5 Legal Mistakes to Avoid in Your Business | Ep. 66 | Business Podcast
Summary
Paying a lawyer can be expensive and it pains me when I see the bill. What’s more painful?
Making legal mistakes that cost 10x and even more importantly suck up your time and set your business back from making progress.
I lay out 5 legal mistakes I’ve learned over my entrepreneur career that you want to avoid at all costs.
Listen to this episode and see if you’re on the road to making any of them.
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Hello, friends. Welcome to the show. Today we’re gonna talk about five legal traps that you want to avoid to protect the company that you spent so much time and effort to build. Waste a second. Let’s get to these these air important. There’s one thing that can screw up a company. It’s legal trouble, and ah, lot of it can be avoided. The challenge is, is that we as entrepreneurs, are building our companies so fast and with so much passion that we forget, just stick by the rules. I have this challenge all the time. I know over 20 plus years, and I’ve made I probably every mistake in the book, I hope maybe there’s more. I don’t want to discover him, but the fact is, is that your company has a legal structure and there’s laws that we’ve got to follow and that we want to use to protect the asset that we’ve built not only for ourselves but for the entire team. So I want to go over five legal traps that business owner should avoid.
Number one. Make sure that you own all of the copyright and I p for your company. Now what do I mean by that. If you in the beginning hired contractors to do work for you, you want to make sure that that is a work for hire. Now, I’m gonna stop right here and give the disclaimer. I’m outlining these for you from my experience, but you should always consult your lawyer. And I know lawyers can be expensive. But what will beam or expensive is you losing your company or going out of business or losing a big asset because you didn’t spend some money to protect it. So always consult your lawyer. I am not a lawyer.
But these are my experiences that I’ve had and I’m going to share with you because I don’t want you to fall into this trap. So talking about copyright and I p that you have built for yourself, you want to make sure it’s work for hire, which means that if you’re contracting people because that means that you own that I pop and that you have the rights to it and you want to make sure in your contracts that you have that spelled out that this is a work for hire and if it’s verbal, then when you pay the invoice, whatever that is.
Have some sort of contract that you’ve consulted with your lawyer about that you can use when you use a consultant to do work, even if it’s graphics, whatever that is, make sure that you own it and then in your for all of your employees, you want to make sure that there’s a clause in an agreement that they signed, that all the work that they do that you pay them for is property of the company. And there’s some general paragraphs and pieces that you can put into this document. It’s not super complicated, but you want your lawyer to put that in there, and you want to make sure that everybody in your company signs that so that you make sure the rights that you have the rights for that because that can come back to bite you. Someone can say, Well, I own the rights to that.
You need to pay me a licensing fee or even worse, you go to sell your company and you find out that you actually you at the company don’t own some of that I p and then you have to go back and get a release, and you can imagine the discussion that you’re gonna have with a person saying, I need you, Thio Turnover. This I p. Because we’re about to sell the company If you are in that person’s shoes, you’d say, Huh? Well, how much am I going to get for that? And you can. Sometimes it can go well.
Sometimes you can imagine where that goes, so make sure that you have all of the I P writes. Whether using a contractor and or some clause in an agreement with your employees. Number two Put all of your equity agreements in writing. I could do ah whole show. I could do a whole course on founder Equity Owner Equity and how you should divide that up or or at a minimum, how you should document it. But here’s what I found in my own experiences and with all of my students and all of my colleagues that in the Entrepreneur Network that I have with a lot of my friends and and we’ve all made this mistake, it’s it’s that we don’t define who owns what up front, and there’s different ways to do this.
There’s a great book out there called Slicing the Pie. Forget who it’s by, but if you Google, you could find it. And there’s a pdf, I think download for free online that you could get. But this guy has a formula that you could use. You don’t have to use the exact formula, but, ah, formula you could use to figure out who gets what in the company. Quote unquote fairly, because what happens is is we come together with somebody. It could be our best friend and we build this thing and we get a year into it two years into it, sometimes unfortunately, and then there’s this discussion. Well, how much do you own? How much do I and what I did this And it is very hard to have a discussion about that. When when you’re gonna be emotional, it’s just not gonna work, and it’s gonna turn into a fight, and I forget the statistics.
But there’s like a crazy statistics in the top five reasons why companies fail At some level, it’s because of equity fights, So it is a really hard discussion, I tell you, it’s hard for me toe have because it’s uncomfortable because you’re valuing some somebody’s efforts that you clearly value, but now you’ve got to put a number on it as it relates to this. Who owns what piece of the 100% pie. But you have absolutely got to get this in writing. It will be very uncomfortable. You will avoid it, but you need to address it before you get too far. And the other thing that I would add to that getting your equity portions in writing is vest. Do not give.
