Legalities, if not handled correctly, can trip up any small business, but several pitfalls are particularly dangerous for tech startups trying to ink deals with customers, partners, and investors.
That's according to Jason Boyarski and David Fritz, partners in the New York City law firm Boyarski Fritz LLP, who specialize in brokering deals involving entertainment, media, personalities, and technology. They say if you don't want a deal to fall apart you should avoid these common mistakes.
1. Underestimate the costs of delivering your product.
Good ideas are one thing but bringing them come to life is quite another. In addition to the upfront costs involved in building a product or service, entrepreneurs often fail to consider the ongoing costs later down the road.
"Where that translates onto the legal side is that you often have an entrepreneur bring a potential investor to the table... a little too early," says Fritz.
2. Create an overly rich feature set.
Fritz points out that Instagram is a pretty simple app that's wildly successful and worth a fortune. Similarly, when you keep features uncomplicated and focus on what's most important your business benefits financially and legally.
3. Fail to clearly communicate the scope of a licensing agreement.
Getting intellectual property into the hands of users is critical for tech startups but you'll have problems if all parties involved don't completely understand the scope of the rights being granted. For example, since technology can be outdated or standardized someone could assume they're getting something that they aren't if an agreement is not clearly defined.
"And so our job as the lawyers and dealmakers... oftentimes we need to work very closely with our tech company clients to assure we understand their technology so then we can accurately convey what the third party is getting in the agreement," Boyarski says. Create presentations or fact sheets--whatever you need to do to be very explicit about what your partners are getting.
4. Operate in isolation.
Input from seasoned veterans can help deals get done so it's imperative to have a great board of advisers--people from the industry in which you're operating as well as those from outside it. They should also be actively involved.
"It's not about just putting somebody's name in a brand presentation; it's actually having the ability to tap the resources of that adviser whether it's running an idea by them by phone or sending them presentations for review," Fritz says.
Legally speaking, it's important to spell out whether these people will be compensated, what obligation they have to the company, and if they require director and officer insurance which protects them in the event of a claim against the company.
5. Hire a lawyer with no hands-on business experience.
In addition to being attorneys, Boyarski and Fritz both have non-law business experience--Boyarski is a partner in a marketing agency and former GM and senior VP of Warner/Chappell Music. Fritz has invested in and actively helped manage toy company Myachi and has also owned a record label called Medalist Entertainment.
"When you have a lawyer that has had the experiences of standing in the shoes of the client... they are able to say 'Wait a second, here's what you're going to face down the road because it happened to me,'" says Boyarski.
Don't know where to find a lawyer with business savvy? Ask your great board of advisers.
Fledgling entrepreneurs can be tempted to cut corners when it comes to hiring vendors, consultants, and lawyers but doing so can cause problems down the road.
"Unraveling mistakes is a lot more difficult and oftentimes more expensive than structuring something correctly from the outset," Boyarski says.