In my thirty years, plus, of practicing law I have consulted with dozens and dozens of start-up entrepreneurs. Some succeed and many fail but all start out enthusiastic and optimistic. It is the enthusiasm for a new product or new idea that catches my attention and makes it fun to practice law.
I have learned over the years that there are some very predictable hurdles and sometimes pitfalls that can be avoided with some planning, warning, and careful execution. I want to share some of them to help the unwary hopefully become aware of some issues and avoid some costly mistakes and missteps. Ben Franklin’s advice is timely today, “An ounce of prevention is worth a pound of cure”. Here are a few ounces.
Sharing your ideas
Enthusiastic start-uppers love to share their idea, their product, their plans. Keep in mind, that a trade secret is only valuable if you keep it secret. If you share it at a party, over the backyard fence, or especially on Facebook or a blog, it is no longer a trade secret. Many folks lose their intellectual property by failing to have non-disclosure agreements signed before they talk about their great new idea. A simple “NDA” or non-disclosure agreement can save a lot of frustration in the future when you go to patent or market your product or idea. Trademarks, trade names, and copyrights can lose their value, too, if you don’t protect them. Failing to lock up all variations of domain names has been a problem. Learn what you can do to protect your intellectual property (the catch-all term for all the above) without incurring a large legal fee. Some very simple steps can save a lot of time and money.
It is said that start-ups get their money from the three F’s — F cubed, that is, family, friends, and fools. Watch a few episodes of Shark Tank® and you will get a real feel for where people get their initial start-up money, family, friends, college funds, credit card floats, inheritances, and yes, some fools. This is where most failed start-ups trip up. A bad financial plan or worse yet, no financial plan at all, is the death knell to a start-up. Running out of money or using a credit card with 12 to 18% interest soon takes its toll and the business fails not for want of a good idea or product, but for want of a good plan. Sit down with a C.P.A. or a successful businessman or woman and run your financial plan by them. Add up your expenditures. Add up your income. Be conservative and then cut your income in half and double your expenditures. You need to be prepared to carry your business until it turns a profit and you need to know where that money to carry it is coming from.
If you are asking people for money you are walking through a minefield of risk. If you borrow even a few hundred dollars from someone and that someone expects a return on the money simply because they loaned it to you, it could be a security, in fact, under Utah’s securities laws it is a security. Whether you get in trouble for doing it depends on the circumstances, but this minefield requires a map to avoid getting blown up. In most settings, all of the presumptions are against you as the borrower. You are rarely seen as an innocent borrower but as a guilty securities creator, securities seller, trickster, con artist. Really, be careful. Again, an ounce of prevention is worth it.
No start-up can be successful without soon hiring or needing to hire employees. Traps and pitfalls include bringing on friends, or potential co-workers, and failing to pay at least minimum wage, with the promise, “when we make it big, I’ll make it up to you” or “I’ll give you stock in the company instead of wages”. This doesn’t work. Minimum wage and overtime are laws you need to become aware of and follow. Penalties for non-compliance can kill a small company. Even though Federal civil rights employment laws don’t necessarily apply until you get 15 employees, they are still important to understand. Simple policies, procedures, posters, and training can avoid hours and dollars wasted in defending your company.
Wow. After re-reading my own article, I see how start-uppers can be hesitant to talk to an attorney! However, it’s really not as bad as it seems. A lawyer can give you not only advice about specific laws, but if she or he has good experience, you can get a simple plan and process to follow as you proceed so you can avoid these issues as you proceed in growing your dream into a reality.
Mark D. Stubbs is a founding partner at Fillmore Spencer. Mark has been practicing law for more than 40 years in the states of Utah, Idaho, and Arizona. He seeks the most effective and economical solutions to business, employment, and other legal matters confronting his clients, who hail from all around the state of Utah. Mark currently focuses his practice on business disputes, employment law, mediation and arbitration, business planning and organization, contracts, and negotiations.