Entrepreneurs.  Start-up companies.  Joint ventures.  High tech.  Lawyers?  The people driving growth of small businesses today often share common characteristics: they’re creative, visionary, optimistic, and goal-oriented.  They move fast and get things done.  They dislike formality, red tape and lots of documentation.  These common traits may explain why entrepreneurs too often fail to hire or consult lawyers early enough, at the planning and early execution stages of their deals and hires. 

Three key legal areas where entrepreneurs would benefit by consulting lawyers early include intellectual property, contract review and human resources.  Unfortunately, entrepreneurs tend to strike the deal,  develop the idea, or hire the employee, first, then call an attorney to “handle the paperwork” afterward.  We’ll explore common pitfalls for entrepreneurs in each of these areas and how to avoid them by hiring an attorney early.

Intellectual Property

In addition to helping protect intellectual property by trademark, copyright and patent – after the property is well developed — attorneys should also get involved early, to draft or review non-disclosure agreements and licenses.  For example, when an entrepreneur wants to pitch an idea to a potential investor, before handing over key information about the idea to the investor, he or she should first be sure that the investor can’t legally take and use the idea somewhere else.  That’s the reason for signing a strong non-disclosure agreement. 

However, many standard form non-disclosure agreements used by investors are written to benefit the investors, and not to protect the entrepreneur.  Hiring an attorney early to develop or review non-disclosures or licenses for use can protect the entrepreneur’s idea from poaching even before it matures enough to be trademarked or patented, and can be critical to the future success of the idea.

Contract Review

It’s common for an entrepreneur to negotiate with an investor or potential partner, agree to “a deal”, and only then hire an attorney to document the terms in a written contract.  Unfortunately, this is usually the most expensive way to document a deal.  Why?  Primarily because if entrepreneur didn’t consult an attorney in advance, then the agreed deal points usually don’t include key terms (for example, termination, insurance, indemnification, intellectual property ownership, dispute resolution).  In addition a good lawyer can use his experience to help you structure the deal to your advantage and the general structure of the transaction is often negotiated up-front. If key terms weren’t part of the original deal, then the attorney has to send the parties back to the negotiating table to hammer out those terms.  Or, worse, the parties may have – often inadvertently — agreed to terms that are very negative to one side or the other.  If the attorney attempts to correct this imbalance in the written contract, things can get sticky (and expensive).

A much faster, cheaper and more effective method of using attorneys to document important deals is to consult your attorney early on.  Ideally, prepare for the contract negotiations using an example of a contract favorable to your situation, or work with the attorney on a list of key deal points.  That way those important terms are part of the original deal. 

Another common mistake entrepreneurs make is to use – or even draft and sign — a contract based on a sample they found online, without getting legal review first.  Often the parties don’t fully understand what the contract says or the contract is intended for a different type of transaction.  It may be lopsided in favor of one side or the other.  It may not accurately reflect the deal.  It may not even accurately name the parties!  In these cases, an attorney usually gets involved later, when problems occur, only to find that the contract isn’t going to help solve those problems and the language of the contract has in fact created additional problems that will be expensive to correct.

Human Resources

Hiring the right employees in the beginning can be the most important decision an entrepreneur has to make.  Human resources problems are often at the root of the downfall of promising new ventures.  Entrepreneurs in a position to hire are usually in that position because things are going great, moving quickly, and suddenly they’re too busy to sleep, eat, much less consult with a lawyer.  But failure to consult a lawyer can really hurt if a key employee later leaves with intellectual property, client lists, or expensive technology, and then begins to compete against you.

Ideally entrepreneurs should hire attorneys to draft or review non-disclosure agreements, non-compete agreements and document ownership of inventions and other intellectual property, especially for key employees – and most early hires are key employees.  A common mistake entrepreneurs make in this area is copying a form – say, a non-compete agreement – only to find out when later trying to enforce it that it doesn’t actually conform to applicable Colorado law. 

Another common mistake is waiting until AFTER hiring the employee to consult an attorney to draft or review those documents.  In many cases, agreements with employees like non-competes and assignment of intellectual property are not enforceable if signed after hiring.  Consulting an attorney before hiring ensures you’ve got the right documents ready before the employment offer is made and accepted.

If you’d like to consult an attorney early, please contact our Business Law Group partner, David A. Closson at [email protected].

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