Start ups and the law – what you don’t know


DonCorleone“We are all honorable men here, we do not have to give each other assurances as if we were lawyers.”
Don Corleone in Puzo’s The Godfather

So are you starting a new business?  Then Don Corleone’s words are absolutely not meant for you. You are going to need to give assurances and you are going to need a lawyer. And according to a panel put together recently by DK Smith at the Dumbo offices of Huge, you’d better get one on board ASAP.

“What’ll kill you, is what you don’t know,” said one panelist.

I am not giving you advice here (legal disclaimer!) – but what I heard was persuasive. There were tales told of best friends who started something – why would they need to write anything down? They’d never had an argument. But soon one is pulling more all-nighters than the others, one gets a different idea, one wants to split and go to Thailand. And so what to do? Who owns the IP? How is the stock divided? Does the working partner have to support the other in her travels?

Do yourself a business pre-nup because these are not unusual situations – and they are never foreseen. Friendships and families have been destroyed when this stuff was neglected.

Incorporate so that the IP can be owned by the business. Divide up ownership shares. Write down expectations and off-ramps. Do the NDA’s. Just do it. Complain by all means – blame it on the lawyers – but just do it.

Some words from the panel: “You need legal advice to keep the company healthy” “You have to have structure to legislate the IP within the company. It doesn’t figure itself out” “Do it wrong now and it could cost you a lot later”

Here’s another caution: so you have an idea but you need a developer. Don’t panic and give them a big handful of stock just because you are relieved to have found one. They will be gone soon and have no more skin in the game – if you’ve made them your partner you will be sorry.

And now to taxes. “Wow – leave me alone” I hear you cry! This is really an area where you don’t know what you don’t know. The ramifications of missing a step “can creep up in the most unlikely places.” This is especially true regarding the valuation of options. (Important: File an 83 b when you receive options.) I am not going to be foolish enough to try and explain – but trust me, the downside can be very sad. Get yourself an accountant. Early. Just do it. If you miss a step, unraveling can be very costly – if it is even possible.

Your chosen lawyer should understand the opportunity and where you fit in the market: an advisor not just a document writer. Someone who will connect you to clients and investors and talent. Someone who knows the pitfalls and the work-arounds. “It’s the knowledge, not the documents.”

“The life of the law has not been logic; it has been experience.” – Oliver Wendell Holmes

The panelists quoted above are Nad Adjir, Amy Goldsmith, Julia Heming Segal, Charles E. Torres

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  • I have run this small company for 17 years and for about 14 of those we have had the same lawyer who has worked on every sort of agreement or found a colleague for those outside his remit. I have rarely argued with his billing and have always been much more comfortable when I have his advice on a deal than not. But I always make the commercial decisions in the context of his advice and we know where the boundaries lie. We have had good success in negotiations with vastly larger organisations over the years. My advice, therefore, is to find a good lawyer and work closely with him/her towards understood goals. But never forget who runs the business.

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