Top Legal Challenges
Facing Start-Up Clients
In today’s world with increasingly impressive technological advances, entrepreneurs are on the rise; there are now more start-up companies than ever before. What does that mean for you as an attorney? A whole new group of clients with a whole new group of issues. Entrepreneurs need legal help more than most in business because they are generally clueless as to the legal ramifications of their actions. This is where we come in. There are a number of common issues you will face when working with an tech entrepreneurial client, including corporate issues, intellectual property assets, a lack of agreements and potential litigation risks.
There are a number of Corporate issues that will arise if your client is seeking to start a new corporation. To begin with, your client must first choose a corporate entity and there are a number of options. Most major corporations in the U.S. are “C” corporations including Coca Cola, Apple, and GE. “C” corporations are not limited with respect to ownership participation and there is no limit on the type or number of shareholders a “C” corporation may have. In contrast, an “S” corporation can only have 100 shareholders, generally cannot have non-individual shareholders, and all shareholders must be U.S. residents or citizens. However, there is a tax advantage to choosing an “S” corporation as their income is subject to only one level of tax at the shareholder level (and this is not the case with “C” corporations). An LLC or limited liability company is essentially a partnership with a corporate entity for liability protection. Like an “S” corporation, an LLC’s income is subject to only one level of tax, at the member level.
Next, your client must decide where to file the corporation. Typically, corporations are filed in Delaware, Nevada or the home state of the client. The largest U.S. corporations are headquartered in Delaware and Nevada is trying to take some of the Delaware market offering a corporate friendly environment.
Entrepreneurial clients will come to you with an incomplete corporation running business as a fully formed corporation. This common issue occurs because of incomplete or unsigned paperwork or even a lack of the requirements to form the specific kind of entity. Clients will come to you having failed to wait the proper amount of time to begin running their business and have opened themselves up to personal liability. The best thing you can do for these clients is prioritize! Bring the corporate filings up to date, ensure board resolutions are in place and ensure all paperwork is complete and signed. Do this ASAP! Entrepreneurs will not know where to begin or what to do, so make a plan, give them a prioritized list and stay on top of them.
There are four main intellectual property assets relevant to entrepreneur law and entrepreneurial clients: copyrights, trademarks, patents and trade secrets.
Copyrights protect the client’s original work or “expression” and is signified by the words copyright or the © symbol, the name and the year. A copyright’s value grows over time and has very narrow protection under copyright law. Protection lasts 100+ years and is easy and inexpensive to file, ranging between $35 and $65.
Trademarks protect words, phrases, logos, etc., think branding. Trademarks are more descriptive and less distinctive and used by virtually every business. A trademark receives growing protection that is perpetual, forever. However, unlike copyrights, trademarks generally take between 18 months and 2 years to file and costs between $2,500 and $3,000.
Patents protect inventions, i.e. things, methods, improvements, or designs. Filing for a patent grants broad protection that lasts only 20 years and then becomes a part of the public domain. The cost to file is anywhere between $5,000 and $20,000 just for the first filing, and over time can grow to over $100,000 with international filings.
Trade secrets protect processes, designs, formulas and patterns forever as long as the information remains confidential. There must be certain procedures in place for handling the confidential information as well as technological and legal security measures to protect the confidentiality.
A failure to timely file for an intellectual property asset is a common issue among entrepreneurial clients, generally due to their failure to know that they must file for protection to be protected. If you fail to file a patent on time, you will lose your rights to the patent. A failure to file for protection or a failure to police the protected intellectual property results is another common issue with these clients. By failing to properly police and manage protected intellectual property it is as though they never filed to begin with. The court is not going to monitor other’s use of your protected property, this is a concept entrepreneurs do not understand. Ensure your client understands their responsibility in protecting their IP assets, as well as other aspects such as their data (since the new GDPR laws recently came into place).
Another common mistake amongst entrepreneurs in which results in a client needing your legal expertise is a failure to use contracts or agreements in business. Entrepreneurial clients will say, “Oh, but he is my friend, we don’t need a formal agreement..” over and over. And then, they show up to your office with a slew of problems that stem from a failure to contract. You will want to inquire into any oral contracts that were formed and ask for any template-agreements used which need customization. You should require your entrepreneurial clients to submit all contracts or agreements to you for review before signing. A failure to review a contract before signing could result in high litigation costs, make clear the fact that your client should never sign an agreement without reading it and/or submitting it to you for review. Additionally, you should always include warranties, disclaimers and indemnification clauses as well as limitations on liability. You can include attorneys fees and arbitration clauses if necessary or just to be on the safer side.
It is important to understand the risks your entrepreneur clients face in potential litigation so you can accurately provide that information to them. Costs are generally very high and that is attributed to the amount of time it takes to litigate these new-business claims and issues. Usually, all claims are not to be litigated at once and will take several months and sometimes even years, which becomes costly and sometimes detrimental to newly formed businesses. Litigation is a marathon, not a sprint and that should be accurately expressed to your client with hard numbers so they know what the potential risk is going to mean for them going forward. I suggest giving your client viable, more reasonable alternatives to litigation, including mediation or arbitration. Your client should be made aware of all possible options before you give them your advice on how to proceed.
With entrepreneurs, you will want to set a game plan from day 1. Prioritize and make lists for the client to work through. And always follow-up and check in before big dates to ensure your client is doing what you asked of them, even ask if you can help complete their task list. A plan is important to avoid lost time and money, company or personal liability, litigation risks and the ultimate loss of the company. Lowered risk means improved success!
How To Earn CLE Credit on this Topic
For additional information on this topic, Attorney Credits offers a course titled “Entrepreneur Law.”
The course is available for CLE credit in the following states: Alaska (AK) | Arizona (AZ) | California (CA) | Connecticut (CT) | District of Columbia (DC) | Florida (FL) | Georgia (GA) | Illinois (IL) | Maryland (MD) | Massachusetts (MA) | Michigan (MI) | Missouri (MO) | Nevada (NV) | New Jersey (NJ) | New York (NY) | Pennsylvania (PA) | South Dakota (SD) | Texas (TX) | Washington (WA)