When you have a bright idea with a ton of promise, it’s hard to imagine all the things that could go wrong… legally. Tricia Meyer has been an attorney and has been advising the start-up community in Chicago for more than a decade to help entrepreneurs cover their bases.
The reason she understands an entrepreneur’s plight: She is one herself. Moving onto her fourth business venture, Meyer understands the degree of risk that entrepreneurs are willing to take on – which, in some cases, can diverge from what your lawyer would advise.
How do you fearlessly move forward with your startup while covering your bases? Meyer lets us know what to watch out for while stepping forward, and how to avoid the 5 most common mistakes she sees with start-ups.
Tip #1: Protect your intellectual property.
Meyer said that though trademarks and copyrights are more obvious legal matters, many people will hire without setting enough boundaries to the rights to their product.
“Whoever creates it owns it,” Meyer said. “Unless you have language otherwise.” Many companies will hire a developer, then down the road, find that the developer has rights to the product in a way that the company hadn’t anticipated.
“What if the developer breaches the agreement? They’re not going to be able to pay them in full and then you can’t get ownership rights,” she said.
Meyer said to make sure that before hiring, ownership rights are clearly placed out in a contract – a simple way to avoid a potentially big problem.
Tip #2: Make founders agreements – as soon as possible
At the beginning of a venture, “everyone’s excited, everyone’s on the same page,” Meyer said. “They think they’ll never ever have a disagreement with people they’re starting the business with because they’re in a euphoric state.”
“Sometimes you’re starting a business with your best friend,” Meyer said. Everything is rosy in the beginning, and then “fast forward a couple years and it’s a nightmare.”
Again, a simple way to avoid a big problem: Lay out founder’s agreements as soon as possible, and try to prepare for every scenario. Meyer said this problem happens just as often as the previous one.
“Even though you have a good relationship, in time, things may not be as great and differences might arise so why not get a framework at the beginning if issues do arise?”
Tip #3: Don’t over-promise in your contract
Sometimes in a business proposal between a company and its customers, companies stick “to all the glorious terminology of how great their company is,” Meyer said.
“A lot of time in these proposals, there’s a lot of marketing language that you don’t want to bind yourself to in the contract,” Meyer said, adding that many companies attach these proposals as a contract.
The contract should be what the business is going to be providing for their customer and should be specific for services and products provided for, Meyer said.
This can be done by “sticking to the deliverable, what can really be provided” she said, to prevent from overexposing the company and introducing the company to extraneous liability .
Tip #4: Limit liability
Meyer said to make sure to limit your liability. Having a provision in your contract that does so can prevent you from getting sued for an unlimited amount in damages.
“In that section, a lot of times, it will limit the customer’s liability and not yours,” she said, noting that it’s important that the company covers its own bases.
Just as with the previous tip: Language is key. Make sure your contract incorporates specific language as to not only what your company can offer, but also what your company is willing to take on as risk.
“You don’t want to sign a $100,000 contract and take on $1 million in liability,” she said. Know how much liability you can take on, and prepare accordingly.
Tip #5: Have a good relationship with your lawyer
“Companies should be able to pick up the phone and know they’re not being nickel and dimed by their lawyer,” Meyer said.
“Businesses will try to save money and time and not hire lawyers,” she said. “So many times I see the problem and issue could have been avoided.”
When looking for a lawyer, it helps to find one that deals with businesses like yours. “You don’t want to deal with an attorney that never deals with start-ups,” she said. Finding someone that’s experienced with what you’re doing and relatable can help you foreshadow potential problems.
Also, it can help you be more creative in how you manage your company’s liability. Many attorneys are risk-averse, she said, which counteracts the nature of entrepreneurship. Start-ups need to take on a level of risk, and it’s important to be able to work with an attorney that can help you figure out how much risk is appropriate.
The biggest reason these tips are important: Your investors. If your founder’s agreements are not in place, if your ownership rights are not secured, or if you are not armed to manage your liability, your investors are bound to worry.
With the growth of the Chicago start-up community and the changing landscape of entrepreneurship, you think new legal problems would emerge with more new products and companies. But Meyer said this isn’t the case.
“I wouldn’t say that there aren’t many new problems,” she said, adding that there are the same problems in larger quantities. “People are jumping in to get products out there without thinking about the consequences.”
Many try to find quick fixes to a problem and it leads to greater problems down the road and additional costs.
Sites such as LegalZoom may help with basic advice, but may not be as thorough as your company may need. “I think sometimes they can be ok, but I can tell you that more often than not it leads to additional work,” Meyer said.
Cover your bases at the beginning, tread carefully throughout the process, and save yourself a lot of time and trouble in the end.