There is the famous scene in “The Social Network” where Eduardo Sevarin meets with the company attorney to sign some documents. They were just “standard stuff”. Little did he know he was giving up the farm.
Attorneys can get expensive but they are worth it in the long run. Legal documents are complicated by design. You need someone who speaks the language.
Blogginggazelle is published daily by Shawn Carson
There are two lessons here. One is that VC’s consider patent protection a check box. But a patent doesn’t ensure commercial success by any stretch. What’s more is that it won’t keep anyone from stealing your idea if they really want to. This is why Samsung and Apple are suing each other and they have a lot more money than you do. Lawsuits are very expensive and out of reach unless you’re Apple or Samsung. This doesn’t mean you shouldn’t protect your IP. Just understand that a patent is not a key to your product’s success in the market.
The second lesson is this. Sometimes people are introduced to us and want to talk about their business idea. Immediately after the business cards are exchanged, out come the NDA’s (non-discloure agreements). Well-meaning business attorneys encourage this. But this is a bad move. It shows a level of immaturity when it comes to pitching your idea. And the bottom line is, business advisors, incubators, mentors, investors, bankers and pretty much anyone else who’s out there to help you – will not sign them.
As a startup, you need more help than you can imagine. In order to acquire this help, you need to pitch your company… A Lot! The secret stuff you can keep secret; like how you make your ‘secret sauce’ or who your investors are. What business advisors are interested in is your business model and evidence your product works and that people will buy it. There should be nothing confidential about this. When it’s time to reveal your financial details or your design specs to a design partner, of course you want the protection of a good non-disclosure agreement.
Patents are a good thing and there is a time and a place for NDA’s but neither will protect you from competition. And you still have to figure out how to make your stuff, sell your stuff and get paid.
Blogging Gazelle is published daily by Shawn Carson
Early in the fundraising process, many entrepreneurs avail themselves of the traditional 3F’s (friends, family and fools) to raise that early capital. While this is a legitimate and valid process, it does not mean that it shouldn’t be treated as a formal legal arrangement.
Sometimes, entrepreneurs are highly successful in raising capital from a number of close acquaintances. This gets to be a problem when you start to raise equity based capital from angels or venture capitalists. Rather than dealing with a single owner, there are in fact many individual owners who may all have different assumptions and expectations. While some investors will give you enough time to clean up your cap table, it can be enough for other investors to pass altogether. The time to keep this all clean is the first time you take on capital from a friend or family member. You need to treat the transaction like any other legal contract spelling out terms and rights.
Legal issues are tricky. Every term, every clause has ramifications and usually is made up of latin words you won’t understand.
All attorneys are not created equal. You wife’s brother who is a trial lawyer, may not be the best one to negotiate your license agreement. Negotiating a term sheet with a VC is very much a specialty.
It’s expensive, it can be frustrating and it’s rarely fun but find yourself a good business attorney who knows the issues of small business.
You may just avoid seven years of bad luck.