Emerging Enterprise Center Blog - Commentary and Analysis For Entrepreneurs and Startups

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 Rosen.  Download 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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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.

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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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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