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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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.

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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Some great news for Bloomington, Ind software and technology start-ups – the Bloomington Technology Partnership recently joined the BizSpark program, which provides certain software technology companies with three years of free Microsoft software, including Microsoft Windows Server, Microsoft Office SharePoint Portal Server, Visual Studio, SQL Server and more!  To be eligible for the BizSpark program, start-up companies must be:

• privately held
• have a software-based product or service at the core of their current or future business
• be in business for less than three years
• earn less than $1 million in annual revenue.

The entire press release follows:

Bloomington, Ind. — The Bloomington Technology Partnership announced today that they have joined BizSpark, an international program that provides software technology startup companies with three years of free Microsoft software.

“We are very excited to help bring cost savings to our local start up business community,” said Jeremy Sowders, Vice President of Business Development for the Bloomington Economic Development Corporation (BEDC) which manages the Bloomington Technology Partnership. “The BizSpark program by Microsoft is an innovative way to help companies during the critical early stages of development and for that reason we wanted to help make this resource available in Bloomington.”

The Bloomington Technology Partnership worked closely with the Indiana University Research & Technology Corporation (IURTC) to bring the BizSpark program to the Bloomington area. “The Microsoft BizSpark program fits right into our mission of helping fledgling start up ventures successfully transition into profitable entities.” added Tony Armstrong, President & CEO of the IURTC. “By sponsoring this program the Bloomington Technology Partnership strengthens the position of both the Bloomington area and Indiana University-Bloomington in today’s ultra competitive start up business environment.”

Microsoft programs available through BizSpark include Microsoft Windows Server, Microsoft Office SharePoint Portal Server, Visual Studio, SQL Server and more. To be eligible for the BizSpark program, startup companies must be privately held, have a software-based product or service at the core of their current or future business, be in business for less than three years, and earn less than $1 million in annual revenue. A company may take part in the program for up to three years unless it goes public or is acquired by another company. There are no initial fees to join the program, but $100 is due from the company when it exits the program.

Companies can solicit the Bloomington Technology Partnership to be their BizSpark sponsor by visiting the program’s web page at http://www.microsoft.com/bizspark/ and entering the section labeled “Startups.” After selecting the proper region, click on the Bloomington Technology Partnership as the sponsor organization.

About Bloomington Technology Partnership

The Bloomington Technology Partnership fosters the growth of Bloomington’s emerging high-tech economy. A public-private partnership established in 2008, it draws on the “best and brightest” to meet the needs of high-tech companies and their employees.

The Bloomington Technology Partnership is a program of the BEDC, a not-for-profit corporation funded through memberships from private industry, City of Bloomington, Monroe County, Indiana University and Ivy Tech Community College-Bloomington. The Bloomington Technology Partnership is funded in part by the City of Bloomington. For more information go to www.bloomingtontech.com

Source: Bloomington Economic Development Corp.

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I work with start-ups and entrepeneurs in my law practice all time – one common question / concern I get from my clients is regarding the right time to organize / incorporate their business into a formal, legal business entity.  Some ask because they are trying to save the money associated with the process until they know that their business will be a forward concern, some ask just out of general curiosity.

As a rule of thumb, I typically tell clients they need to form a legal entity separate from themselves anytime (1) there is more than one founder or (2) the business is about to engage ANY sort of third party for ANYTHING.  The first point is obviously based on the need to put down pre-incorporation/organization agreement in writing (i.e. avoid arguments and conflicts among founders), the second based on the need to shield potential liability.

I came across an excellent posting on this topic by Yoichiro (”Yokum”) Taku, a west coast attorney who maintains StartupCompanyLawyer.com.  He has some points that expand nicely upon my second rule of thumb above, some of which I have included below:

Funding.  Obviously, if third party investors want to invest in a startup idea, there needs to be an entity to accept the investment.  Generally, I prefer to incorporate and issue founder’s stock at nominal prices well in advance of a Series A preferred stock financing because it is difficult to justify that common stock should be priced at $0.001 per share while Series A preferred stock is issued at $1.00 per share.

Launching a service/product and general liability issues.  One important reason for incorporating a company is to protect the stockholders against personal liability.  If a company complies with corporate formalities, creditors of the company generally cannot reach the stockholders to satisfy the company’s liabilities.  Thus, a company should generally incorporate before launching a product or a service due to potential liability issues, as the risk of liability to a founder increases with customers or users.

