Navigating the Legal stuff in Startups

They tell you that you need to protect everything in your company before you start selling it in order to keep what you owe. Many startups though are ignoring the legal hurdles and just trying to get their name out there. Going the way of most social media personalities, startups just want to get some public recognition before dealing with any of the legal issues and even if they wanted to, who would want to work with them anyways?

The standard idea in any startup is to protect anything you have created that way no one will steal it from you. The simple action would be to copyright, trademark, and protect anything you created so that when you start to look for financing you can have who ever you talk with sign a non-disclosure agreement (N.D.A.) ensuring that the other side you are talking with doesn’t go behind your back and try and let one of their companies know about your idea and steal it. This would make smart sense in a world where ideas are a dime a dozen and anyone with a super fast internet connection could take another person’s idea from half-way around the world and make it in their little town or city to make a few bucks off of it. That happens a lot unfortunately so it would only make sense that you would want to get legal protection for anything you do for your company.

The Way of the Dinosaurs
Legally protecting your ideas is a very smart move on the founder’s part, especially when it comes to very complicated areas of protection that deal with technology, biology, and science. But how do venture capitalist’s, the guys who dish out loads of cash for startups, feel about non-disclosure agreements? In short, they don’t like them. Infact majority of startups are either turned away or refuse to sign any N.D.A.s because it slows down their ability to snag the next best thing. From a VC’s point of view this is very crucial in a market that fluctuates very rapidly. After signing the agreement, the VC firm has to wait for a week while all the legal work is dealt with leaving the market open for any other competitor to enter in and capitalize while the VC firm is still left waiting.

At the same time N.D.A.s are very hard to prove in court that any of your ideas were stolen. A founder of a startup would need to provide a verified paper trail of some sort to show that their idea, even after a N.D.A. was signed, that the person, or firm, took the idea with the intention of profiting off of it.  This could turn into a very difficult and costly situation to be in, especially for someone who is still looking for money to get their idea off the ground.

Take it Slow
If you are starting a company with no funding and you are thinking that your idea is good enough that anyone will want to throw money at you then it might be a good idea to step back and look at exactly what you are doing. Everyone believes they have the next billion dollar idea “if only I could get my hands on a little seed money first.” Those always seem to be the famous words of any startup. The issue though is that if the idea is so great then why do you need money from a venture capital firm (this is a question all VCs ask in any interview)? The truth is your idea is not that great and it’s not worth much on it’s own. So where does the value of an idea come from and what makes a venture capital firm jump at an idea?

1. VC Firms Look at Effort
Mark Zuckerberg would probably not be anywhere today if he went to VC firms first and started to pitch his idea without actually having produced anything. He could go the way that most startups do and say things like, “I need hundred thousand to hire a team of developers; need another hundred thousand to buy equipment, and additional five hundred thousand for office space.” Remember, nothing has been created yet, he’s just asking for money on an idea that he thinks is great (how many people do you know like that?).

VCs firms invest in startups that have already put in the majority’s work. They want to see work and effort in an idea. Mr. Zuckerberg wasn’t after funding, although he knew he needed it, he was solely focused on making facebook happen, this is why he spent all his time coding the website and building everything he wanted to make it come true. All the hardwork was done and it paid off by the number of students who were signing up daily. This was all the proof needed when VC firms came running after him, instead of the other way around.

Bottom line: If you have put in any work to show that your idea is great, no matter how amazing it looks on paper, don’t bother any VC firms, they will just tell you that you are wasting their time, and to come back when you have a working model or something that shows people want it.

2. Protect Everything (so they don’t have to)
Venture Capitalist’s like it when they do not have to worry about getting legal protect for an idea that is valuable. If you can show that everything you are showing them is already protected then they know that if they decide to fund your idea then they can focus on making sure that all the legal gaps are covered instead of the big stuff. They can market the company knowing that the big stuff has already been protected. This takes the pressure off of them for awhile.

Most startup entrepreneurs also worry that any VC will ask for the details of their idea. The best way to work around that is to slowly reveal your idea in layers and that if they want the details then that can be discussed after an agreement has been signed about funding and protection. You can also ask to record the session that way you have proof of what was discussed and asked in the presentation.

3. Never Walk into any Place that offers you time without doing your homework
Just because some place offers you the time and space to pitch your idea doesn’t mean they will fund your idea right away. For all you know they could be a fly-by-night mom-and-pop operation that is just looking for ideas to steal. They can rent a fancy office in a fancy building for the day, set up shop and have people pitch to them all day, stealing only the ones that sound promising.

In order to avoid getting yourself into one of those situations do your homework on the firm and the people who will be listening to your presentation. Ask for references, what companies they have worked with before, and any other information you can find online. This might be harder now that people think they have a right to be forgotten online by requesting certain information about them be deleted but try your best to find out anything you can.

4. Talk to Anyone Who will Listen (within reason)
The best thing you can do for your business is talk to anyone who will listen to your idea within reason that you do not give away the secret. There are many groups out there who want to hear ideas from promising startups so it’s important to start making the right connections in your industry. What amazes me about the startups I meet is how closed off most of them are in the beginning.

Here is a perfect way of looking at it, the business people who attend the many social functions that go on every night know more people out there about who to connect with than the founder of a company who is shy and avoids large crowds. The employees of that company depend on their founder to be going out there everyday and making contacts who will give money to the company so they can pay the bills, including everyone’s salary.

Attend social entrepreneur and startup functions that are designed for networking. Take advantage by getting your name out there to anyone that is interested in listening to what you are trying to do. You never know who you might run into.

Proceed Carefully
Any startup that focuses on funding probably won’t make it in the long run. Their focus is not on the idea but on the money. Your idea is what should drive your efforts, if you think it works and will make enough money to support your beginning operations then you shouldn’t be focusing on pitching to VC’s all the time. Remember their goal, once they fund you, is to make sure it succeeds, by any means necessary, that includes, but not limited to, replacing you with a new CEO, bringing in their own board members to carry majority voting rights, or less funding then needed. They are not at your mercy so do not think for one second they are working for you once you get funding.

You should always view VC’s as a last resort, end-of-the-line option when it comes to funding. And remember who is doing the knocking, if you are the one knocking on all the doors, you are at no advantage in the situation but if it is the other way around, make sure you follow all the steps otherwise something bad might happen. In the mean time, it doesn’t hurt to carry with you N.D.A.s but don’t be hurt if they turn you down, it just means you need to be extra careful with what you say and what they ask for.

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