THE ONE AND ONLY WAY TO AVOID LEGAL DISPUTES
A lawsuit is the NUMBER 1 disruptor to your business.
If you have a good system, then nearly everything else is replaceable and fixable. But a lawsuit can screw your company up.
So here it is . . .
I. THE ONE AND ONLY WAY TO AVOID LEGAL DISPUTES:
Do nothing.
If your company never finds itself in a legal dispute, its not because you're doing something right, it's because you're not doing anything. If your company pushes the envelope, if it's actually going out and doing something, you're going to get sued. It will happen. Period.
Take some solace and comfort in this fact. I've seen entrepreneurs lose their mind over stress, lack of sleep, and worry about impending legal action. But relax on this one point because it's also a sign that you're doing something right.
Think about how many times Apple gets sued. It's just the way things are if you want to do any serious business.
So then instead of telling you how exactly to avoid lawsuits, I'm going to tell you how to minimize lawsuits.
First a bit of understanding as to why lawsuits happen.
II. LAWSUITS HAPPEN BECAUSE OF THIS REASON:
Unrealized expectations.
That's the reason that any dispute happens . . . with anything. You can explain any divorce or breakup that way too.
It's all about unrealized expectations. So the best way to minimize lawsuits is to manage and control expectations. The other reason why lawsuits happen is when some asshole does something and you have to go on the offensive. For example, someone might steal your idea and blatantly rip off your design. But even then too, you can protect yourself.
So the key is to not avoid lawsuits completely. The key is to MINIMIZE lawsuits.
III. HOW TO MINIMIZE LAWSUITS CHECKLIST
Phase 1: Formation
____ 1. INCORPORATE AS SOON AS POSSIBLE
Incorporation takes ideas and work products of you and your colleagues and formalizes and makes the formation official. It shifts expectations that come from just a couple of dudes talking to the expectation that this group is actually doing something--that they're actually going to make this happen.
Beyond legalities, there is also an important psychological shift. Before incorporation people have an expectation that ideas and things I create are my own. After incorporation, it becomes for the company. This is a big deal.
____ 2. VEST SHARES
If company stock is given to founders without a vesting schedule, then a co-founder can run off with half of the company after day 1.
If that happens, you can be sure that there's a legal dispute is in the cards. It needs to be.
People think that a co-founder leaving like this is something that only happens maliciously and if a co-founder is a douchebag. That's not it. Some times better opportunities come around. People want what's best for their family and young kids. This is especially true in the energy industry and industries where a lot of individuals are highly technically skilled.
Vesting is really just about managing expectations. The expectation starting off is that all of the individuals will grow this company together into something great over the next few years. Vesting memorializes and insures this expectation.
____ 3. DEFINE INDIVIDUAL ROLES IN THE STARTUP COMPANY
Co-founder disputes are ugly as hell. The best way to stop this from ever happening is, as always, to manage expectations.
____ a. Have proper bylaws and other corporate governance matters properly set up. This means memorialize how decisions will be made.
____ b. Avoid perfectly equal ownership splits. Having one person clearly in charge on matters helps the decision making process.
____ c. Know who is going to do what in the company. Who is the marketing guy? Who is the business development person? Who is the tech person?
____ 4. MANAGE INTELLECTUAL PROPERTY
Intellectual property disputes are some of the most expensive and disruptive legal actions.
____ a. Make sure that anyone who contributes anything to the company-to-be prior to incorporation assigns their IP to the company via agreement.
____ b. Make sure that any IP created by individuals after the company has been incorporated is owned by the company. You do this by having agreements and provisions in employment contracts, contractor agreements, etc.
____ c. Have a written agreement with any one just talking to you about your company about the product idea does not mean that they are contributing IP.
