

Legal Mistakes Made by Entrepreneurs - bjonathan
http://hbswk.hbs.edu/item/3348.html

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grellas
This is a nice piece and Connie Bagley is a gifted lawyer and teacher who has
for years now published a good legal guide for entrepreneurs along with Craig
Dauchy of Cooley (we also had worked together at the same Big Law firm in the
early 1980s).

A few observations:

1\. Founders are much more aware of 83(b) elections today than they were in
2003 when this piece was done and failure to file these on time is much less a
problem today than it was then.

2\. The biggest problem by far among early-stage founders that is not
mentioned here is failure to assign IP into the company at the time of
formation when shares are issued. This is commonly overlooked when founders
take a do-it-yourself approach. Normally, it is easily cleaned up but, in
cases where disputes have arisen, it is a painful and expensive problem to
deal with.

3\. I would add as well trying to "do it yourself" without even consulting
with a good lawyer to get strategic guidance. This can lead to problems that
are easily avoided at small cost by consulting up-front with a lawyer, even if
you intend to defer hiring a firm in the earliest stages (see, e.g., for an
example of what can go wrong as a founder candidly discusses why
"incorporating my startup [in Delaware] was my worst mistake":
<http://news.ycombinator.com/item?id=2399139>).

As a point of comparison, here is a link to a similar list (equally good) done
by Scott Walker and posted on HN a while back:
<http://news.ycombinator.com/item?id=1418300> (as to which I made a detailed
comment touching on LLCs, Delaware, vesting, and tax).

In general, founders are much more savvy about legal startup issues today than
when this piece was written but it is always helpful to review the major
issues as a double-check when starting.

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izak30
#4 seems to go against a lot of other advice here [RE: Don't Sign NDAs, which
is my personal stance] Almost everyone with a crappy idea wants an NDA, so
much so that I have a stock `why I won't sign your NDA` email.

That being said, There are times when I know an NDA is well thought out, and
necessary, but this is the exception, not the rule.

~~~
entangld
I need the upvote numbers back. How am I supposed to distinguish between when
someone says something that sounds good but isn't necessarily true and a point
that many HNers agree with?

This thread is a perfect example. I'm trying to learn something here and I
have no way to determine credibility.

~~~
alexqgb
Upvoted.

I use a Greasemonkey plugin called Backbars, which turns the numbers into a
graphical display that floats behind the headline. This makes it even easier
to scan a page very quickly, and note what's got traction - which can be as
interesting as the articles themselves.

HN - please - bring the numbers back.

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kmfrk
Good article. Here're the ten mistakes:

#10: Failing to incorporate early enough.

#9: Issuing founder shares without vesting.

#8: Hiring a lawyer not experienced in dealing with entrepreneurs and venture
capitalists.

#7: Failing to make a timely Section 83 (b) election.

#6: Negotiating venture capital financing based solely on the valuation.

#5: Waiting to consider international intellectual property protection.

#4: Disclosing inventions without a nondisclosure agreement, or before the
patent application is filed.

#3: Starting a business while employed by a potential competitor, or hiring
employees without first checking their agreements with the current employer
and their knowledge of trade secrets.

#2: Promising more in the business plan than can be delivered and failing to
comply with state and federal securities laws.

#1: Thinking any legal problems can be solved later.

~~~
RuadhanMc
I daresay Zuckerberg disagrees with #1.

~~~
imjk
I daresay Zuckerberg seems to be doing fine dealing with legal problems.

~~~
chopsueyar
Reread the grandparent post.

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rmason
Let me add one that has personally bit me years ago - failing to file for a
trademark before launching a business. Don't think that it's something you can
put off until later. Being first to use and owning the domain name is not a
valid defense.

Even having the trademark might not help you if you face a well funded foe but
it helps. We weathered the rebranding but it slowed us down and was very
costly.

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bfe
This is an excellent article that every entrepreneur should keep as a handy
reference.

However, there's one significant error regarding international patents I want
to correct.

There's no single patent application for the European Union. What there is is
a single European patent application through the European Patent Convention,
which is independent of the EU and has an overlapping but not identical set of
member nations, as well as extension agreement nations (that typically
eventually transition to member nations), and that recently also started
establishing patent validation agreements without extension agreements (the
first being Morocco).

International patent prosecution is very complex, but the one thing to
definitely remember is just to talk to your attorneys about international
patents at least a few months prior to one year after the initial filing date
of any patent applications.

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sv123
For #8 how do you go about finding such a lawyer?

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larrik
Especially outside of DC/Boston/NYC. Are we doomed?

~~~
imjk
I second Boston.

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MikeHo
Business Law is flawed for those under age of majority...

I've had numerous start ups and successful ventures since the age of 12, and
to date (I'm currently 17), it's always a burden to know I'm held back from
incorporating etc.. as nothing I sign is legally viable.. therefore making it
hard for me to play by the rulebook.

~~~
dangrossman
What do you mean? You can enter into contracts and they are fully binding for
the other party. It's only you, the minor, that can sometimes choose to ignore
the contract legally. That's why most businesses choose not to contract with
minors, but if they do, they are enforceable.

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tlrobinson
More on the 83(b) election: <http://www.quora.com/What-is-an-83-b-election>

Of particular note is you have 30 days from the date of the stock purchase to
file. I miraculously remembered this on the 27th day.

~~~
mncolinlee
Does anyone know how the new Startup America tax rules impact section 83? I am
not a tax lawyer, but it sounds like the new rules are a proposal in Obama's
2012 budget that would remove the need for 83b elections for founders if the
budget passes. Is that correct?

[http://www.treasury.gov/connect/blog/Pages/Startup-
America-H...](http://www.treasury.gov/connect/blog/Pages/Startup-America-How-
a-Small-Business-Tax-Cut-will-Support-Innovative,-High-Growth-Companies.aspx)

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bugsy
I agree with 8 and 3. 4 is highly debatable and possibly completely wrong.

The rest are all promotion of spending lots of money on legal services even
when you really should not be and there is no benefit to doing so.

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scarmig
Does giving away half your startup for $1,000 in writing count?

