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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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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I just read an excellent post on the StartUpNation.com blog about cost effective ways to market a startup business.  The post provides some excellent advice on how to come up with, and implement, a good marketing plan.  I use a few similar techniques in my law practice, and have had some success in doing so.  You can read a blurb from the post below, or you can read the entire post by clicking here.

How much should I spend on marketing?

The answer is: It depends.  What are your revenue goals?  What kind of business do you have?  For some companies, it might be appropriate to spend more than others.  The key is to have a budget and use it wisely.  For many smaller companies, low cost and no cost marketing strategies such as networking groups, social media, publicity and direct mail can be very effective.

What marketing strategies should I use?

Again the answer is; it depends.  Strategies will differ based on what your business is, who your customers are, and where they are, and what your revenue goals are.

Survey what other companies in your industry have done that has worked and hasn’t worked.  Ask your CPA to help you with a budget, and then stick to it.  And most importantly, measure the results of your marketing efforts to you can understand what is working and what is not.

Indianapolis attorney, Hannah Joseph, recently launched a new blog called FinePrintLawyer.com.  The blog takes a stab at an interesting niche – which Hannah describes as “…the legal angles of social media, marketing and advertising…common sense explanation of the tiny writing that clutters up all that nice marketing copy.”

Check it out!

Internet start-ups are a lot like traditional, brick and mortar businesses.  The require all of the same things I listed here. There are also some unique matters that must be attended to when starting and operating and Internet Business. Below is a checklist of some of the things every Internet start upshould have.

• A properly organized corporate entity.  Just because you are doing business on the Internet does not mean you are free from the liability concerns of traditional businesses. Make sure you form an entity through which to do business and adhere to corporate formalities.
• A plan to protect your intellectual property. This should include proper registrations of copyrights, trademarks and patents.  It should also include the use of confidentiality, nondisclosure, and invention assignment agreements. There should also be clear, conspicuous notices of your intellectual property rights.
• Properly drafted Terms of Use and Privacy Policy for your website. This is an important step for traditional businesses who’s website is merely complimentary to the bricks and mortar.  It is a vital and even more important step for an Internet business.  Don’t rely on cutting and pasting from another site – that is just a bad idea.
• If you are an SaaS provider, make sure you SaaS agreement is bullet proof. Don’t try to do this on your own!  You not only need to make sure the provisions in the agreement are sound, but you also need to make sure that you have a valid acceptance of the agreement by the end user.
• Make sure you have carefully reviewed any development agreements.  Among other things, this needs to be reviewed VERY CAREFULLY to ensure the scope of the project, developer obligations, warranties and most importantly intellectual property ownership are all adequately spelled out in the agreement.

This list is, of course, not inclusive.  You should consult with an Internet Start Up Attorney prior to and during the operation of your Internet start up business

I get questions from friends and clients all the time about what is and isn’t ok to post on a blog in terms of copyrighted and trademarked materials.  The answer is not all that easy to explain, but Indianapolis attorney Kenan Farrel has an excellent post on his blog that does a nice job of explaining the issue.  You can read the entire post here (A Legal Primer For Bloggers – Intellectual Property), but I have included a few highlights below:

On copyright law, fair use, and transformative use:

Keep in mind that the law favors “transformative” use.  In other words, if you’re reposting another person’s original work, it’s more likely to be fair use if you’re using that work in a different manner or for a different purpose than the original.  While you may borrow directly from another source, adding your own commentary and content is better than strict copying.  Likewise, it’s better to repost only a small portion of someone else’s work than the work in its entirety.

On what to do if someone contacts you to remove their work:

Also, on a practical note, if you’re using someone else’s text or images and they contact you to ask you to remove them, you probably just want to go ahead and do it.  After all, there are lots of different ways to express an idea and usually hundreds of equally wonderful pictures to adorn your blog.

On nomative fair use of someone else’s trademark:

…while trademark law prevents you from using someone else’s trademark to sell your competing products, it doesn’t stop you from using the trademark to refer to the trademark owner or its products. That is called “nominative fair use,” and is permitted if using the trademark is necessary to identify the products, services, or company you’re talking about, and you don’t use the mark to suggest the company endorses you.

Again, you can check out the entire post, as well as two other posting in his “Legal Primer for Bloggers” series here.

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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.

Limited liability companies (LLCs) can be managed by either their members, or by a board of managers (board of managers is the term used in Indiana – some states differ slightly).  This is something that needs to be specified in the articles of organization for the LLC, and although the articles can obviously be amended at any time to change how the LLC is managed, it is an important decision nevertheless.

A member managed LLC is exactly what it sounds like – an LLC with its daily business managed by its members.  This is obviously not a big deal if you have one, or even two members.  Problems arise when an LLC has multiple members.  Typically, except as otherwise spelled out in a written operating agreement, all of the members will have the authority to act on behalf of the LLC (sign checks, execute agreements…etc).   This is not an ideal situation.

A manager-managed LLC, on the other hand, has its daily business matters managed by a board of managers.  This would be analogous to a board of directors or even officers in a corporation. Members elect the board of managers, and become much more passive in the operation of the LLC.  Members, of course, can also serve as managers.  The flip side of this, and another advantage to having a manager managed LLC is that you can elect managers that are not members.

Any LLC, regardless of whether it is member managed or manager managed should clearly define the authority of its members and managers in a written operating agreement executed by all the members and the LLC.   Check back sometime soon for a follow up post about how this should be handled and what things need to be considered.

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