I recently read a good post on Venturebeat.com about 6 common legal mistakes startups make.  Some of these have been covered elsewhere on this blog – some not.  Here is the cliff notes version- check out the post itself for more details:

• IP Ownership – make sure it can be transferred to the startup.
• Choice of Entity – choose carefully.  They recommend a corporation instead of an LLC.  I disagree on a certain level, as I have stated before on the blog and my Indiana Law Practice Blog.
• Place of Incorporation – they say Delaware.  Again, I disagree to an extent (see this post).
• Vesting Restrictions – make sure founders stock vest over time, otherwise you run the risk of a founder leaving early on and keeping all of his /her stock.
• Securities Law Compliance – beware of not complying when issuing any securities to anyone, no matter who they are.
• Legalzoom – avoid like the plague.  Hire an attorney!

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The short answer is YES!

Lots of technology startups, internet startups and software startups I work with have typically developed some degree of intellectual property prior to actually organizing a business entity (corporation, LLC…etc).  Sometimes that IP is very early stage, sometimes, especially in the case where a founder is a developer or engineer, the IP may be very far along in terms of development.  Sometimes that IP may simply be a domain name. This may not seem like a big problem initially – but if the company ever wants to (a) enter into any significant contractual relationships relating directly or indirectly to the IP, (b) raise capital via private equity or debt, or (c) sell the business, not assigning the IP to the company can be a big problem.  The other parties in the transactions mentioned in the previous sentence will require that the company represent that it owns the IP – and when it can’t (because it doesn’t) – those other parties will require that it be duly assigned by the founder to the company.  What is the founder then demands a big payday?  What if he walks – and takes the IP with him?

To prevent all of this and a litany of other problems, founders should assign to the company whatever IP they own / have developed that is related to the business of the company – and the assignment should be made upon inception when the first grant of stock is made to the founder.  This may be done via a simple, broadly worded, IP assignment agreement.

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A friend and colleague of mine, David Castor, recently posted a series of entires on his blog about developing a good business model for early stage companies.  In a nutshell, he suggests that any good business model includes (1) a strong market opportunity; (2) a solid management team; and (3) a sound capital structure. Check out the links below if you want to read the entire series – its good stuff.

Entrepreneurial Law – Developing a Good Business Model – Part I
Entrepreneurial Law – Developing a Good Business Model – Part II
Entrepreneurial Law – Developing a Good Business Model – Part III
Entrepreneurial Law – Developing a Good Business Model – Part IV
Entrepreneurial Law – Developing a Good Business Model – Part V

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These seem kind of obvious, but according to successful, serial tech entrepreneur, Marc Andreeson (the guy who founded Netscape and pretty much paved the way for the modern Internet), the 3 criteria for any successful start-up are:

1. A substantial market opportunity.
2. A product that is 10x better than its competition.
3. An outstanding team.

He says #2 above can be compromised to a degree, but the other 2 are not optional.  Can’t say I disagree with these, as I am guessing that most start-ups that fit the above description are wildly successful.  Regardless, the video below is worth a watch – check it out.

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A very common question I get from entrepreneurs involves the timing of actually incorporating or organizing (depending on whether a corporation or LLC is formed) a formal business entity through which to conduct business.  There are lots of factors to consider. I recently read an interesting “decision matrix” by Ryan Reynolds, which takes into consideration factors such as:

• The number of founders.
• The degree of risk of experiencing some sort of lawsuit.
• Whether your start-up is seeking outside fundings.
• Whether and what sorts of contracts you are signing.

I tend to agree with this these factors for the most part – at least as a way to quantify the need (for those people that like to quantify things before making a decision).   Typically, though, I will recommend that a business incorporate or form an LLC as early in the process as possible (assuming the cost is not prohibitive – and it shouldn’t be so long as you find counsel that can help you do so for a reasonable fee).  For entrepreneurs that are serious about their business endeavor, forming a business entity is usually the first step toward making things “official.”  When someone goes through the process of organizing an LLC, opening a bank account, retaining an attorney, retaining an accountant…etc…what was once an abstract business plan or hobby becomes more tangible…and a platform is created from which to focus and launch the business (not to mention the obvious legal advantages such as limited liability that are discussed elsewhere on this blog).   What it really boils down to is this – when you are serious about starting up and executing a new business, that is when you should seriously consider spending the time and money to incorporate or organize a formal business entity (corporation of LLC).

