Aditya Kothadiya's Blog

Recently I read an article by Constance Bagley, Associate Professor in the Entrepreneurial Management unit at Harvard Business School on mistakes made by entrepreneurs. Her recommendations to the founders on handling legal issues of startup were very critical, so I thought of covering some of the most important points in this post.

During my first entrepreneurial attempt, we also did the same mistakes even after we were warned by my mentor. Now when I look back it, it makes so much of sense to follow these suggestions at early stage.

#1. Failing to incorporate early enough.
There are two main issues with not incorporating your venture early enough:
1. Partner who is involved in the venture at early stage, but eventually drops out, may show up to demand his or her share when company is ready to get financed or acquired. To avoid this, incorporate early and issue shares to the founders which are subject to vesting.
2. Also, incorporating a startup early before it creates a significant value and well in advance of any financing event helps to prevent potential tax problems for cheap stock.

#2. Issuing founder shares without vesting.
Vesting of shares protects the founders who take the venture going forward. If people remain on the team and are productive, their shares will vest. If they leave earlier, that stock can be retrieved and given to whoever is brought in to replace them.

#3. Hiring a lawyer not experienced in dealing with entrepreneurs and venture capitalists.
Many venture capitalists say that they often rate the judgment of entrepreneurs by their choice of legal advisor. It’s better to hire someone who has played the game, who knows what’s standard and what isn’t, and who will get the deal negotiated and closed promptly.

#4. Disclosing inventions without a nondisclosure agreement, or before the patent application is filed.
If patent protection hasn’t been obtained, or in cases where a patent is not available, the only protection is to maintain something as a trade secret. It is must recommended to keep inventions secret from competitors before they are marked as trade secret.

#5. Starting a business while employed by a potential competitor.
If someone is key employee at some company, he or she cannot operate a competing business, states the law. Current employer can file a lawsuit even if you just incorporate the company. Would-be entrepreneurs should first go to their current employer and either resign or tell the employer what they’re doing and ask them if they’d be interested in investing. Even after leaving the current employer, one still cannot use or disclose the company’s trade secrets. 

#6. Thinking any legal problems can be solved later.
The common tendency to think is to work on legal aspects once the funding is available or product is up and running. This can be a shortsighted logic. That also doesn’t mean that one should devote all of their time, effort, and money to the legal issues. That’s a good reason to hire a competent lawyer. It will cost much less to get it right at the beginning than to try to sort it all out later and correct it.

I personally found these tips from Professor Bagley are very critical for all would be entrepreneurs who are excited to start something but are likely to forget these important issues in their excitement. Make sure you don’t get trapped into any one of those situations during your exciting journey.

Play legal, play hard!