There are many questions founders have as they get started and making mistakes early on…
Are You Putting Your Business At Risk With These Mistakes?
We had a lively webinar with Mary Juetten, Founder and CEO of TrakLight, on major mistakes that could sink your business. So you’ll have no excuses for making these, here’s a quick rundown of the session plus the full presentation deck to 10 Tips to Minimize Risk and Maximize Value.
Business Risk #1 — Choosing the wrong form of legal entity
Limiting your personal liability is one of the first things you should do. Not incorporating in some form or fashion means your personal assets are on the line. Set up your legal entity on day one.
Business Risk #2 — Not protecting your IP
Why is having an IP strategy important? IP could account for as much as 80% of your business’ value. You will get a higher valuation and be more attractive to potential investors and acquirers if you own your IP outright.
Patents are really important and one of the first avenues you should explore in protecting your IP.
Patents protect ideas that have useful applications by giving holder(s) the right to stop other people from manufacturing or selling a product without your permission.
What a patent is not. A patent is not a trademark. Unlike trademarks, which give holders the ability to use a name exclusively, patents do not protect your brand. Patents don’t give you the right to make or sell something. They also are not affected by your choice of business entity.
Some key steps to take:
- Patents must be filed in the inventors’ names; but make sure to then assign the patents to your company.
- If you have multiple inventors, make sure you and they assign patent rights to the business entity.
- Get legal help with the process.
Patents apply in the U.S. only; if you’re going international, you need to take add’l steps to protect your invention.
Trade secrets refer to information that is valuable to your company. Laws vary by state but those steps include taking reasonable steps to protect them. That means communicating which information is secret (to your contractors, employees, business partners, suppliers, and even interns) and what steps they must take to protect it. When you talk with potential strategic partner or suppliers, always get confidentiality agreements or mutual NDAs in writing. But never ask VCs to sign NDAs (rookie mistake).
Business Risk #3 — Missteps with Co-inventors and Co-founders
Handshakes=headaches. Don’t leave anything to handshakes: otherwise you are putting your business at risk. Create a written founders’ agreement including what happens when there are cofounder disputes. Make sure your agreement includes a buy-sell provision (“business divorce”). And if you use a template founder agreement, always have a legal professional look it over first. Even small changes in wording can mean big legal differences.
IP ownership challenges usually center around who owns your IP:
- Read your employment agreement to make sure your/your co-founder/employee/contractor’s current employer does not automatically own any invention you/they create.
- Make sure you and any co-founders/contractors/ developers, etc. assign ownership rights to the company. Don’t wait until after you’re successful to do this.
- Software work-for-hire — Paying for something doesn’t necessarily mean you own it. When you work with contractors, make sure you negotiate full ownership rights to what contractors create for your business. The default for most agreements is that creators retain ownership to some rights, and you pay a licensing fee to use some parts of the work. Read the contract so that you know what you are getting.
- Software patents used to be covered under “Business Methods.” They are still available depending on what the software is used for. Get legal help to figure out the best way to go about it. Provisional patents can be a way of protecting code pending a trademark decision. Copyrights are another.
Business Risk #4 — Skipping required disclosures when fundraising
Understand key terms such as enabling “public disclosure” and who is an “accredited investors.”
The Internet is considered public disclosure, not only in the U.S., but also internationally. Before you share your company information online in a crowdfunding campaign, make sure your patent or provisional patent filing is in place.
The SEC is set to release new rules on public solicitation this summer. For now, if you do public solicitation, it is up to you to verify that the investors you approach are accredited and that SEC compliance requirements are met.
Practice safe crowdfunding. Different crowdfunding sites have different criteria on which investors they allow to participate. Get legal help to make sure your pitch is vetted before you seek funds. Although federal rules are still pending, multiple states have already established equity crowdfunding guidelines.
Business Risk #5 — Infringing others’ IP
“Free” isn’t free. Don’t assume you can copy things without permission. Whether or not they are clearly marked as protected by copyright or trademark, using photos, music, and video without attribution exposes you to fines and penalties for copyright infringement. Make sure you get permission for and properly attribute anything you use. Creative Commons is a good site for permissioned works.
Before you buy a brand or domain name, make sure someone else has not already trademarked it.
Business Risk #6 — Not having a handle on financials
Be realistic and detailed with your financial plan and know your numbers. If this isn’t you, get help to make sure you are on top of your financial projections and all your key metrics.
which leads me to…
Business Risk #7 — Not meeting book and recordkeeping requirements
Meeting filing requirements is a must for any business whether for investors, banks, or tax compliance. So is keeping good books. Hiring people to do this for you saves you time and effort so you can focus on running your business.
Business Risk #8 — Skipping key disclosures
Don’t hide things from potential investors. This includes pending litigation, cease and desist notifications, and copyright infringements to name a few. Remember that ignorance is not an acceptable defense. Call on your advisors for help and draw on legal professionals as needed.
Do you need help with your tax or accounting compliance? Ask us in the comments section below or contact Early Growth Financial Services for a free 30-minute financial consultation.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.
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