Most startups initially focus on incorporation, funding, and protecting their intellectual property, which is logical and practical! While these are all important and necessary, startups should also ensure that they are protecting their new startup from legal actions such as a lawsuit – the dreaded “L” word. A lawsuit is the official court process in which two or more parties seek to resolve a dispute. A legal battle can be lengthy, expensive, and create bad publicity. Startups are experiencing a rise in litigation and below we will focus on three growing risks to startups and provide practical steps to prevent these types of lawsuits.

Being threatened with a lawsuit is always frightening and unsettling but sometimes can be avoided. For example, in a sole proprietorship, both the company and owner could be liable for the damages. Structuring a startup as a corporation or a limited liability company could help reduce owner liability. Generally speaking, the creditors of a business also cannot succeed against the founders and other investors of corporations and LLCs for unpaid debts because they are sheltered by the corporate status.
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startup moneyPreviously, we outlined the most common exit strategies for startups and why it is important to think about those strategies early. One of the most common exit strategies is mergers and acquisitions, or “M&A”. For a startup, this means the sale of all or a part of your company to another person or entity. Although M&A can refer to a sale of assets or equity of a company, we will primarily focus here on equity.

There are two types of M&A transactions which are distinctly different exit strategies: strategic and financial. A strategic M&A transaction would be the sale of your startup to another larger company that is a competitor, within the same industry, or that would enjoy some synergy with its current business by acquiring your company. Think of Amazon acquiring Whole Foods, Facebook acquiring Instagram and WhatsApp, or Google acquiring YouTube and Waze.


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emergency exit sign“What is your exit strategy?” This is one of the most common questions that startups or early stage companies are asked, but many entrepreneurs have not given their exit strategy much thought. An “exit strategy” does not refer so much to your departure from the company (although it might), but rather how an investor will make a return on his/her/its investment. Although it may seem counterintuitive, giving some thought to your exit strategy up front can help you determine how to structure and operate your company, and many investors will want to know your ideal exit strategy before they invest. Keep in mind that these various strategies are also not mutually exclusive, and your company may experience one or more of these through its lifetime.
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startup moneyThe new business idea is coming together, the circle of friends and advisors is tightening and it’s time to pull the proverbial trigger on this thing. The questions arise, “who’s in?” “who’s out?” and “how do we set this up?” During the initial startup phase, it is important to keep key players involved, and maintain the flexibility to let them go if things aren’t working out.  Most startups don’t have the cash to pay salaries high enough to keep people involved, so a mix of compensation options is often on the table.  A common solution is restricted stock (or restricted units in the LLC context), which is equity that is subject to certain contractual restrictions on its ownership, typically including:
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Money puzzleThere are many ways to raise capital for your startup… and many potential pitfalls. While the initial conversation may center on “how much do we need?”, startup companies should also take some time to discuss “how do we structure this financing?”. Your startup may have short-term or long-term needs, may desire long-term investment and involvement from VC investors, may or may not know the valuation of the company, etc. The answers to these types of questions may factor in to choosing which capital-raising method works best for you and your company.

Before you can determine what approach is right for you, it’s helpful to figure out what the different options are and how they work. The list below contains a brief description of the most common methods by which a company can raise capital.
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moneyFor startups looking to raise capital, crowdfunding looks to be a modern solution to capital-raising concerns. In 2015, the SEC issued a rule on crowdfunding (“Regulation Crowdfunding”), which exempts companies from the lengthy registration requirements necessary when offering a sale of securities, including a sale of the company’s equity to the public. Regulation Crowdfunding allows unaccredited investors to invest in companies and allows such companies to raise up to $1,070,000 in a 12- month period through a registered portal.

Here are a few of the risks startups should consider when deciding if crowdfunding is the right option to grow your business:
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Money puzzleIn your free time, while not grinding away at your corporate day job, you’ve developed an early-stage version of an application that allows users to chase small digital emojis around town while staring at a smart phone. You’re confident it’s the next big thing, and the opportunities to monetize are endless. The problem: you’re not