News

A Legal How-To for Start-Ups

Little-known legal tips to help you start your business hassle-free

You’re very excited to start your venture, but you need to know the legal landmines to avoid before you
hang your shingle. We got the lowdown from two attorneys who counsel start-up business owners on
the little-known legal issues that often trip up new entrepreneurs.

Entrepreneur’s Start-Ups magazine – July 2002
By Nichole L. Torres

A big issue start-ups overlook is document retention, says Jeffry W. Smith, a partner with law firm
Lathrom & Clark LLP in Madison, Wisconsin. People tend to accumulate so much written material that
"they don’t have any practical way of inspecting it at a later date," he says. "The general rule of thumb is
that anything [you] generate or put down in writing could someday be an exhibit in a lawsuit." This goes
for e-mail communication as well–so be very careful of what you write and to whom you are sending it
before you hit send.

Smith also advises against keeping a copy of each draft of a
document. "It’s discouraging to see three to four drafts of the same
document being pulled from a file in litigation," he says, "because
that means that every change of a document could be the subject
for questions in a deposition." Only keep the previous draft around
long enough to see that all the proper changes were made–then
discard, he says. However, be sure to seek the advice of counsel
before destroying potentially vital information (à la Enron).

*********

What to Ask Your Prospective
Attorney

You don’t want to take that legal jump alone,
and good counsel can really help you navigate
the early phase of your business. Kenneth W.
Chung, a senior partner with law firm Kring &
Chung LLP in Irvine, California, lists the
following questions every start-up entrepreneur
should ask their prospective counsel:

1. What is the extent of your experience in
working with start-ups?

2. Do you have expertise with various start-up
legal issues, such as entity selection, securities
law, intellectual property and labor and
employment?

3. What is your experience in the particular
industry that we are pursuing?

4. Do you have contacts or a working
relationship with other professionals who could
be of assistance–accountants, investment
bankers and venture capitalists?

5. Who will be handling my file?

6. What distinguishes your firm from others?

**********

Smith, an expert in intellectual property, also advises inventors to keep documents such as e-mail and
interoffice correspondence that establish a date of invention. "If there’s ever going to be a contest as to
who was the first to invent a particular product or process…[you] need to have documented records and
evidence of [your] dates of invention," he says.

And if you run a consumer products company, for example,
be careful of outside inventors pitching unsolicited product
ideas. They might pitch an idea that’s already on your
drawing board and later sue you when you bring that product
to market, claiming it as their own. "It’s really dangerous for
a company to keep a copy of that letter, or to really review it
in any detail," says Smith. "There should be a standing
policy to send it back with a letter indicating that it wasn’t
reviewed, no copies were kept [and] it’s [your] policy not to
review [them]."

Kenneth W. Chung, a senior partner with law firm Kring &
Chung LLP in Irvine, California, notes that legal issues are
intertwined within every aspect of any business, especially
during the start-up stage. Start-ups need to be especially
mindful of things like buy-sell and shareholder agreements,
for instance. "Start-ups often involve two or more founders
who continue to grow their company without a shareholder or
buy-sell agreement," Chung says. "However, when an
irreconcilable dispute occurs between the founders, they
may find themselves in a deadlock."

And though it may not be the most obvious thing to think
about while starting your company, Chung advises
entrepreneurs to come up with an exit strategy. Ask
yourself, "Is [the business] to be acquired, or [do I] desire to stay on with the company for the indefinite
future?" says Chung. Settling this issue early will also affect how you structure your business.

As the start-up phase of your business wears on, you’ll deal with setting up your business entity, labor
and employment issues, intellectual property and vendor contracts–just to name a few issues. Both
experts suggest running your plans by your legal counsel, who can cater to your specific start-up
needs. One of the key questions you should ask yourself at start-up, according to Smith: "How are we
going to establish proprietary rights in what we’re developing, and how can we avoid infringing on the
rights of others?" Hmmm…seems like a good rule to live by in general.

Copyright © 2002 Entrepreneur.com, Inc. All rights reserved.

http://www.Entrepreneur.com/article/0,4621,301110,00.html

News Catrgory Sponspor:


Dorsey & Whitney - An International business law firm, applying a business perspective to clients' needs in Missoula, Montana and beyond.

Leave a Comment

You must be logged in to post a comment.