How to Run an "Illegal" Start-up
Is your company a scofflaw? Are you sure?
Due to an increasing thicket of state and federal business regulation, you may already be in trouble with the law—and the legal landscape won't be simplifying anytime soon.
This became obvious during the hearings on Capitol Hill over the Stop Online Piracy Act, commentators, entrepreneurs, and venture capitalists voiced one deep concern over and over again: Congress simply does not understand the technology and markets that it is attempting to regulate with SOPA.
This disconnect between lawmakers and technology is not new (witness our privacy laws, the broken patent system, etc.) But today—as we head into an age of crowdsourcing, collaborative consumption, and other new business models that are increasingly disruptive to established markets—we can expect this disconnect to further intensify. The laws simply will not keep up with the technology—and you may very well find that your company's business inadvertently runs afoul of rules and regulations that made more sense in 1992 than in 2012.
As a lawyer, I have a duty to highlight potential risks for my clients. But as an adviser to emerging technology companies for years, I believe that there are substantial rewards out there for entrepreneurs who have the nerve to weather the legal storm and continue pressing forward with their trailblazing ideas. There are a few guiding principles that can help start-ups succeed—and not get in hot water—in uncertain legal environments:
There are countless industries where the applicable laws and regulations are beyond arcane. These are often industries that are ripe for disruption from innovative new technology companies. The mere presence (or even possibility) of a legal challenge to your business does not, by itself, mean that you need to change course. If you're not hurting anyone or stealing from anyone and your intentions are legitimate, then the conversation needs to shift from whether or not you pursue the line of business, to how you continue to push forth in the line of business while managing the legal risks.
Seek out local experts.
The most important step that you can take is to engage expert legal counsel who knows the out-of-touch laws that you must navigate, yet who also understands emerging technology companies and their increased appetite for risk.
As a start-up operating on the cutting edge, you will almost certainly lack crystal clear visibility into whether your business model operates entirely within the rules and regulations. Instead, you have to take a proactive approach. You want to assess the laws and your business as they stand, make the obvious changes, and be geared up to tackle future challenges. It’s really about being equipped with legal counsel "on the ground" who can provide bottom-line guidance now yet be prepared to jump in to handle legal challenges.
When I say "local" experts, I also mean legal counsel who is familiar with the government agencies that enforce these laws. As we've seen with companies such as Uber, a legal issue is never purely a "legal" issue. Other industry and political players are often involved. Disruptive business models decrease revenues for incumbents—and those incumbents (and their political allies) tend to not like that outcome.
You should align yourself with experts who are not only familiar with the letter of the law, but who also know the regulatory scene and its players. You need counsel who knows how the particular regulatory game is played: someone who's been in front of the labor board, who has sat in a mediation with the taxing authority, or who has dealt with countless cease and desist letters.
Rely on analytics, and take a measured approach.
Your legal strategy needs to reflect an informed cost-benefit analysis. There will always be an overly-comprehensive "kitchen sink" approach to provide the maximum level of legal protection possible. This sort of thing will make most lawyers happy…and rich. It involves making sure that no stone is left unturned—that your innovative technology is safe from legal challenges—even from the local authorities in Greenland where you have one user!
For most start-ups, however, there is simply not enough room in the budget to implement an all-encompassing legal strategy all at once. Wise entrepreneurs dig deep into their customer analytics and work with their legal counsel to make a calculated judgment about where to devote legal attention and resources in the short-term.
Take a look at your traction numbers. Where are you most likely to show up on the radar? Develop a strategy to address the most pressing areas of your market now—and come up with a long-term plan to broaden the level of legal protection as your company's legal budget and customer base grows.