Football season is upon us again and, with it, the excitement, the thrill of moving the ball forward for a touchdown, and the agony of defeat. Ups and downs like this are what most start-ups experience. In football, it is important to protect the ball, to play good defense, and to avoid penalties. Similarly, start-ups need to protect their assets, defend their intellectual property, and avoid incurring unnecessary costs in the future. Following a few simple “rules” can help your start-up do all of these things.
RULE NO. 1: Stop the rushing game and avoid “illegal formation” penalties. Avoid quick-fix company formation tools you find on the internet. I know, start-ups hate paying lawyers. (This isn’t unique to start-ups.) You may like your lawyer, enjoy talking to her, appreciate the insights and ideas but, in the end, I know you’d rather not pay me for all of that (why can’t we just be friends, you ask). Why do smart clients nonetheless retain lawyers (like me) knowing full well we have to be paid? Because smart clients, like a good coach, recognize that starting a business is a process and that investment on the front end can lead to considerable savings on the back end.
Case in point (names changed to protect the innocent…you know the drill). CLIENT anxious to start a new business with Mr. Wonderful Guy (not that Mr. Wonderful of Shark Tank fame) partner turns to one of those ubiquitous (but all over TV commercials) to remain nameless companies, who sets CLIENT and Mr. Wonderful Guy up in a 50-50 ownership structure for a FEW HUNDRED DOLLARS. No operating agreement. No business “prenup”. Just 50-50 ownership and a simple corporate formation. Fast forward to 2 years later. Mr. Wonderful Guy turns out to be not very dedicated, not very competent, and overall a Mr. Not Nice Guy.
What’s an innovator to do? If Mr. Not Nice Guy Won’t dissolve the business, the only choice you have is to retain someone like me (preferably me) to file suit. Mr. Nice Guy’s defense team doesn’t just roll over. He files his own suit raising nasty claims against CLIENT. Fast forward again yet another year and a FEW HUNDRED THOUSAND DOLLARS LATER a judge finally dissolves the business but orders an auction to determine who gets the business. CLIENT HAS TO BUY HIS BUSINESS BACK even though it was his idea in the first place! A proper ownership structure, with a majority owner who can make decisions, and a good operating agreement with a dissolution plan, could have prevented this outcome. What would doing right have cost in the first place? A couple thousand dollars. Now, that’s a good no penalty play!
RULE NO. 2: Protect your blind side. Investment in a smart, disciplined offensive line of intellectual property protection (IP) on the front end can reap victories ten-fold—even season championships. But the upfront cost can be daunting. A good IP lawyer can help you to prioritize needs based on what must be done now to protect IP and what can be done later. Rules of thumb—patents and trade secrets—priority; copyrights and trademarks—important but can in certain situations be delayed. If budgets permit, do it all, but what start-up has an unlimited IP budget? Think future. Think maximizing asset LINE value through good strategic planning and budgeting. If your business succeeds, you will love and thank your IP lawyer forever for getting you that larger multiple. If your business fails, you still will have an asset that can perhaps provide seed money for your next great thing.
You also need to consider the other “team’s” IP and avoids infringement and other risks. IP clearance searches can be expensive, but there are ways a good IP attorney can help at least reduce risks within a budget.
Overall, if you follow these rules, and a few others, you will save money in the long run and maximize your investment of time and money in your new venture.