The Entrepreneurial Manager

Harvard Business School

4 April 2001

Entrepreneurial Manager Tool Kit

Starting Right: Managing Uncertainties through Contracting

How much law do you need to know?

Enough to know when you should be nervous.• Ignorance of the law is no defense.

Enough to evaluate and work with a lawyer.• Know enough accounting to work with an accountant.

• Know enough to ask good questions and understand and evaluate answers.

Enough to understand that the law can be a powerful tool to: • Carve up and allocate downside risk.

• Protect upside-e.g., intellectual property.

How do you find a good lawyer? Use your network.

• Generally best to focus on premiere firms.

• Get names of individual partners.

Do lunch.• Discuss business plan and get lawyer’s reaction.

• Gut test.

Due diligence.• What similar experience do they have?

• Could you contact current and former clients?

• Use your network to find someone you know who knows them.

Avoid bait and switch.• Meet the lawyer with whom you will be working.

• You don’t want to pay for an associate’s education.

What do you look for in a lawyer ? Content expertise

• What experience do they have with similar businesses, similar industries, similar stage?

• What experience do they have with relevant areas of the law-e.g., intellectual property, securities offerings?

Contacts• Who do they know that might be able to help you?

Chemistry• Are they excited about your business plan?• Do they pass the gut test?• Are they willing/able to explain things simply?

Credibility (like a premiere venture capitalist).

How can you structure a deal? Remember entrepreneurs can be very desirable

clients for law firms:• Bring prestige and potential for future work.

You don’t need to pay cash up-front:• Defer billing until first round of financing.

– Implicit promise that lawyers not come after you for fees if you don’t raise money.

• Lawyers may accept right to co-invest in first round, rather than demand equity flat-out.

• May do standard work-e.g., incorporation, sort out founders, non-disclosure--for a fixed fee.

What you don’t know can kill you...

A contract doesn’t have to be written down to be enforceable.• Verbal agreements can be binding.

Just because an agreement is written down, doesn’t mean it is enforceable.• Clause in term sheets stating something like “This letter expresses

the intent of the parties and is not legally binding on any of them unless and until such mutually satisfactory definitive agreements are executed and delivered by the undersigned.”

Just because it’s boilerplate, doesn’t mean its not enforceable.

Remember

If the other party has written a hundred similar contracts and this is your first, you are at a disadvantage.

The devil is in the details, but you’ve got to figure out which details matter.

IF YOU DON’T UNDERSTAND IT, YOU SHOULDN’T SIGN IT.

ResourcesBooksBagley, Constance E. And Craig E. Dauchy. The Entrepreneur’s Guide

to Business Law. Cincinnati, OH: West Educational Publishing Company,1998.

Bagley, Constance E. Managers and the Legal Environment: Strategies for the 21st Century. Cincinnati, OH: West Educational Publishing Company,1999.

Book ChaptersRoberts, Michael J. “The Legal Protection of Intellectual Property.” In

The Entrepreneurial Venture, edited by W. A. Sahlman, H. H. Stevenson, M. J. Roberts, and A. Bhidé.

Second-Year ElectivesLegal Aspects of Entrepreneurship, Fall 2001: (29 Sessions & Exam)

Objectives:

1) To prepare students for the legal and regulatory challenges inherent in starting and growing a business;

2) To teach students how a manager can use the law as a strategic asset; and,

3) To teach students how to identify legal issues before they become legal problems.

Instructor: Constance E. Bagley

International Business Law, Winter 2002

Instructor: Guhan Subramanian

Tax Factors in Business Decisions, Fall 2001: (29 Sessions & Exam)

Objectives:

1) Provide students with a perspective on taxation as a force affecting business policy;

2) Provide insight into the federal government's use of taxation as an instrument of social and economic policy; and,

3) Teach students to integrate tax factors with business decisions by providing information about selected areas of corporate, securities, trust and estate law.

Instructor: Henry P. Reiling