Have you had actual legal issues in a startup?


8

In getting started we all take shortcuts. I'm thinking about when we:

  • hire employees without having employee manuals or making them agree that they are at-will employees
  • enter into an agreement with a partner with a contract that does not have all the legal-eze in it
  • make a deal without getting full legal advice

In big companies it's expected that all of this is done 100% correctly but in startups we have to make a tradeoff about how much energy to devote to this. My questions is have you ever regretted it? Have you ever gotten into a situation where you though "I really wished I'd gotten more legal advice before going into this" or is it just as easy to fix most things after the fact.

Legal

asked Apr 15 '10 at 12:34
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Dane
1,866 points

3 Answers


10

Do I really need a lawyer to review this contract? provides some suggestions for when contract review by a lawyer may be critical and when it may not be necessary.

I am puzzled why you would want to hire employees without an at-will employment acknowledgment.

Hiring employees without an ironclad assignment of all rights to whatever they create is one of the most serious, and most common, mistakes that I see startup companies make - please see Securing IP Requires More than an NDA.

If you would like to prepare a thorough employee handbook inexpensively on your own, you can use software from the CA Chamber of Commerce.

Regarding the potential perils of fixing problems after the fact, each situation is unique, so it is impossible to generalize. Real-life examples are discussed at So how important is this legal stuff anyway? and Acquisition Derailed by Lack of Compliance.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

answered Apr 15 '10 at 14:53
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Dana Shultz
6,015 points
  • +1 for making sure you have proper employee agreements in place when you hire - not doing so seems reckless and irresponsible to me, not a corner I would want to cut in any business situation. – Steve Wilkinson 9 years ago
  • Dana, I understand all of this and have always spend a bunch of time on this I was just curious with all the people in this forum whether anyone had ever had any actual problems. Not I heard someone had a problem once but actual first hand accounts of problems. – Dane 9 years ago

4

Most companies in the "start-up" phase don't tend to have legal problems. It's when they mature into larger companies, take on later-stage investors, dissolve or are sold, and/or come under the scrutiny of regulators and government agencies that they face legal issues either on existing issues or past conduct that wasn't handled properly.

Partnership, equity, and employment issues immediately spring to mind. Handling these issues from the get go can save you a headache and legal fees further down the road.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

answered Apr 15 '10 at 22:45
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Jesse
279 points

2

OK, this was asked a long time ago, but I'm first seeing it now. For those who may find this in later searches:

Yes, I have personally had severe legal issues in a young startup. I really can't elaborate in a public forum, but I certainly advise others to not cut corners on the legal stuff.

Another thing: I'm pretty sure this discussion suffers from survivorship bias. In other words, the startup community doesn't hear much from those startups who do have legal problems, because those startups often 'die' and leave the community. IMHO this leads to many people under-estimating how common this class of problems is.

answered Nov 28 '10 at 17:29
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Jesper Mortensen
15,292 points

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