Hiring employees or third party contractors.  Although I’ve run into a situation where the former CEO of a Fortune 500 company personally paid an “employee” out of his own pocket for a year prior to incorporation while incubating an idea, most founders will need to incorporate a company if they intend to hire employees.  In addition, if an entrepreneur needs to engage third party contractors, it generally makes sense to incorporate a company so that the third party enters into an agreement with a company instead of an individual.  In addition, any IP created by the contractor can be assigned to the company instead of an individual founder.

You can find the original posting here.

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Entrepreneurs are some amazing people, and create some amazing things – but they are not perfect.  Lots of entrepreneurs make mistakes - some fatal to their start-up business, some not.  The people over at YoungEntreprenuer.com have compiled a list of the Top 10 Mistakes People Make When Starting A Business.  I have seen a lot of these lists, but this one really hits the nail on the head based on what I typically see from start-ups.  The comments to that particular post have some very valuable information on this topic as well.  Here is a summary of the list:

1) Undercapitalization

The most common reason why new businesses shut down is that the owner runs out of money. Cash flow is critical to a start-up business. You could be profitable and still have to close your doors because your customers are taking too long to pay you. Cash is king in a startup venture and you need to prepare for it.

2) Not thinking survival.

Starting a business is all about survival. How do you stay around one more day so that you can learn more about your market and close new customers?

3) Maintaining Momentum

Many new entrepreneurs have ambitions to start a business so they create a website, try to make a few sales, go all out for a few months and then stop completely. Building a business is all about momentum. If you had 24 hours to spend on a business they would be put to far better use by spending one hour a day than for 24 hours straight.

4) Trying to do it all alone.

Nobody is perfect or has the skills to do everything themselves. You need to understand what it is that you bring to the table and what you need to surround yourself with. If, for example, you are very strong at inventing but don’t want to sell then you need to find a salesperson to help you.

5) Not hiring the right people, right away.

You should begin looking at who can be brought on board to help you from the first day of starting your company. There will be tasks in any business that you, as the owner, should not be focusing on if you hope to build any sort of sizable organization. Why are you doing admin work when you should be out closing customers, talking to the media, and landing new partnerships?

6. Doing it just for the money.

If you don’t truly love your business then you won’t be successful. If you read the stories of famous entrepreneurs and how they built their organizations you will find that it all comes down to the root of loving what you are doing.

7. Getting to year 1, past year 2, and into year 3.

Many entrepreneurs have a hard time getting to the end of year one. Typically it’s because they started the business on a whim and got excited about an opportunity but didn’t do the proper research. These entrepreneurs usually run out of money and close down after a few months.

8. Building the business around your preferences, not those of your customers.

The best way to make a lot of money quickly is to find a customer who has a problem and is willing to pay you to solve it – and then you go out and build the solution. Most entrepreneurs take the opposite mentality of “if I build it, then will come” only to realize that they’ve built it and nobody is coming. Instead of talking to customers as to why they’re not coming they decided to continue building and building. Soon they find out that they’ve invested years of work and nobody is interested in buying from them.

9. Not seeking mentors.

A great way to get a business going is to find out what other people have done to achieve success and implement those strategies into your own company. Find mentors who have knowledge of your industry and will give you time out of their day to help you.You could set up a formal board of advisers and compensate people for their time but if you’re a startup you can play on the fact that most entrepreneurs are willing to help out a fellow business owner as a way to give back. If you show genuine appreciation and approach the right people, the advice you get will help make or break your company.

10. Working under a rock and not getting involved in the community.

Countless opportunities are generated by connecting with other young entrepreneurs and finding out what they are up to and how you can help. You will get new business opportunities, partners, investment, media attention, ideas for productive tools to use, advice for your company, and many other resources that otherwise would take you years of trial and error to figure out (if you ever do at all).

For more information, be sure to check out YoungEntrepreneur.com.

About YoungEntrepreneur.com

I have been an avid reader and subscriber to Youngentrepreneur.com for awhile – far before I started writing this blog.  It is a fantastic resource with lots of entrepreneurial advice, business growth strategies, startup experiences and marketing tips.

The website was founded by brothers Matthew and Adam Torren, and there is a blog managed by Evan Carmichael. Of particular value is the blog author’s personal insight, derived from his own experiences as an entrepreneur.  I especially like the entrepreneurial advice which he shares based on his own experiences. The site also has an awesome and very active forum for entrepreneurs to share advice, discuss business, and network.

Their blog contains tons of great information for entrepreneurs. One of my favorite categories is Entrepreneurship University in which experts share advice and provide lessons – extremely valuable information. Another great feature is the entrepreneur profiles. This blog is a must-read for any young or young at heart entrepreneur.

Youngentrepreneur.com is a must read for entrepreneurs, start-ups and small business. I will continue to monitor is as a great resource – you should consider doing the same.

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