For anyone who’s seen the movie The Social Network, which is about the development of Facebook and its subsequent lawsuits between founder Mark Zuckerberg, his former partner Eduardo Saverin and his former Harvard classmates Cameron and Tyler Winklevoss, then it should be clear just how costly and time consuming legal issues can be while building a startup.
At a recent Alabama Small Business Group seminar held at Innovation Depot, a pair of Birmingham attorneys with law firm Gray, Lawrence & Jenkins gave some startup legal advice to a room full of entrepreneurs so they could avoid the common missteps that could lead to an expensive settlement.
Be clear on intellectual property ownership
” Your technology is your biggest asset. That’s your code, your programming, your brand, and what people think about you. All of that is encompassed in the intellectual property,” said Craig Lawrence, transactional partner at the firm. “Keep it clear and have in writing who owns the intellectual property and who is just contributing to it, like your employees or cofounders.”
Lawrence also said it’s important to trademark your company early on to avoid having to change the company’s brand due to the unavailability of your desired trademark later on in the life of a company.
When closing a deal, never rely solely on a handshake, said Drew Jenkins, transactional partner at the firm.
“You don’t want to do (handshakes) in a business context. My memory will probably differ from your memory if we were to go to court. If we have this agreement in writing, it’s very easy to see exactly what was said and what the terms were,” he said. “If we just shook hands, it’s much easier to have a dispute and wind up in court. You can trust what they’re saying, but verify it in writing.”
Avoid 50/50 ownership
“If any of you are married, you know you go through the honeymoon phase. That’s exactly what it’s like starting a business. There will come a point in the life of the company where you and your partner disagree and you are 50/50 on this. If you can’t resolve a dispute, the company will slip.”
If you and your partner are hesitant about giving up control of a shared business, Jenkins suggests bringing in a third partner so that no one partner has a controlling share.
If, however, a 50/50 ownership structure is unavoidable, use vesting.
Vesting is a clause in employment and labor law that takes away the ownership of a partner if he or she decides to quit working.
Lawrence said it’s very common for one partner to have second thoughts on running a business and back out, which often leaves the other partner in a situation way over his or her head, but still only controlling half of the company.
July 23, 2015