In your opinion, what are some of the most important legal issues that affect online businesses and e-commerce based startups?
One of the most important issues for online businesses is to make sure their online contracts are binding. Two common mistakes are neglecting to use click-through contract formation processes and reserving the right to change their online terms at any time without notice to their customers. There have been a number of high-profile cases where companies have been unable to enforce their online terms because of these mistakes.
Another important legal issue involves privacy and data security. On the privacy front, businesses need to be sure to treat users’ information in accordance with their privacy policies, and on the security front, they need to protect the information from theft.
From a legal perspective, what does a small business need to do to get up and running?
In most cases, the legally-required minimum is pretty minimal. Depending on your location and industry, you’ll need a business license and maybe not much else. But prudent business owners will want to protect themselves from unnecessary exposure to liability, so they’ll need to set up a limited liability company or corporation, obtain federal and state tax numbers, open a business bank account, and obtain liability insurance. If the business requires a physical location, there will probably be a lease to negotiate. If the business will have employees, there will be many more complications, including payroll taxes, unemployment insurance, workers compensation, wage and hour laws, discrimination laws, and much, much more.
As online business models become more prominent, does it become more or less difficult to protect intellectual property?
I’m not sure the prevalence of online businesses has made it more or less difficult to protect intellectual property. I’d say that there’s more general awareness of the issues than in times past. Now if your business involves content creation, such as photography, the ease with which content can be copied, shared, and basically stolen could be quite a challenge.
In one of your posts about angel investing, you mention that investors can help to protect themselves by conducting due diligence prior to signing a contract. Is there anything that potential investors commonly overlook when investigating a business?
There’s quite a range in sophistication among people who invest in early-stage businesses. The pros don’t overlook much. Less experienced investors often don’t have a sense of how to look under the hood, but areas that they should focus on are the areas that drive the value of the company as well as areas that endanger that value. If the value is captured in an invention, the patent or other protection should be evaluated. If the value is in being quick to market, then management’s ability to execute quickly should be investigated.
Though not really due diligence, I’ve found that a lot of people don’t understand how dilution works. Sure you might be buying 5% of the company now, but that doesn’t mean that you’ll be a 5% owner for long. Investors need to pay particular attention to ways insiders can pull value out of the company.
Many businesses now accept e-signatures as an acknowledgement of terms and contracts. Is there anything that users need to watch out for when digitally signing a contract?
With the federal ESIGN law and state UETA laws, electronic signatures are now as enforceable as wet-ink signatures in most cases. This is great news because the signing process can be streamlined and simplified. It’s no longer necessary to print out contracts, sign them, and mail them to the other side. You can just sign them electronically.
One thing to watch out for is the fact that emails can now constitute signed written contracts. Email communication is generally less formal than written correspondence. But I’ve seen court cases where people have formed written contracts by exchanging simple emails, and their names at the bottom of their emails are deemed to be their signatures.
Your law firm, Blue Maven Law, LLC, focuses on small business and entrepreneurs. What are some of the things that startups should be aware of before allowing their company to merge or be acquired by another business?
It’s usually a great day for an entrepreneur or small business owner when their company is acquired. When I’m representing sellers, I’m mostly concerned that they get paid what they’re owed and that they don’t retain unnecessary liability after the sale. It’s common these days for sellers to finance at least a part of the purchase price by taking back a promissory note. That’s fine and it might even help a seller get a better price, but they have to realize that their effectively loaning money to the buyer that might never be repaid.
Also, sellers need to make sure that they don’t have unnecessary exposure to the business’s liabilities after the sale. This means having any personal guarantees and the like released at closing as well as negotiating limitations on the buyer’s ability to come after them after the sale.
As a business owner and lawyer who uses social media, is there anything that entrepreneurs should keep in mind when creating profiles for their businesses in terms of protecting both themselves and their customers or clients while online?
Social media is a great way to communicate with large numbers of people and develop referral and business relationships, but it can be the source of problems. The most common problem companies have with social media involves user error, for example, when one of their employees posts something offensive or foolish. It’s important for companies to have good processes and policies around who can post, what they can post, and what sort of review should be required.
In one of your posts, you mention that you enjoy survival shows. What are three things that you think small businesses need to not only survive, but thrive, in a world where startups and self-employed entrepreneurs are becoming more prominent?
I’d say optimism (never, ever, ever give up), talent (execution is key), and revenue (if customers aren’t buying you won’t survive for long).
If you are starting a business with other people, what are some of the precautions you should take to prevent any problems down the road if the business becomes successful?
Without a doubt the most important thing is to come to agreement about equity split, salaries, responsibilities, and the like before getting too far down the road. People often put off nailing down their agreement on these issues because they’re focused on getting their business off the ground. But you’re much more likely to be able to iron things out when there’s a sense of optimism and common purpose during the early days. By the time tension or serious disagreement crops up, it’s too late. And of course the agreements should be documented in an operating agreement or shareholders agreement.
There are various types of funding approaches, such as debt and equity. How do they affect a business?
Debt is generally a good source of funds if it can be obtained at a reasonable interest rate. Debt doesn’t dilute the ownership interests of the business owners, which is a great plus. On the downside, the business has a legal obligation to repay the loan with interest, and the business owners are often required to personally guarantee the obligations. Repayment can drain the company’s resources if the business isn’t as successful as envisioned. Also, the owners’ personal finances could take a hit if personal guarantees are called upon.
Equity can appear to be a cheaper source of funding because the money doesn’t have to be repaid. And on the downside, if the company fails, the owners usually don’t have to make their investors whole. However, equity can be a very expensive source of funds for successful companies. If you sell 5% of your company to an early investor for $5,000 and later sell your company for $5 million, you’ve paid a lot of money for that $5,000.
What are some of the most important legal precautions you should take when considering outside funding?
One critical thing when raising money is to realize that you’re probably selling securities and that you need to be careful to comply with federal and state securities laws. Also, you need to make sure you understand the legal documents. Entrepreneurs have been unpleasantly surprised to learn that they’ve lost their company when investors who have gained control of their board fire them and take back unvested stock. Or when they didn’t understand how dilution affected their ownership interest. Or when they tried to sell the company but couldn’t because an investor had some sort of blocking rights. Or the investors were able to force them to sell their company on terms that weren’t favorable to the entrepreneur.
Because you have worked with so many small businesses and startups, what do you think causes so many to fail?
Basically, business is hard. It can be very rewarding—both financially and in other ways—but it’s rarely a walk in the park. In my experience, almost everything in business is more difficult, takes longer, and is more expensive than one would expect at the outset. That means that projections that seem to be very conservative tend to be overly optimistic. If you think it will take you six months to get your product to break-even but it actually takes 12, you could be in a world of hurt.
Plus, creators of businesses have to have an inner fire that burns even in the face of disappointment and a resiliency that allows them to get up day after day even when things aren’t going as planned. How many of us really have that?
And lastly, since you are a writer as well as a lawyer and a business owner, what is your stance on the Oxford comma?
I’m all for simplicity, but I think it’s a mistake to omit such an important piece of punctuation. It’s a rare instance where using the serial comma would cause confusion, and not nearly as rare where its omission would cause confusion.
Brian Roger’s is an attorney at, and owner of, Blue Maven Law, LLC, a firm designed specifically with business in mind, in St. Louis.