11 Ways toto Avoid Litigation

Legal Issues for Startups and EntrepreneursMay 26, 2015

© 2015 McCarthy Law, LLC

1. Treat Everyone Fairly

• Medical malpractice analogy• Take the long view of every

negotiation• Leave something on the table• Make everyone you work with feel

as if they are getting more out of your relationship than they deserve

2. Think Through Founders’ Dilemmas • Address founders issues at the

very beginning• Be like the Godfather: deal with

bad news right away.• Formalities are more important

with friends and family than with business acquaintances

3. Purge All Unethical/Reckless

Behavior• Assume all unethical behavior in

your business will be imputed to you, because it will

• Metzloff’s law• Fiduciary duties

4. Never Intermingle Personal-Business $

• Piercing corporate veil• Multiple business shell game =

bad• All business debt becomes your

debt

5. Legal Expenses, Hard Way or Easy Way• Consider legal expenses a line-item of your

budget• Failure to allocate a budget for legal

expenses is like failing to do maintenance on your car or house.

• If you don’t include a lawyer in your process early, more likely than not you’ll have a $25,000-plus unexpected legal expense in your first five years. And it’ll be the most stressful thing in your life.

6. Respect Securities Laws

• Private placement• Material omission• Form D• Right of rescission• Jail/Prohibition from raising

capital

7. Don’t Sign a Contract You Can’t

Leave• Termination for convenience• Very common• Things change. Always allow

yourself wiggle room to get out of a contract

• Should apply to both parties• For cause termination isn’t

enough

8. Make sure you own your IP

• Every contractor, employee, founder, and contributor should assign IP to the company

• Every contract should address IP• Company should ask for, review,

and inspect prior employment agreements to ensure no conflicts

9. Tread Carefully w/Investors & Shareholders

• Fiduciary duties• Just because you can do

something, doesn’t mean you should

• Clear communication – open dialogue

10. Don’t Let Users Sue You

• Binding arbitration good idea for cash-strapped companies

• Mediation even better• Litigation is too expensive for

early-stage startups. Contract your way out of the option.

11. Don’t Get Too Successful

• Walmart gets sued twice a day• Cost of doing business• Always think rationally about legal

expenses • Separate emotional component

from financial component, develop and maintain good policies and practices, and outsource

Thanks!• Kieran@ColoradoStartupLawyer.com• Legal Issues for Startups and

Entrepreneurs• www.ColoradoStartupLawyer.com• @CoStartupLawyer