Phase 2: Growth and Operations
____ 1. DON'T MESS AROUND WITH EMPLOYMENT LAWS
Hiring personnel, firing personnel, and employment laws are legal mine fields. The way that employment laws are structured is that some laws will apply to certain sizes of companies, some law's won't. So the legal framework is different for different companies. But the important thing is to use common sense. The underlying principle is to not discriminate based on gender, age, etc. Remember that this is often state specific. Pay attention to Texas laws, federal laws etc.
Make sure to also use proper procedures when dealing with personnel. Document everything. Write important dates down. Take particular care when hiring and firing people.
____ 2. PUT CONTRACTS WITH BUSINESSES, ENTITIES, AND THE OUTSIDE WORLD IN WRITING
You would think this is obvious. This is not theory. It actually happens that companies do business without putting contracts in writing. I spoke to some entrepreneurs recently with a successful company that was operating without properly placed contracts. Yes, legal action was taken and it eventually bit them in the ass.
____ 3. CREATE PAPER TRAIL AND FOLLOW PROTOCOL
A lot of disputes are nipped in the bud by taking proper records. You'd be surprised at to how many minor disputes are easily won when you can pull up the facts, when you can refer to exact times of contact, exact names of people, and exact points of discussion. Be the kind of person that writes things down. It sounds like a lot of effort if you've never done it before, but like anything if you practice at it it becomes second nature and becomes something you don't even think about.
____ 4. DON'T DEAL WITH SHADY PEOPLE
One of my clients is a terrific business man. He does a lot of good work and has a lot of big projects. Unfortunately he's often found himself hiring services or buying products from people who can't and don't deliver. And they can't be found again. This has caused a lot of legal action to be taken.
Something that is unreasonably cheap may come with a very expensive hidden cost.
Deal with people that have honor and deal fairly. Integrity is very important. And that goes not just for the people you deal with but also for yourself.
Phase 3: Financing
____ 1. PUT AGREEMENTS WITH COLLEAGUES, FRIENDS, AND FAMILY IN WRITING
This goes for agreements about anything with these individuals. But often agreements with friends, family, and the like concern financing--particularly very early financing when things are not completely settled. Financing issues have high potential for blowing up in your face later. Really that's the case for anything that involves money and people you are close to.
Putting agreements in writing comes across as obvious when dealing with other businesses and companies, but it either becomes less obvious or just gets overlooked when it comes to any agreements with non-businesses. What I'm talking about in this section is that you need to put agreements in writing with anyone: co-founders, friends, family, whatever.
Even the sweetest couple with beautiful children yadda yadda yadda can have the nastiest divorce. Imagine how ugly it can be when business partners get into a dispute. This is especially true for business partners when there's lots of sweat poured into the project, stress levels crazy high, and tons of money and livelihood at stake--and these partners weren't even in love!
Always remember: manage expectations.
____ 2. ONLY SELL SHARES OF YOUR COMPANY TO ACCREDITED INVESTORS
SEC rules and regulations are clear. Don't run afoul of them. Trust me--you don't want a situation where your company issued stock to someone when the company wasn't allowed to. The deal can be undone and the ramifications can be beyond disruptive to your company. Your company literally is at stake.
IV. SUMMARY OF THE ONE AND ONLY WAY TO AVOID LEGAL DISPUTES AND BONUS
- Doing nothing: Remember, if you never find yourself in a legal dispute of some kind, you're probably not doing anything. Don't freak out if you find yourself in a legal dispute of some kind. Only those that aren't pushing the envelope don't get themselves in such a situation. This is especially true in the tech, energy, oil & gas industries.
- Unrealized expectations: these are the cause for legal disputes. Manage them.
- Bonus: Be real with yourself--
As I said, it's all about managing expectations. It starts with you. I've come across so many delusional entrepreneurs that have absolutely ridiculous expectations. I've seen entrepreneurs talk about how within 5 years they will have a value of $XX million--when they are nowhere. They also don't realize how far away 5 years is and how much can change.
It is difficult to manage expectations with others if you can't manage your own expectations.