3 ms·

The biggest legal mistakes startups make

4 points by duck 16y ago

tptacek 16y ago
Here's 'grellas take on the same subject, which I think crushes this article: http://www.grellas.com/faq_business_startup_005.html http://www.grellas.com/faq_business_startup_005.html In particular, the points he makes about "VC firms will want you to do X, so do X from day 1" seem to be flat-out wrong; setting up a complicated C corp and equity structure is more painful than just creating a simple temporary structure, because the lawyers are just going to re-do everything when you get funded anyways.
- AmberShah 16y ago
  I agree that since you can just pay to redo it once you're actually making money/getting funded, then what is the point of hiring a lawyer to create an S-Corp in delaware? I want to read this article: Legal things you have to do to cover your ass while you're bootstrapping
- anigbrowl 16y ago
  Indeed - and any mistakes which need to be rectified later will come out of the founders' cut. This is easy to miss amid the excitement of getting properly funded, but can become expensive later. In the film industry (where I work), indie firms are thrilled to get a distribution deal, but many fail to realize the importance of legal and technical diligence early on and are later surprised to find find anticipated revenue drastically reduced by various compliance issues - for example, a producer might get releases from their main actors but not have all appropriate paperwork in place for professional contributors, or the acting releases may be legally inadequate. The distributor will cheerfully supply all the necessary paperwork to cover their potential liability, but then subtract the cost of its preparation before royalties are paid. What seems like 'mere overhead' at the deal-signing stage can turn to be extremely expensive later, and few people want to share the details of such mistakes in public.
blueben 16y ago
A law firm recommending that you do things that require a law firm's help, and scaring you away from cheaper competition in Legal Zoom. Color me surprised.
- rlpb 16y ago
  I've always been a bit sceptical about this. There seems to be a general idea that only lawyers are qualified to have any input whatsoever into legal situations. This may be technically true, but I'm also sure that there are plenty of bad and/or indifferent lawyers out there. There must be non-lawyers who will be able to do a better job themselves. In particular, I think that hackers have a good chance at this. That is, it is implied that: [all lawyers] > [everyone else] whereas I think that: [good lawyers] > [some intelligent non-lawyers] > [bad/average lawyers] > [everyone else] This can apply in particular if you are prepared to research a particular topic for hours on something that a lawyer would speak to you for ten minutes and then copy and paste boilerplate for. You will likely find the same boilerplate and research all the options more thoroughly yourself. I am by no means saying that lawyers shouldn't be consulted. I use one for stuff that is very important for me, since I cannot risk getting it wrong. But I also do my own research, and this has helped me ask the right questions and get the right result. I'm just saying that hiring a lawyer is no silver bullet.
bradleyland 16y ago
Here's another one for the small-ish entrepreneurial set, because not everyone is going to be able to attract big VC funding. Don't mix your businesses. As a busy entrepreneur, it's tempting to do work from a "past life" and bill it through your shiny new company. Don't do it. Just don't. One of my companies is currently involved in a lawsuit because of an agreement that one of my partners signed, of which I had no knowledge. You take on enough risk in the normal course of business while focusing on your core business. If something is worth doing, it's worth having a company dedicated to doing it. In large part, the function of a corporation is to compartmentalize your business and isolate risk. Take advantage of that fact wherever possible. Having learned our lesson, we've even gone a step further and isolated our core IP holding corporation from our operating/sales companies. "If I knew then what I know now" I wouldn't be in this mess.

4 points by duck 16y ago

Here's 'grellas take on the same subject, which I think crushes this article: http://www.grellas.com/faq_business_startup_005.html http://www.grellas.com/faq_business_startup_005.html In particular, the points he makes about "VC firms will want you to do X, so do X from day 1" seem to be flat-out wrong; setting up a complicated C corp and equity structure is more painful than just creating a simple temporary structure, because the lawyers are just going to re-do everything when you get funded anyways.

AmberShah 16y ago
I agree that since you can just pay to redo it once you're actually making money/getting funded, then what is the point of hiring a lawyer to create an S-Corp in delaware? I want to read this article: Legal things you have to do to cover your ass while you're bootstrapping
anigbrowl 16y ago
Indeed - and any mistakes which need to be rectified later will come out of the founders' cut. This is easy to miss amid the excitement of getting properly funded, but can become expensive later. In the film industry (where I work), indie firms are thrilled to get a distribution deal, but many fail to realize the importance of legal and technical diligence early on and are later surprised to find find anticipated revenue drastically reduced by various compliance issues - for example, a producer might get releases from their main actors but not have all appropriate paperwork in place for professional contributors, or the acting releases may be legally inadequate. The distributor will cheerfully supply all the necessary paperwork to cover their potential liability, but then subtract the cost of its preparation before royalties are paid. What seems like 'mere overhead' at the deal-signing stage can turn to be extremely expensive later, and few people want to share the details of such mistakes in public.

blueben 16y ago

A law firm recommending that you do things that require a law firm's help, and scaring you away from cheaper competition in Legal Zoom. Color me surprised.

rlpb 16y ago
I've always been a bit sceptical about this. There seems to be a general idea that only lawyers are qualified to have any input whatsoever into legal situations. This may be technically true, but I'm also sure that there are plenty of bad and/or indifferent lawyers out there. There must be non-lawyers who will be able to do a better job themselves. In particular, I think that hackers have a good chance at this. That is, it is implied that: [all lawyers] > [everyone else] whereas I think that: [good lawyers] > [some intelligent non-lawyers] > [bad/average lawyers] > [everyone else] This can apply in particular if you are prepared to research a particular topic for hours on something that a lawyer would speak to you for ten minutes and then copy and paste boilerplate for. You will likely find the same boilerplate and research all the options more thoroughly yourself. I am by no means saying that lawyers shouldn't be consulted. I use one for stuff that is very important for me, since I cannot risk getting it wrong. But I also do my own research, and this has helped me ask the right questions and get the right result. I'm just saying that hiring a lawyer is no silver bullet.

bradleyland 16y ago

Here's another one for the small-ish entrepreneurial set, because not everyone is going to be able to attract big VC funding. Don't mix your businesses. As a busy entrepreneur, it's tempting to do work from a "past life" and bill it through your shiny new company. Don't do it. Just don't. One of my companies is currently involved in a lawsuit because of an agreement that one of my partners signed, of which I had no knowledge. You take on enough risk in the normal course of business while focusing on your core business. If something is worth doing, it's worth having a company dedicated to doing it. In large part, the function of a corporation is to compartmentalize your business and isolate risk. Take advantage of that fact wherever possible. Having learned our lesson, we've even gone a step further and isolated our core IP holding corporation from our operating/sales companies. "If I knew then what I know now" I wouldn't be in this mess.