As a business leader, your job is not just to grow your company – it’s also to try to not kill it. And, there are an uncountable number of weapons and wars that can fell your business. Here are 5 ways legal trouble can kill your business and some practical ways you can protect yourself.

1. Forgotten Founder

A Forgotten Founder is someone who helps you early on but doesn’t get dealt any equity. Two terrible things can happen. First, he can claim – maybe correctly – that the work he did for you belongs to him. Second, he can sue you and your investors for a piece of the action.

Protect Yourself.

Here are some ways to protect yourself:

  • Get everyone to assign in writing the stuff people work on for you to your business as early as possible.
  • Pay them as soon as you can.
  • If they are entitled to equity, give them equity, but….
  • Issue equity that is on a vesting schedule. Vesting means that the shares can go back to the company if they go away or get fired. That way, you can get rid of them legally if necessary.
  • If they are not entitled to equity, get them to assign to you everything they did and get them to sign a release, promising that they have no claims against you.

2. Starting Before You (or your hires) have Left Your (or their) Current Job

If you start operating a business competitive with your current employer, eventually your employer could be entitled to shut you down and take profits of your new business. Similarly, if you hire employees under noncompetes or trade secret agreements to do the same things they did at their old jobs, their old employers could shut you down and take your profits.

Protect Yourself.

Here are some ways to protect yourself:

  • Wait to start your business until after you’ve resigned and walked out the door.
  • Don’t take anything belonging to your employer to use in your new business – not a paperclip or a contact. Certainly, don’t take a customer until you’re well out the door.
  • Don’t hire staff – anyone including you – who is under a noncompete or a trade secret agreement without review and counsel from a lawyer expert in noncompetes.
  • Create a zero-tolerance policy for employees against using property of their old employer in your new company.
  • If you ignore these things, get really comfortable with risk, lawyers and legal bills.

3. Operating Outside the Law

Operating a business that is against or outside the law is more common than you’d imagine. Companies go out of business all the time because they either didn’t know the law or thought they could skirt it.

For instance, Tucker Automobiles – the startup car company celebrated in the movie Tucker died because it got bogged down in SEC investigations. And, Aereo was a company that sold people access to cable services by intercepting cable company feeds. The concept was developed by an engineer and a copyright lawyer. Sued by television networks, Aero’s eventual loss in the Supreme Court made their business model illegal, and they quickly announced their dissolution.

Protect Yourself.

  • Here are some ways to protect yourself:
  • Talk to a lawyer about what you can and can’t do.
  • Be mindful that if you skirt the law or act as a renegade, you could win but the fight will be costly.
  • Disclose the risks to investors. Or else you could get in serious, personal, lose the house trouble.

4. Patent Trolls

Patent Trolls are people who own patents so that they can shake down real inventors for a piece of their profits. Patent Trolls come to own patents in two ways. Either they file patents for “inventions” they have no intention of ever producing or they buy patents to hold. Then, they conduct harassment campaigns against active companies to slice off a share of the profits. The company who gets harassed has three choices: fight (and maybe lose) million-dollar litigation, go out of business or give the patent trolls a percentage of profits.

The consequences are real. $22 billion in VC funding went unspent because of patent trolls. Businesses suffer from the hassle and expense.

Protect Yourself.

Recent Supreme Court cases have made it likelier for patent trolls to get hit with lawyer fees for ludicrous lawsuits. And, the US Patent and Trademark Office improved the patent challenge process. So, deterrents are cropping up, but patent troll harassment is still a big risk. Here are some ways to protect yourself:

  • Get a Freedom to Operate search and analysis to assess your risk. Freedom to Operate searches look at the landscape of similar patents to identify existing patents that could overlap with your inventions. These searches are expensive and not a defense against getting sued, but they can at least tell you whether you shouldn’t go into a certain area. You can do it yourself, but it’s not as good as hiring an expert.
  • Hire a patent lawyer to advise you, particularly if you get a letter from a patent troll.
  • Engineer around someone else’s patent. You may be able to reconfigure the design of your invention so it does not infringe on an existing patent. But, do this only with the advice and counsel of a good patent lawyer.
  • See if you can get insurance against patent infringement to pick up your legal fees.
  • Consider joining one or more of the groups and organizations that exist to defend and deter against patent trolls.

5. Founder Feuds

The relationship between you and your partners can be an asset or a killer liability. Fighting owners can stop all progress. I’ve seen feuds kill many companies. The owners stop communicating or start trying to actively hurt the other or the business. Often, one or a group of people will leave to compete with the business. An owner’s departure can cause customers, suppliers, employees, lenders and investors to leave, forcing the survivors to quit or rebuild. There are also owners that turn out to be just plain crooked and they steal, which that not only drains resources it also demoralizes the survivors.

Protect Yourself.

Here are some ways to protect yourself:

  • First and foremost, follow this rule: Don’t’ Do Business with Douchebags. Picking a decent, mature, accountable partner is the first and best protection against getting into company-killing fights with your partners.
  • Second, have serious conversations with your business partners at the beginning about how much you will all contribute, take out and control over the business. Be very clear about who the boss is and when some people get veto power. Put your agreements in writing.
  • Put in place controls as a check on people, even if you feel you can trust them. For instance, your bank account should require more than one signature and the company credit cards should have limits.
  • If you and your partner(s) are starting to disagree or communicate, then you must work on your relationship. It may be uncomfortable and weird, but you will probably have to discuss how each of you are feeling about the way you work together. In a perfect fantasy land, in which business is a white box where we bring our best, most logical selves, we wouldn’t need to tend to our business partnerships. But, your relationship with your partner is subject to the stresses and strains of every other prolonged human interaction: insecurities, power struggles, miscommunications, and needs that can all shape how you feel about each other. How you feel about each other impacts how you sell, supervise, produce and manage your business. The stakes are high. The solution may not always be each party getting exactly what they want, but what is best for the business to protect founders’ investments in the partnership and the jobs it creates. Just like a marriage, counseling may be the key to saving your business, even if amicable and fair dissolution is the best outcome. Business “Marriage” Counseling may be the only way to approach this difficult quagmire co-founders so often face. Learn how this unique service may help your business partnership survive its most difficult challenges.

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