When it comes to talking legal matters most entrepreneurs start to develop a slight nervous twitch. In the midst of launching a start-up, legal contracts, agreements and IP are like a cloud of doom hanging overhead. This is not because they aren’t important – we all know they are. But essentially (for the majority) they represent something we don’t fully understand, and therefore require a lot of head space, and often call on funds we need to spend growing the business. What made David’s presentation so different was his open acceptance of exactly that. Which got the attention of the room.
David’s pragmatic approach was refreshing and helpful. He openly accepts that entrepreneurs are in a difficult position: Option 1 – spend all the budget on legal fees and you may not be able to grow a business that needs protecting; Option 2 – invest in growing a business and in 2 years time lose it because it wasn’t protected. Empathising with this predicament his whole presentation was focused on what start-ups can do themselves in the early days to set themselves up for success legally:
1. Be honest with your partners
In short, there is no point in hiding something that you know will happen in the future i.e. a board member is leaving, and trying to get the contract drawn up based on the current situation. David used an example of a commercial agreement between AWS (scooter manufacturers) and the Spice Girls, who signed the agreement knowing Geri was leaving. They did not lie – but failing to disclose led to substantial damages being paid to AWS.
2. Agree things clearly up front
I think we all know how easy it is to forget to do the due diligence at times. This is usually driven by a desire to keep the momentum going in a new business relationship – whether it be a business partnership or recruitment. Often this desire stops us stepping back and getting clear on the details, playing out the scenarios and agreeing on expectations. Unfortunately it is the unspoken expectations that then leads to relationship breakdown and business failure.
3. Write things down
Another eye-roller… we all know it, but at the time it can be difficult to be rigorous in practise. David points to the case of Levi Roots and the Reggae Reggae sauce recipe to demonstrate how important this little rule is: After finalising the recipe and getting substantial backing a former business associate who had originally been part of Roots’ carnival days came out of the wood work wanting a share. As luck would have it, the courts eventually decided there was no verbal contract – but only after significant costs and time. Had it all been written down, this cost could have been avoided. Verbal contracts are binding – so you may as well get everything in writing and be clear from the start.
4. Give things the eyebrow test
A much less tangible ‘tool’ but the message is clear – if a proposal seems too good to be true or ‘raises an eyebrow’ due to its complexity get good advice and weight up the risks with the potential gains very carefully
5. Defend your business interests reasonably
That all important legal term ‘reasonably’ pops up in this one, but in short it means don’t push your luck with contract terms. For this one David used the example of Wayne Rooney where an 8 year agreement exploited everything he did. In the end, the contract binding Rooney was seen as unreasonable, and was ruled invalid. Whilst this is a high profile example, the principle can come into play with things like restrictive employment agreements. So defend your business – but don’t push it too far.
That was David’s rules of the road for keeping the business on the track from the start. He has done a whole series of articles called Cogs in the Machine dealing with various topics to keep the engine of business running. Have a look at past publications of Entrepreneur Country to read them in full.