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I recently stumbled across the “Lean Start-Up” Process, a term coined by Eric Ries, 31, an engineer, entrepreneur and blogger. His inspiration was the lean manufacturing process, fine-tuned in Japanese factories decades ago – which focused on eliminating any work or investment that doesn’t produce value for customers.  This is a concept I am familiar with in my solo, virtual law practice – operate lean and focus only on providing good legal service.  Any effort or energy expended otherwise is of no benefit to me nor my clients.

Part of the this process also involves developing a “minimum viable product” that will please some customers, and then build the business from there, responding and reacting rapidly to market responses to product changes.

Below is a great slideshow that illustrates the process.

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Today I launched a new a couple of new websites, one of which is myIndianaLLC.com. Over the past year, a good deal of my solo legal practice has been driven by the various blogs and sites I maintain on the internet, including this one.  One thing I have learned is that not everyone that finds me wants a “traditional” experience with an attorney. They know what they want in terms of legal advice or documents. They want it quick, and they want it to be affordable. They don’t need or want to meet face to face. They don’t want to visit an office. They don’t want broad representation. Some of them need an LLC formed. Some of then need a power of attorney.

myIndianaLLC.com caters to the needs of these people. By using carefully designed, interactive questionnaires that help me quickly assemble documents, I am able to form and organize an Indiana Limited Liability Company at a fraction of the cost that some other attorneys charge. In fact, the prices on myIndianaLLC.com are right on par with non-attorney legal form sites such as LegalZoom.com. Keep in mind that LegalZoom.com is not an attorney and may not give you legal advice – I can.   Not to mention that myIndianaLLC.com will form your Indiana LLC and return all of your documents to you in either 1 or 3 business days, depending on which package you purchase.  You get an Indiana LLC, prepared online by an Indiana LLC Attorney.

So what do you get?

A single member LLC starts at $400.  A multiple member LLC starts at $600.  You get:

• Articles of Organization that have been filed with the Indiana Secretary of State (the filing fee of $87 is included in your price!).
• A Certificate of Organization from the Indiana Secretary of State.
• A Single Member Operating Agreement.
• Organizing Resolutions of the Members or Managers.
• A Membership Interest Certificate, evidencing your ownership interest in your new Indiana LLC.
• A memo with instructions on what to do with your documents, how to apply for an EIN, various state reporting requirements, and advice regarding how to maintain the limited liability protections provided by your LLC.

How Does it work?

Follow a simple process to get started:

1. Choose the Indiana LLC package you would like to purchase.
2. Register for an account (subject to terms of use).
3. Purchase your Indiana LLC package.
4. Fill out our easy online questionnaire

Once you complete the questionnaire, the documents associated with your Indiana LLC will be generated and sent to experienced LLC attorney Brian V. Powers for review.  We will review them, follow up with any questions, file the appropriate documents with the Indiana Secretary of State, and when everything has been completed, we upload your completed documents to the site where they will be available for your download.

Why are online legal services fast and affordable?

Its the technology of course!  By using the latest in online document automation technology, your LLC documents are prepared quickly without the need to have a paralegal or legal secretary to key in your information.  Our technology is smart too – it knows how to assemble your document based on the answer you provide.  Answers are collected online.  Payments are collected online.  Documents and advice are delivered online (and by phone from time to time).  Most lawyers waste a lot of time and money on expensive offices, unnecessary staff & overhead, and client meetings.  Not here.  We focus on you and your legal needs and organizing your Indiana LLC – which saves you time and money!

Compare Us to Others – A Licensed Attorney vs Legal Forms Providers

I challenge you to find a better value anywhere. In fact, here is a link to the “leading” online document-preparation service: LegalZoom(tm).  I put that link there hoping you will click on it, and knowing that you’ll be back.  I spend a lot of time fixing the mistakes they, and other non-attorney document preparation services, make.  The advantage of using us – you’ll have the advantage of a real lawyer personally preparing your LLC documents and forming your Indiana limited liability company, instead of some non-attorney clerk on the other side of the country.

