Focus on Immediate Survival- Save Long Term Planning for Later

Being an entrepreneur is complicated.  Enterprises often face having too few resources but an abundance of expenses.  Even so, when you choose to make trade-offs, don’t be pennywise but pound foolish.  Spend smart money on a few key legal documents to build essential infrastructure for your company.

By spending this money when you start your company, you can be protected from several critical issues that may seriously damage your business later- and it is far more expensive to have these issues fixed after the fact, than it is to properly address them in the beginning.

Here are three examples of common mistakes we see short-sighted entrepreneurs make:

Ownership:

As with any business relationship, but especially so in the world of start-ups, ownership is issue number one.  You need to document  which members of your team own what share of your company, or risk the fate of Mark Zuckerberg, who has been forced to face numerous lawsuits (and settled out of court for at least $60 million) regarding who truly owns Facebook.  If you have a “friend” or advisor who helps you develop your company’s software, make sure he/she knows what his payment is and that his equity in the company is documented; otherwise, when your business takes off he may suddenly become “a founding partner”.  These documents are relatively inexpensive to create in the beginning compared to the value of protecting your stake in the company.

Partnership Responsibilities:

Your legal documents should state the owners’ duties and responsibilities in the company, and what those will become if something changes.  It is important to distinguish who does what from the beginning of your venture (and while everyone involved is still happy with each other).  We find that a good way to make these distinctions is to provide a checklist of things to consider, such as: “What happens if a partner dies? What happens if a partner wants out? How are you going to handle it if one of the partners decides they want to do something else and they aren’t contributing as much in terms of time or capital?”  When a start-up faces one of these situations without an answer in the middle of a turbulent period, it can be crippling.  If everything has been mapped out beforehand, the answer is already in writing and you have a definite plan to move forwards.

Intellectual Property:

You need to own your name in order to truly own your business, because a recognizable brand has tangible monetary value.  But simply using your name first does not give you an exclusive right to it.  In fact, if another company in a distant state files to trademark your name, they may be able to use ICANN procedures to shut down your website and litigate against you as an infringer.  Conversely, a federal trademark gives you the ability to shut down malicious sites, squatters, and copycat sites that are using your name illegally. By protecting your brand, you increase the value of your company.

While it can be difficult to make the decision to spend more cash in the beginning, remember that you are far more likely to avoid pitfalls and attract investment dollars if you have these issues taken care of.  Dollars spent today can protect your company’s value tomorrow.  Proper legal documentation of your entity, its ownership and management, and your brand can be invaluable as you grow and change.

Visit the MWR Legal Springboard Blog for more critical legal advice for entrepreneurs!