January 4, 2013 | 6-minute read (1028 words)
Originally published in Inc.
Starting a company means lots of surprises, but a lawsuit shouldn't be one. Successful young entrepreneurs explain what they wish they knew about the law when starting up.
The Young Entrepreneur Council asked 14 successful young entrepreneurs about which unforeseen legal issues pop up while starting up. Here are their best answers.
1. Watch Out for Your Advice
When I first started speaking professionally and coaching individuals, I never thought that I needed special insurance. It is rare, but I have seen some people take advantage of well-intended "advice" by claiming it destroyed their life and then suing the communicator. If you are in the business of providing advice, look into getting some liability insurance.
-Kent Healy, The Uncommon Life
2. Consider Vesting Your Equity Over Time
It is extremely difficult to find the right co-founders for your business. You need to have a similar work ethic and timeline for the investment, your chemistry has to match, and you have to make sound decisions for the company. Instead of getting all of your shares at once, consider vesting your equity over time so you have a fair solution if these factors do not line up, as is often the case.
-Doug Bend, Bend Law Group, PC
3. Get Protection From Deadbeat Clients
I wish I'd had an ironclad contract that allowed me legal recourse against a client who refused to pay. I never realized that so many people use your products and services, and then just walk away. Now, my contract states that I can go after them for the money owed and any associated legal costs.
-Alexandra Levit, Inspiration at Work
4. Beware the Costs of Hiring Contractors
We started Modify with one employee and a litany of contractors. This seemed like a "cheap" way to grow—we had few payroll taxes and few benefits. However, the definition of a contractor is quite strict. A company loses "behavioral control" with contractors; you cannot set fixed hours or define the role with granularity. Mis-classifying employees creates significant risk for a business.
-Aaron Schwartz, Modify Watches
5. Establish a Buy-Sell Agreement
What happens when one of the partners wants to exit? What do they get, and under what terms? What happens if a partner gets hit by a bus? If their ownership interest goes to a spouse, does the spouse have a say in management decisions? Uncomfortable questions, but it's much easier to address these up front than it is when you're making lots of money. Get it on paper in the beginning.
-Sean Johnson, Digital Intent
6. Limit the Company Transparency
When incorporating your business, some states like Delaware keep your LLC information private, while others do not. If you have a large platform with a customer service aspect, its important people are not call your cell phone with issues, you must design the operations to encompass all related services. Keep your information safe, especially when scaling your platform.
-Andrew Bachman, Scambook.com
7. Harness the Power of Documentation
Documentation is essential. Taking the time to get your paperwork in order ahead of time pays off big as your company grows, so make sure that you get all of your initial legal work correctly pulled together. This includes offer letters, confidentiality agreements, option agreements and, most importantly, your initial customer contracts.
-David Ehrenberg, Early Growth Financial Services
8. Take Notice of Trademarks
Don't get two years into your business and then find that you have to change the name of a popular product or even your entire company because someone has just realized that you're using a variant of their name and wants to sue you. It happened to us and at least three others that I know. Do your homework (most can be done online) and get a trademark before you start rolling with it.
-Luke Burgis, ActivPrayer
9. Prepare for Employee Issues
Inevitably, some of your most favorite employees today will not always work out in the long run. Be sure to you have well-written offer letters with non-competes, mutual agreement to arbitrate clauses, and other protective addendums. Keep counter-signed copies on file and formally document reviews and disciplinary write-ups. Diligence upfront will save you a lot of time and money in the future.
-Christopher Kelly, NYC Conference Centers
10. Keep Up With the Contracts
I wish I had realized the importance of having contracts with my vendors, clients and employees. Initially, I made deals on a handshake, and although this never led to any serious legal problems, it did make for plenty of headaches. You need to have something in writing to outline terms and conditions. This protects both you and the person or company with whom you are working.
-Andrew Schrage, Money Crashers Personal Finance
311. Read Those Terms of Service
-Nick Reese, Elite Health Blends
12. Hire a Trustworthy Lawyer
At one point, I was being sued by the Department of Workforce Services for $100K. I had no idea I even needed to work with them when I first started up! Luck would have it that I had a great lawyer and ended up settling for a heck of a lot less.
-Jordan Guernsey, Molding Box
13. Look Out, Lawyers Get Expensive
I thought I needed an attorney for everything. If you educate yourself about legal issues in your industry, you will know when you do need to include an attorney--and save a lot of money in the meantime.
-John Hall, Digital Talent Agents
14. Always Read the Fine Print
Read the fine print if you are using another company's API to build your business. Make sure there aren't call restrictions or commercialization limitations.
-Abby Ross, Blueye Creative