These 3 Legal Traps Can Stop a New Business in its Tracks
Once a new business is beyond the phase of executing the early idea and is getting off the ground, some of the biggest challenges revolve around risk.
There are a number of risks, legal ones in particular, that magically appear in business and can stop you dead in your tracks. The difficult part is that you’ll never see them coming.
If you're a first-time entrepreneur, understanding legal risks is particularly troubling because you may not be experienced in thinking about the litany of issues that have the potential to strike in each and every situation.
Here are just a few of the legal issues that you need to pay particular attention to, as well as how to best avoid getting sued early on. Note that I’m only speaking from my personal business experience and am not an attorney, so please seek counsel for legal questions.
1. Trusting verbal or handshake agreements. A prime example of this happens particularly early on in business and often starts with the first employee, independent contractor or friend that comes to help.
You need assistance but have no money to pay, so you agree that they’ll get a defined percentage of the company or sales. You have a personal relationship so there’s really no need to draft a whole agreement. It will work out and if it doesn’t, you’ll just talk about it. You trust each other.
This is a nightmare of a situation because it rarely works out. When the time comes, it’s going to be your word against theirs, which is unlikely to turn out well for you -- particularly if your business has become successful.
Even if you don’t have money to pay an attorney to draft an agreement, go to our friend “the Internet” and find a template agreement that you can alter to serve your purpose. Anything is better than nothing. I do want to be clear with respect to this point: You really should seek legal counsel, which will be well worth your investment in both the short and long term.
2. Unknowingly using someone else's patents. Here’s the story: You came up with an idea that was going to revolutionize an entire market -- no, the entire world. You’re pumped, so you dig through pages of Google results and are confident that your new idea doesn’t exist. You begin executing on your new ideas while making progress, so you invest your life savings -- or at least a large piece of it. This, of course, is going to be the greatest investment ever.
Months later, when you’re making serious traction in the market, you receive a letter in the mail with the ominous heading, “Cease and Desist.” This letter serves as notice from another company -- which happens to be a lot bigger than yours -- that you’re infringing on their patents. The next step will be legal action if you don’t comply.
The good news is you now have the opportunity to stop using their intellectual property before they sue you. The bad news is your business just went from growing to non-existent and they might sue you for damages nonetheless.
To help mitigate this risk, it’s imperative that you have an attorney that specializes in patent law -- which is referred to as intellectual property -- perform a patentability search, the results of which will tell you who’s in the market and what’s been patented.
3. Unfairly competing. You scored big time and landed an all-star employee from your biggest competitor. Now you’re going to rule the world. As things get moving, your favorite new hire is out converting all of the business from their previous employer to their new one -- you -- while using their wealth of inside information they have on the competition to their advantage.
This is great news, right? Nope, not unless you love lawsuits.
There are “unfair competition” laws in every state, most of which -- if not all -- dictate that you can’t hire an employee from a competitor, then have the new hire use confidential information to take all of the relationships with them.
Want to avoid this legal trap? It’s pretty simple, hire the all-star from the competitor but restrict them from using their confidential knowledge to solicit accounts. If they have the relationships, the accounts will come willingly.
The business world is full of legal issues, many of which are difficult to learn about without having experienced them. With that said, I can’t express enough the importance of investing in good counsel, as they will steer you away from these major legal traps and help keep you from being sued.
Adam Callinan is a founder at BottleKeeper, the fast-paced and sarcasm-infused solution to the warm beer and broken bottle epidemics that have plagued the world for centuries. Callinan is also a founding partner at Beachwood Ventures, a Los Angeles-based early-stage and non-traditional venture-capital firm at the intersection of technology and entertainment. As an entrepreneur, Callinan has spent over a decade building small businesses in and around technology, medical devices and consumer products, which most recently includes an exit in 2013. Callinan lives in Manhattan Beach with his wife Katie.