5 ways to avoid legal trouble as a startup

February 19, 2018

Scales of Justice

Your startup’s journey from sticky notes to demo day involves crossing a minefield of risk. Don’t let legal issues put you on a path to peril.

Legal advice doesn’t come cheap, but you don’t need to be a lawyer to cover your bases, said Christopher Meakin, professor at the McCombs School of Business at the University of Texas at Austin, at the M.S. in Technology Commercialization program (MSTC).

“We teach entrepreneurs to be savvy consumers of the legal product, not to become lawyers,” he said.

Meakin recently took time to explain five ways for startups to avoid regulatory pitfalls and peril.

 

1. Determine who owns what

Imagine two founders in the early stages of a venture. Maybe one person had the hatchling of an idea, and the other person helped form it. Say a third person came in and offered their expertise. Now what?

Have a clear, frank discussion on issues like percentage ownership, equity, compensation, expectations and decision making.

“If you can’t come to an agreement before you've had success as a startup, you certainly will never reach an agreement after success,” said Meakin. “In the words of that great philosopher Cyndi Lauper, ‘money changes everything.’”

 

2. Choose the right entity

Should you form a general partnership, LLC, S-corp or other entity? The answer to this question will affect your company’s taxes and liabilities. Sometimes founders end up with a partnership, when perhaps they didn’t want the ownership split equally. In such a case, maybe the common LLC would have been more appropriate.

Meakin emphasized how important it is to understand the variations and choose according to what you need.

 

3. Claim IP

File for the appropriate registration for intellectual property like trademarks and copyrights with the U.S. Patent and Trademark Office. Don’t overlook protection for trade secrets and confidentiality agreements.

In addition, know that someone else might own your trademark in a different country, which could create problems if you have customers abroad.

“Get your IP rights in every market you think you could land in,” said Meakin.

 

4. Choose counsel wisely

You work hard to hire employees that make a good culture fit. Do the same for your legal counsel. You need more than the right expertise from a lawyer; you need them to fit with who you are and how you work. One example is your approach to risk.

“If your tolerance for risk differs from your counsel’s, that could create tension,” said Meakin. “You might think your risk-averse counsel is overly protective. And they might consider you to be overly risky. So it’s important that you find a good match.”

Also, consider communication styles. Are you constantly online, preferring to talk over Slack or email — or through quick calls? They might prefer longer phone conferences or in-person communication.

That difference is stressful for both parties. It’s hard to work through any problem if communication isn’t working. Make sure it does.

 

5. Engage your employees

You never want to get sued by an employee. One way to minimize your vulnerability to claims is by treating your people the way you would want to be treated.

“The law has some stated minimums,” Meakin said. “For instance, don't discriminate based on race, gender and religion. But that’s the floor, not the ceiling. You get the most out of your people when they feel like they have value in your eyes.”

The better you incorporate employees into multiple facets of the business, the more likely they'll feel engaged. There is no guarantee, but that could very well make them less likely to get litigious later on.
 

The M.S. in Technology Commercialization (MSTC) is a one-year master's degree program focused on technology, business and innovation at the University of Texas at Austin’s McCombs School of Business. Learn more about MSTC.

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