud. In a business plan, one must make an honest
appraisal of what's doable and set forth their assumptions, so the person
putting up money can judge whether they are realistic.
#3:
Starting a business while employed by a potential competitor, or hiring
employees without first checking their agreements with the current employer and
their knowledge of trade secrets. The law is clear
that if someone is currently working for a company, particularly if her or she
is a key employee, they cannot operate a competing business.
#4:
Disclosing inventions without a nondisclosure agreement or before the patent
application is filed. Is it wise to get
potential venture capitalists to sign a nondisclosure agreement? In the best of
all worlds, yes, but most won't.
#5: Waiting to consider international
intellectual property protection. In the United
States, if an invention is sold or made public, there's a year's grace period
to file a patent application. Everywhere else, if the invention is sold or
publicized prior to filing the patent application, the invention is
unpatentable in that country.
#
6: Negotiating venture capital financing based solely on the valuation.
Valuation is not the only thing one should consider when selecting a venture
capitalist or when negotiating the deal.
#7:
Failing to make a timely Section 83 (b) election. An
83 (b) election allows the tax computation to be made based on the value at the
times the shares are issued, which are often pennies per share.
#8:
Hiring a lawyer not experienced in dealing with entrepreneurs and venture
capitalists. Lawyers who have no experience working
with entrepreneurs and venture capitalists will most likely focus on the wrong
things while failing to recognize some of the more subtle potential traps.
# 9: Issuing founder shares without vesting.
Simply put, vesting protects the members of the founding team who take the
venture forward.
#
10: Failing to incorporate early enough.
One problem that arises here is the so-called "forgotten founder": a
partner involved in starting the venture subsequently drops out. When the
venture gets financing or is ready to go public, this partner returns, perhaps
with an inflated view of what his or her contribution was, demanding equity.
Out of the 10 legal
mistakes, one stands out the most for me: #4: Disclosing inventions without a
nondisclosure agreement or before the patent application is filed. Along with
getting the nondisclosure agreement sign and the patent application file. Don’t
talk to anyone you don’t trust, make sure they have a legal obligation to keep
your idea a secret, and if they do not need to know, do not tell them. The
other 9 mistakes do not matter, if your idea is stolen.http://hbswk.hbs.edu/item/3348.html