Neither of you should get your equity upfront, meaning you should earn that over time. And there’s a lot of different ways to do it, depending on your legal structure. If your C Corp s Corp and Elsie Sole sole proprietorship, there’s a lot of different ways to do that. But what I mean by that is you don’t want to say Okay, you own 40%. I own 60% and all the shares are vested and you have it. Here’s why. Because in two years maybe you decide that you’re not going to do this. You walk away with 60% the company you’re like, Oh, you go figure it out. The person who has 40 says, Well, I’m not working for 40% and you say, Well, I’m not giving up my 60%. I just spent X amount of years, and you can imagine where that goes or the person with 40% walks out the door. And now what you gonna do?
Who you gonna give mawr equity to to to come in and fill so you want people to earn it? And there’s a lot of different ways to do that. And you want to really understand that with your account and and your lawyer because there’s tax consequences to that as well. The difference between short term and long term capital gains is significant, and there’s a bunch of rules on stock options now. From the early dot com days, things got a little wacky, and I wanna make sure that you have that at least a strategy that you’re going to address that. So number two is put your equity in writing Number three. Don’t sign standard contracts, so don’t just pull something off the shelf.
Don’t go cut and paste six paragraphs into something. There is really important gig that you’re getting together or relationship or licensing and candidly even the little ones. Just get your lawyer to help you build some contract that catch the result that you’re looking for. What you want to communicate to lawyers is here’s the result that I want and let them back filled the language. Standard contracts will get you into trouble. Sometimes it could just be a simple clause. It could be three words in the legal world that change everything, and you just don’t want to pull something off the shelf that’s going to come and bite you later.
And like I said, the surprise comes when you are either selling your own equity in the company or you’re selling the company or you’re selling a piece of the asset or even licensing a piece of the asset or or even better, not better or worse, but different. You’re trying Thio, Insure yourself against liability and the insurance company asked for the contract and says, Well, we can ensure you on this. Look at this. That’s going to be a terrible situation and going back to re negotiate deals. It’s not impossible, but I will tell you it’s really hard. So don’t sign standard contracts. Have your lawyer draft up something. They have templates for results that you’re looking for.
So in today’s age, it shouldn’t be this exorbitant amount from your attorney. But that investment will go a long way. Number four. Make sure if you have a partner that it is spelled out in your operating agreement. How personal problems that someone may have, like a divorce do not implicate or affect the company because the person that owns ownership in a company when they go through a divorce becomes an asset that they have, and that could be contentious. And you wanna have language in your agreement that protects against that. I’m not gonna go too deeply into this because this can get complicated.
But I will tell you to companies ago in agreement, we had some lawyers, and they did a remarkable job at this. And it’s not just a divorce, it could be a death. What happens when the founder dies and then the quote unquote estate gets it. And now people think there’s a windfall fortune, and now all of a sudden you’ve got some interesting people showing up to your board meeting, or even different is they have controlling interest. How is that going toe work. Put something in place that addresses all of these scenarios. And I can tell you in the early years, as I look back some of the deals that we did, even in financings they didn’t allow for that. Now we were younger.
When I started, my first company was in my twenties, so I I don’t know that that was as much of a concern, but it really should have people in their twenties, unfortunately, die and get divorced, certainly, or have some other legal trouble. I heard, Ah, horrible story about a actually a student whose partner got into debt trouble. And they the stock in the company became a point of interest because it was something that could be used to pay off this individual’s debt. And now you want to be able to address that.
You may put a clause in there. It says, Hey, look, this is not subject to X y Z. I do not know all of the ins and outs of how to architect that, but lawyers dio this is not really uncommon, and it’s why we pay the lawyers the amount of money that we dio to make sure that we are protected against this stuff. So make sure that your company is protected against all of the co founders. Personal problems and number five. Avoid mingling your assets with the company meaning, ah, lot of founders and co founders, and it’s just the speed of which happening will start to co mingle accounting, meaning. Maybe they pay their mortgage out of their company.
And as soon as you start doing this in the legal world, it has effects, meaning you’re now treating your company as your personal bank account. And that may mean that now everything is wide open, meaning you don’t get the protection of having a corporation, which separates your personal assets from your company assets. So make sure that there it’s not a gray line. It’s a very defined line between what you personally own and what your company owns. And if you can get a company credit card. If you can’t do that and you’re going to use your personal card for a company expenses, make sure that your reimbursing yourself and make sure that that’s documented that’s not uncommon.
Even employees will get reimbursed and whatnot. But be be diligent about doing this because if you commingle your assets and something happens with your company and they can prove that however they can do that, they would prove it because you’ve co mingled your personal assets and you’re paying your personal credit card out of your company account than it could open you up to exposure that you never dreamed of. And you certainly don’t want toe happen. So make sure that you’re working with your accountant on that so that that doesn’t happen.
So that’s the five legal traps that you want to avoid. They’re not super easy, but they are really important, and we’ll keep you out of trouble. And thank you friends for tuning into the show. If you enjoyed this episode, please rate review. We want to hear from you and subscribe so you don’t miss any of our weekly episodes until the next time. Remember, you are just one business plan away. I’m rooting for your success. We’ll see you sin
