Startups have enough difficulty getting off the ground. The last thing one needs is to run into a lawsuit and face litigation. Avoiding litigation as a startup becomes a key component to your business strategy. By following these 11 tips for how to avoid litigation as a startup, you can help propel your business to success.
1. Treat Everyone Fairly
A very practical and easy way to avoid litigation is to treat everyone fairly. Sometimes, the best way to avoid litigation isn’t a legal solution at all. But a practical one; one that comes down to customer and business relationships. Overaggressive and cutthroat tactics have a tendency to piss people off. Maintaining good faith in your negotiations and dealings with others is a prime way to keep things smooth, even in the face of a dispute.
2. Think through the founder’s dilemmas
Thinking through any problems with the Founders of your business is another great way to avoid litigation. Founders are the people who start the business. They are the brains, the brawn, and the money behind every startup. But, how should the division of equity be made among the founders? Should the money gal get more equity because without the money, the startup would be zero? Or, should the idea man get more equity because, without the idea, the business would be nonexistent? What happens when your honeymoon is over and you’re at one another’s throats about how the business should be operated? Or better yet, the direction of the business moving forward?
Thinking through items such as these is paramount in creating, and maintaining, a thriving business. Further, they are also an important factor in avoiding litigation as a startup. Defining the business relationship and entering into proper agreements can help in the face of a dispute. Want to learn more?
3. Purge all unethical/reckless behavior
Let’s be honest. When you piss people off, they have a tendency to get litigious. This stems back to my original tip about treating everyone fairly and not taking risks that could lead to serious downfalls. Many times, unethical or reckless behavior leads to mistakes and coverups. As the owner of a business, your underling’s behavior has a good possibility to be attributed to you. And that leaves you on the hook for bad behavior. Strengthen internal policies and procedures to make sure that the actions of your workers adhere to ethical and reasonable business standards. Check out our link in the bio for more Legal Lessons.
4. Never commingle Personal and Business Money
Aside from the accounting nightmare created by using business funds for personal reasons, and using personal funds for business reasons, there’s a principle in law called piercing the corporate veil. This means a business owner can be personally liable for the actions of the business. This defeats the whole purpose of having a separate business entity in the first place — limited liability. Commingling is a factor Court’s look at in determining whether the business is really that, or is an alter ego of its owner masquerading as a separate business. Keep your business and personal assets separated to avoid this mistake.
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5. Legal Expenses, Hard way or easy way
Legal expenses should be part of your startup and business budget. Did you know that between 36%-53% of small businesses are involved in at least one litigation in any given year and 90% of all businesses are engaged in litigation at any given time. Planning for this expense on the front end of your business endeavors will keep you from taking it on the back end if shit hits the fan. I always like to think of this planning as “preventative law”. It’s kind of like going to the doctor. You want to go to the doctor before the heart attack hits. Plan now, avoid later. Here are more reasons to include a lawyer in your business.
6. Respect Securities Laws
When it comes to raising capital for your business, failure to follow securities laws can land you in deep doo-doo. Not following them is a sure way to NOT avoid litigation. And what I mean by “do do” is federal or state prison or hefty civil fines and penalties. Whenever you accept money from someone as an “investment”, if that person no longer has control over that money, in its simplest form, that is the sale of a security. And the sale of securities triggers a substantial number of laws. Material misrepresentations in private placement memorandums, or in quarterly reports can lead to liability. Any withheld information that a reasonable investor would want to know concerning his/her investment with you is something that must be disclosed. Now, there’s a broad topic. Check out more Legal Lessons with the link in the bio.
7. Don’t sign a contract you can’t leave
That sounds easier said than done. But it’s not the end all be all. If a contract is properly negotiated, it should benefit both parties to it. If a contract is one-sided, that can lead to discrepancies and difficulties with the contract, leading to a dispute. A contract that takes into consideration the needs and wants of both parties, can plan for unforeseen events. Such events can be triggers to terminate the contract. Sometimes it’s not enough to terminate a contract for cause. Being able to terminate a contract for a convenient reason, a reason understood and expected by both parties can save every party to the contract a bunch of energy and angst. Try to work in these contingencies and unexpected events into your next contract in an effort to avoid litigation. Contract Tips
8. Make sure you own your IP
Nothing can ruin your brand faster than confrontation over who owns its intellectual property. Every contractor or employee of your business who is involved in producing content or product for your business should be required to assign any intellectual property rights he/she has over to the business. These founders and contributors to the company as well. Every contract your business enters into should account for IP ownership in some form or fashion. Workers coming into your business should also be questioned and their prior employment agreements reviewed to buffer your business from IP challenges from prior employers.
9. Tread carefully with Investors and Shareholders
Owners of a business owe a fiduciary duty to the investors and shareholders of it. When you give up a portion of your business to an investor or another shareholder/member, you are opening yourself to obligations owed to those people. There are two primary fiduciary duties every owner owes to the business and its shareholders/investors. Those are the duty of care, and the duty of loyalty. Just because you can do something in the business, doesn’t mean you should. Open avenues of communication are paramount when care and loyalty are on the line. 5 Documents you need for your business.
10. Don’t let customers sue you
I love the smell of litigation in the morning. But that doesn’t mean it’s best for your business. Avoiding litigation is paramount as you grow. Litigation sucks, plain and simple. It’s draining, it’s emotional, it’s expensive. Pick your dispute resolution process at the beginning of the relationship. Mandatory arbitration and mediation provisions are binding on the parties. Utilizing them will keep you out of court and allow you to manage your case more effectively and privately. In the end, mediation and arbitration could save a cash-strapped startup from the large expenses of litigation.
11. Don’t get too successful
Let’s face it, when you’re at the top of the food chain, your success is bound to draw attention. And, it’s not always good. Successful businesses get sued all the time. It becomes part of the entry to success. When you’re successful, people want a piece of you, good or bad. Planning for litigation, or planning to avoid litigation, should become an integral part of your business culture. Utilizing a business lawyer in your day to day business operations could save you significantly in the future. A key component here, though: always maintain a business head about your disputes. Getting emotional or making decisions based on emotion or “principle” could lead you down the wrong path. Stay level-headed and always make the best business decision; which might not be the best emotional decision.
Interested in more Legal Lessons? Click HERE for practical and easy-to-implement information that can keep your business on the straight and narrow.