This is the last in our series of blog posts and videos (the whole series is here) about how an idea is just that: an idea, and how there are some basic, critical things a high-potential start-up technology company founder must do in order to make any idea worth having and building upon. The fact is, as I have said more colorfully in earlier points, most ideas are not very good. So a founder needs to be sure this idea is worth making it the most important thing in her life for the next months or years.
My final suggestion for the immediate post-idea steps is: Be smart about your contracts.
You will save yourself so much trouble later and avoid so much inefficiency down the road if right from the start you get into a good relationship with the written word, both in terms of papering your own deals and entering into deals with others.
A serial killer was once a cute, innocent baby. Somewhat analogously, a dysfunctional early-stage company was once an embryonic startup that had an opportunity to do everything right.
Nowhere is this more poignant than in the one area of its existence that it really could completely control, and that has to do with business deals large and small being written down, written down well, and understood by all parties.
Suppliers. Customers. Contractors. Employees. Leases. Stock Grants. Joint Ventures.
Vagueness and imprecision are often the core causes of litigation and certainly are a cause for lost time and resources. So I do want to put in a pitch for going that extra mile, even when you are not sure that the company is even going to be there in a month. You should avoid shaking hands or signing you name on deals where timelines aren’t crystal clear, benchmarks of success aren’t quantified, standards of performance aren’t crystal clear.
If the word “material” as in “a material contract” means something with a value of $2000, push through to have the contract say $2000. If you really have to have an app written in one month, be clear about it. Clarity is non-negotiable.
Here are some examples where clarity and discipline on the written word pays off.
- If you have co-founders and you’ve created an LLC, and you don’t have your operating agreement yet, you need to get that written.
I always say that the only reason to have a contract is for when your business deal goes to hell and you need to have something to tell you what to do next. The Operating Agreement is the place where the rules of engagement for you and your founders exist. Based on brewpub discussions, you may think you know how much you own, who has what rights, what happens in a deadlock, who decides what, but …. do you really have something that will stand up when there’s pressure and stress and a new wrench in the works, like one of you wanting to leave?
- Another example of something you need to get systematic about are non-disclosure agreements, or NDAs. Just get everyone who you talk to about your business to sign one, plain and simple. Keep asking people to sign them right up to the point they just outright refuse, which might be the first VC you talk to. What you are doing with your idea is special, and even if your idea is worthless without further action, there’s no reason why you need to tell anyone what your idea is before you have to. Get a good form NDA in place and deploy it with discipline, and scan in your fully signed copies. I urge you not to blow this off.
- If you do someday decide that you are going to protect your IP by keeping it a trade secret, a good consistent practice of collecting NDAs may be the basis on which you can claim it. If you’ve been sloppy, the cat’s out of the bag, which means no trade secret.
- Get a good form Independent Contractor Agreement in place. Two main reasons here: one, it makes it clear who owns the work product, and two, it is part of the process, but not the whole process, of making sure your ICs don’t get called employees by the IRS or DOL – or the state of California.
- Your whiz kid developer wants stock. At that point, resign yourself to the fact that you’re going to be peeling the proverbial onion of legal and business niceties, just go with it. Concepts like Restricted stock, phantom stock, profits interests, vesting, 83b elections—these might be topics you are going to want to get familiar with almost immediately after you decide to make a go of your idea.
When it comes to incentivization of employees and consultants, it’s about money and expectations and getting a piece of the American dream – meaning that imprecision can lead to a very bad day.
I could go on. My point is this: If you are starting a company, so much of it is going to be hard. So much harder than coming up with the idea. So do the easy things right. Get into good habits now so you don’t have to clean up messes later.
If you have any comments or questions about this Ideas series, or on any business law issue, whether its involving a start up or a high potential going concern, please contact Jared or any of our Virginia business lawyers.