Start-ups and the Employment Law Gauntlet

One of the big positives about working at a large firm is access to legal experts in disciplines that interrelate with key issues that our start-up clients face.  I was rehashing some conversations I recently had with founders and start-ups on employment issues and wanted to highlight some issues of which start-ups should be aware.  In my research, I unearthed this gem of an ebook that succinctly lays out the “Five Common Employment Law Hazards for Start-ups” by one of our resident employment law experts – Mike RosenDownload the ebook ( 5 Employment Law Hazards for Start-ups__eBook_info.pdf)

Mike is right when he says that faced with “limited personnel and monetary resources… many emerging companies employ a band-aid approach to HR-related issues”.  With that in mind, he sets out the areas where employment related disputes for venture-backed start-ups most consistently arise. Keep reading for a synopsis of the 5 major areas where venture-backed start-ups stumble and expose themselves to disputes as they relate to employment law...

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Learning to let go...

This recent article titled: "Entrepreneurs need to know when to let go" by Michael Skapinker  of the Financial Times raises a good point and got me thinking of an analogous example in the very early stages of a start-up. Letting go does not start with selling the company. It needs to start much earlier than that for technology teams looking for venture funding for their idea.

I have often heard senior advisors refer to the decision to raise venture funding as going down a Copyright: Micahel Valdez, iStock Photopath  where the final destination invariably means losing control of your company. Determining if you want to walk down this path is a question often not given enough serious thought by founders.  Think of it as an identity crisis of sorts - one way to determine if the founders are ready to take the VC route is for them to ask themselves: Am I ready to make distinction between myself and the start-up? If the answer is "NO - there is no distinction", then the path from start- up through venture funding to hopefully an exit will be at best more painful and angst ridden than normal and at worse will be a disaster of sorts. 

However, if you think of your company as its own entity (albeit one where you have significant input and credit for it's existence) then it helps to think of going down the venture capital route as sending your kid off to college. He/she is going to grow up to be their own person and though you will always have some influence in their lives, increasingly your sphere of influence will diminish and be replaced by that of their peers, partners, teachers etc..

Letting go also helps entrepreneurs do what they do best -find new problems to solve and start new companies!

Copyright: Micahel Valdez, iStock Photo

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You say % and I say #...

Every time I hear a founder or entrepreneur say they want to give X percent  of their company to this team member or that investor - I cringe a little.  Why?

Percentages are fixed, however #'s are always changing.  When a founder is promising a consultant, advisor, team member, investor (or whomever) a percentage of the company he/she is no doubt promising them a percent of the company at that point in time (so if there are 1,000 outstanding and issued shares, 20% would be 200 shares).  However, the pie is always growing so that 1,000 shares today might be a 1,000,000 shares in the future and that 20% is all of a sudden 200,000 shares. 

Now you're probably wondering, PT are you seriously saying that someone could have a credible argument that the 20% of 1,000 shares could be extrapolated to mean 20% of 1,000,000 shares?!! Get real.

I'm not saying it does, but depending on the facts and the circumstances, someone could very possibly make an argument that it might. Also, if it does or does not is besides the point.  Take this in the perspective of an exit or a large round of VC financing.  You really want this joker showing up a week before you close the deal with a document or a written agreement stating that you promised him/her X% of your company?  Granted, it might not be a very credible argument, but it's going to take either time or money (or most likely a lot of both) to make this go away and even worse it will create doubt in the mind of the investor/buyer, at the very worst could crater the deal.

Promising someone X% of your company? Don't do it - you'll sleep easier and so will your lawyer.

Founder Agreements - Vesting, vesting and more vesting....

A quick shout out to my co-blogger David Broadwin for his recent guest post on Sim Simeonov's (of FastIgnite) blog High Contrast, on the subject of founder agreements and the importance of including vesting. 

 In other words....how not to give away too much of your company to slackers and flakers who don't deserve it.

Every aspiring start-up founder and founding team should give this a quick read.   Click here for the full post.

Advisors; When to appoint them to the Board of Advisors and how much, if any, equity to grant them.

A start-up wants to formalize a relationship between the company and certain advisors who have been providing invaluable advice for the last couple of months. The start-up is also considering granting these advisors some equity in the start-up and want to know what market is. The answer, infuriating for some, is the classic lawyer answer of “it depends”.

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A Prozac economy for entrepreneurs? No way, no how!

David Wessel’s recent article in the Journal, “A Prozac Economy has its Costs,” asks: If we were able to invent the economic equivalent of Prozac – something that would take away the high-highs and the low-lows of our current economy (think the tech bubble of the late 90’s and the current recession) – would we elect for a prescription? Would we, given the choice between a dynamic, volatile economy with painful depressive phases, and a more mellow economy with fewer crises but a slower growth rate over the long term than its manic doppelganger, settle for a calmer existence? Though my understanding of economics is limited to my college-level macro and micro courses, from an entrepreneur’s and VC’s point of view, I think my answer would be: give me manic any day.

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Thoughts on risk management and incorporation

Entrepreneurs are risk takers; lawyers risk managers. An inherent tension exists. Take too much risk or over-manage the risk and the results can range from unsatisfactory to disastrous. However, in every venture, there are manageable risks and uncontrollable risks. The trick is to realize which is which and deal with them accordingly. I have met some smart, innovative first-time entrepreneurs with thought-provoking business plans that illustrate foresight and a nuanced understanding of market forces. However, more often than not, these very same entrepreneurs are more than willing to lump all their risks in the “uncontrollable” category.

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ASAP, ASAP!, and ASAP!! - A lawyer's discoveries in management land

The nature of the law business is that pretty much each attorney is an individual contributor. You do the work clients need when they need it. If clients have conflicting needs, it is mostly up to you to prioritize and manage your own way through it. Sometimes you work on large matters, IPOs (when there used to be such things) and mergers being examples, and you have to coordinate with a group. But, generally, you are the master of your day, your week, your month and your year. When we opened the EEC things changed a lot. We changed the model to some extent and now there are a lot of projects that have to be done by many people over many months (even years). Just saying, “the client needs it ASAP” doesn’t help. When, exactly, is ASAP?

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