Legal Mistakes Made by Entrepreneurs

http://hbswk.hbs.edu/item/3348.html

by bjonathan • 15 years ago

161 23 15 years ago

hbswk.hbs.edu

scarmig• 15 years ago

Does giving away half your startup for $1,000 in writing count?

kmfrk• 15 years ago

Good article. Here're the ten mistakes:

#10: Failing to incorporate early enough.

#9: Issuing founder shares without vesting.

#8: Hiring a lawyer not experienced in dealing with entrepreneurs and venture capitalists.

#7: Failing to make a timely Section 83 (b) election.

#6: Negotiating venture capital financing based solely on the valuation.

#5: Waiting to consider international intellectual property protection.

#4: Disclosing inventions without a nondisclosure agreement, or before the patent application is filed.

#3: Starting a business while employed by a potential competitor, or hiring employees without first checking their agreements with the current employer and their knowledge of trade secrets.

#2: Promising more in the business plan than can be delivered and failing to comply with state and federal securities laws.

#1: Thinking any legal problems can be solved later.

RuadhanMc• 15 years ago

I daresay Zuckerberg disagrees with #1.

imjk2• 15 years ago

I daresay Zuckerberg seems to be doing fine dealing with legal problems.

sv123• 15 years ago

For #8 how do you go about finding such a lawyer?

larrik• 15 years ago

Especially outside of DC/Boston/NYC. Are we doomed?

imjk2• 15 years ago

I second Boston.

sskates• 15 years ago

Advice on how to go about finding a good startup lawyer by those who have gone through the process would be much appreciated.

rmason• 15 years ago

Let me add one that has personally bit me years ago - failing to file for a trademark before launching a business. Don't think that it's something you can put off until later. Being first to use and owning the domain name is not a valid defense.

Even having the trademark might not help you if you face a well funded foe but it helps. We weathered the rebranding but it slowed us down and was very costly.

izak30• 15 years ago

#4 seems to go against a lot of other advice here [RE: Don't Sign NDAs, which is my personal stance] Almost everyone with a crappy idea wants an NDA, so much so that I have a stock `why I won't sign your NDA` email.

That being said, There are times when I know an NDA is well thought out, and necessary, but this is the exception, not the rule.

michaelpinto• 15 years ago

I almost want to come up with my own counter-agreement which states "if i turn out to be a flake i'll pay you $1000 for every hour of your time i wasted"

nostrademons• 15 years ago

There's a difference between "Top 10 legal mistakes" and "Top 10 mistakes" made by founders. Something can be a legal mistake (as in, causes legal problems down the line) and still be a brilliant strategic move. As CEO, it's your job to weigh the legal hot water against the business benefit and decide what you need to do.

Disclosing your idea without an NDA means you may lose exclusive rights to that idea. This is often a prudent course if the alternative is that you fail to gain traction, go out of business, and have to get a job, where you lose all rights to your ideas. Oftentimes, the goal of a startup is to live to fight another day, and strategically it's a good move to take a loss on one particular idea so that you can continue to generate ideas in the future.

entangld• 15 years ago

I need the upvote numbers back. How am I supposed to distinguish between when someone says something that sounds good but isn't necessarily true and a point that many HNers agree with?

This thread is a perfect example. I'm trying to learn something here and I have no way to determine credibility.

alexqgb• 15 years ago

Upvoted.

I use a Greasemonkey plugin called Backbars, which turns the numbers into a graphical display that floats behind the headline. This makes it even easier to scan a page very quickly, and note what's got traction - which can be as interesting as the articles themselves.

HN - please - bring the numbers back.

chopsueyar2• 15 years ago

+100 Agree. Please PG.

grellas• 15 years ago

This is a nice piece and Connie Bagley is a gifted lawyer and teacher who has for years now published a good legal guide for entrepreneurs along with Craig Dauchy of Cooley (we also had worked together at the same Big Law firm in the early 1980s).

A few observations:

1. Founders are much more aware of 83(b) elections today than they were in 2003 when this piece was done and failure to file these on time is much less a problem today than it was then.

2. The biggest problem by far among early-stage founders that is not mentioned here is failure to assign IP into the company at the time of formation when shares are issued. This is commonly overlooked when founders take a do-it-yourself approach. Normally, it is easily cleaned up but, in cases where disputes have arisen, it is a painful and expensive problem to deal with.

3. I would add as well trying to "do it yourself" without even consulting with a good lawyer to get strategic guidance. This can lead to problems that are easily avoided at small cost by consulting up-front with a lawyer, even if you intend to defer hiring a firm in the earliest stages (see, e.g., for an example of what can go wrong as a founder candidly discusses why "incorporating my startup [in Delaware] was my worst mistake": http://news.ycombinator.com/item?id=2399139).

As a point of comparison, here is a link to a similar list (equally good) done by Scott Walker and posted on HN a while back: http://news.ycombinator.com/item?id=1418300 (as to which I made a detailed comment touching on LLCs, Delaware, vesting, and tax).

In general, founders are much more savvy about legal startup issues today than when this piece was written but it is always helpful to review the major issues as a double-check when starting.

tlrobinson• 15 years ago

More on the 83(b) election: http://www.quora.com/What-is-an-83-b-election

Of particular note is you have 30 days from the date of the stock purchase to file. I miraculously remembered this on the 27th day.

mncolinlee• 15 years ago

Does anyone know how the new Startup America tax rules impact section 83? I am not a tax lawyer, but it sounds like the new rules are a proposal in Obama's 2012 budget that would remove the need for 83b elections for founders if the budget passes. Is that correct?

http://www.treasury.gov/connect/blog/Pages/Startup-America-H...

bfe• 15 years ago

This is an excellent article that every entrepreneur should keep as a handy reference.

However, there's one significant error regarding international patents I want to correct.

There's no single patent application for the European Union. What there is is a single European patent application through the European Patent Convention, which is independent of the EU and has an overlapping but not identical set of member nations, as well as extension agreement nations (that typically eventually transition to member nations), and that recently also started establishing patent validation agreements without extension agreements (the first being Morocco).

International patent prosecution is very complex, but the one thing to definitely remember is just to talk to your attorneys about international patents at least a few months prior to one year after the initial filing date of any patent applications.

MikeHo• 15 years ago

Business Law is flawed for those under age of majority...

I've had numerous start ups and successful ventures since the age of 12, and to date (I'm currently 17), it's always a burden to know I'm held back from incorporating etc.. as nothing I sign is legally viable.. therefore making it hard for me to play by the rulebook.

dangrossman• 15 years ago

What do you mean? You can enter into contracts and they are fully binding for the other party. It's only you, the minor, that can sometimes choose to ignore the contract legally. That's why most businesses choose not to contract with minors, but if they do, they are enforceable.

bugsy• 15 years ago

I agree with 8 and 3. 4 is highly debatable and possibly completely wrong.

The rest are all promotion of spending lots of money on legal services even when you really should not be and there is no benefit to doing so.

Legal Mistakes Made by Entrepreneurs

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