Lots of start-up founders try to do things the easy way and create a corporation online with the Indiana Secretary of State, which has really one of the best, fastest, and easiest to use websites around.  This is a great way to start, and it will indeed form your corporation with Secretary of State and generate a basic Articles of Incorporation for you.  The problem, though, is that most people will stop right there, falsely believing that filing articles is all that is necessary.  That is not the case.  Indiana law requires a number of formalities when setting up a corporation, including the approval of bylaws.

I read an interesting post on Gigaom.com this morning titled “The 10 Ways Startup Advice is Flawed.”  It focuses on advice given by people perceived as successful start-up entrepreneurs – attacking the premise that someones status (i.e. wealth, fame…etc) may not necessarily be related to what they did as a start-up – and that therefore their advice is not sound.  Here is a key excerpt from the post.You can read the whole post here.

1. Maybe the thing they did really didn’t cause them to get rich. A lot of startup stories are after-the-fact rationalizations or outright myths. As they say in Latin (and on the “West Wing”):Post hoc ergo propter hoc. In other words, just because something takes place after something else, doesn’t mean the two have a causal relationship.

2. Maybe they got lucky. After all, as my grandmother used to say, “Even a blind pig eventually finds a truffle.”

3. Maybe they did the thing they said and it was actually a bad idea, but they were in the right place at the right time. A lot of powerful businesses (especially network-effects businesses) are largely resilient to incompetence.

4. Maybe the thing they did worked, but only in conjunction with some other unnamed factor. For example, many visionaries partner with a heads-down, practical type.

5. Maybe the thing they did worked, but it only under certain circumstances. For example, perhaps it worked in their industry and not in yours, or only in certain phases of growth, or for certain kinds of teams.

6. Maybe the thing they did used to work, but it doesn’t anymore. For example, perhaps competitors now know how to counter such a move.

7. Maybe the thing they did worked, but for a different reason than they think. For example, perhaps it was the feedback of their customers, not their grand original idea, that was key to success.

8. Maybe they didn’t really do the thing they said they did. Most of the mythological startup stories are highly misleading. Many of us remember the past the way we wish it had been rather than the way it actually was.

9. Maybe they’re not really rich and/or famous. A lot of startup energy goes into what I call “success theater” –- that is, convincing the world that you and your startup is successful. Next time you’re listening to a guru, ask yourself: How do I really know that they’re successful? What is their definition of success? What’s mine?

10. Maybe they have an agenda. Ask yourself: Does this person stand to benefit if I follow this advice? The VCs I know and trust are honest and very pro-entrepreneur, but I routinely hear others give advice that entrepreneurs should be suspicious of. Fundamentally, their incentives are based on having a portfolio of startups. As an entrepreneur, you have a portfolio of one. Think about that the next time a VC advises you to swing for the fences.

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Most start-up ventures are strapped for cash – and most start-up ventures typically require at least some, if not a significant amount, of legal work to help them get the business up and running.  One great way for a start-up to save itself some money is to negotiate fixed fees for the transactional legal services it receives.  Billable hours have been a cash cow for big law firms for a long time, but most smaller and solo law practices will be more than willing to provide a fixed fee for certain types of work.  In my business law practice, I provide project based fixed fees for all kinds of projects, including entity formation, contract review, trademark matters, and even some larger business acquisition transactions.  Projects that potentially involve significant negotiations with other parties are very difficult to offer fixed fees – there is just no way of knowing how difficult or lengthy negotiations might be.

Seek out attorneys that are willing to provide fixed fees for your projects – and if you can’t find an attorney that markets him or herself as providing fixed fees – don’t be afraid to ask for fixed fees from an attorney – even if it is an attorney you have used in the past who you have historically paid by the hour.  Fixed fees will help you control your costs, and will help you more accurately budget your tight cash flow since you know EXACTLY how much your legal expenses will be.