Lessons I Learned Today 6/22/09 – “Overlawyered” Entrepreneurs

This is a digest and recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.

*Generic NDAs: Overlawyered and Overprescribed by Chadwick C. Busk 

*The premise for this post is that Nondisclosure Agreements (“NDAs”) are overprescribed and overlawyered. Just as doctors have overprescribed antibiotics, resulting in a degraded efficacy to cure disease, lawyers have prepared too many generic NDAs, resulting in a reduced ability to protect specific and legitimate confidential information of their clients.”

 “If, as a business person, you really need an NDA to pursue a relationship with a new vendor or customer, consider telling your lawyer to first, make the NDA concentrate on specific information to safeguard and be limited in duration; second, eliminate the more general exceptions to the non-disclosure obligation; and third, spell out how damages will be calculated in the event of the recipient’s breach. You don’t need a large dose of NDA antibiotics when a legal aspirin in the form of a focused NDA will suffice.” 

“Taking these steps will increase the value of NDAs to your organization, and the recipients of your confidential business information will better understand their nondisclosure obligations.”

 

*Employee Agreements Update by Christopher W. Olmsted 

“Common noncompetition agreement provision now invalid. In many states, employers may restrict former employees’ activity with employee contract provisions called “covenants not to compete” or “noncompetition agreements.”

“When an employee leaves your company, chances are that he or she will go to work for a competitor. It is certainly unsettling to know that someone with inside knowledge of your company has fallen into the hands of a rival. Worse yet, that employee may seek to call on your clients or recruit your key employees.”

Take Away Tips:

* Non-compete agreements are enforceable in California only in limited circumstances.

* Any agreements restricting solicitation of business or the right to work for competitors ought to be reviewed and redrafted in light of the Edwards decision.

* Trade secret and confidentiality agreements may be used to prevent employees from taking company information to competitors.

* Conflict of interest policies may validly prevent employees from competing with the company during the term of employment (but not after termination).

* Financial incentives to stay with the company, and financial disincentives for leaving the company (loss of bonuses, tuition reimbursements, etc), are generally valid. Courts have imposed a few restrictions on the disincentives.

 

*Hiring An Attorney – The Five Questions You Should Always Ask by Herbert Chestnut

“Choosing an attorney can be a difficult and sometimes random process. Ironically, in most cases, whether you have selected a good attorney will only be determined when the case is over. Armed with these five questions, you will be able to gain some insight into the type of attorney that you are hiring.”

“The five questions below will not insure that your attorney is competent or the best lawyer for your case.”

  1. How many years of experience do you have?
  2. What percentage of your practice is in this area of the law?
  3. Do you have malpractice insurance?
  4. When I call your office, will I talk to your or one of your staff?
  5. Will you try my case yourself?

 

*Protect Your Intellectual Property Assets – People, Processes & Products by Bambi Faivre Walters

“For the most part, intellectual property includes the people, processes and products that make your business successful over your competition. From a legal perspective, the term “intellectual property” includes patent, trademark, copyright, and trade secret rights.”

“Why is intellectual property important? Piracy, counterfeiting and the theft of intellectual property costs United States businesses more than $250 billion and 750,000 jobs per year. For many businesses, particularly small and mid-sized businesses, they are overwhelmed in the day-to-day operations and oftentimes find themselves at a disadvantage because they lack resources and expertise to familiarize themselves with protecting their intellectual property.”

The article outlines some basics of copyright, patent, trade secret, and trademark law.

 

*What is Due Diligence? by Alex Bomberg

“Alex Bomberg of International Intelligence Limited reveals how firms should guard against their companies falling foul of future litigation via straight forward basic due diligence.”

“In any industry today more than any other time, due diligence must play a vital roll as part of any company’s housekeeping policy, it should be employed at the initial stages of any joint venture and agent selection.”

Due diligence is best described as: “The process of systematically evaluating information, to identify risks and issues relating to a proposed transaction, i.e. to verify that information is what it is proposed to be.”

“Due diligence must in every case be measured, reasonable investigation into a company, group of companies or individuals to obtain intelligence which allows you to make an informed decision based on what you have discovered, without being totally reliant on it.”

Due diligence can be split down in to sections:

  • Company information – director’s names, formation and ownership details
  • Financial information – current turnover and past returns
  • Legal history – judgments past, present or pending
  • Political risk indication – country and region

“Prior to any business relationship, basic information should be requested in a formal document drawn up as part of either a non-disclosure agreement (NDA) or as a stand-alone document. Gathering copies of documentation and basic information will act as basis, the start of a lengthy process that will culminate in founded decision.”

A formal request should be made for the following

  • Names, addresses and dates and places of birth of all company directors
  • Past employment of directors
  • Names, addresses and dates and places of birth of all company shareholders (non-listed companies)
  • Company formation documentation
  • Company structure
  • Company insurance documentation
  • Office locations and registered head office

 

*What New Artists and Musicians Can Do To Keep From Being Taken Advantage Of by R. Sebastian Gibson

“The author warns new musicians and artists in this article that signing a bad contract can end your career before it’s begun.”

“There is probably no other profession than the music business where so many people will try to take advantage of you when you are starting out as an artist or musician if you don’t have a lawyer. When you are just starting out, the entertainment industry sees you as someone whom they can take advantage of.”

“Music contracts are notoriously long, complicated and almost undecipherable to all but a music lawyer. Thirty page contracts are nothing unusual in this business. And there are so many contracts you will be faced with as a musician. Sign the wrong contract and you can be married to a bad agent, promoter, manager, distribution deal, publishing deal or record company and have your career over before it ever began.”

“Besides the issues you will face with copyrighting your music and trademarking your band name and logo, if you have one, there are management contracts, recording contracts, publishing contracts, agent contracts, distribution deals, licensing contracts, promotion deals, festival and concert contracts, producer agreements and that doesn’t even get into the complex issues contained in many of these agreements.”

“A music lawyer must have knowledge of synchronization rights, digital rights, peer to peer file swapping, sampling, mechanical licenses, copyright infringement, publishing, advertising law, immigration, employment law, negotiation, ring tones, and have a good understanding of how music is made from mixing to mastering, from the roles of the producer to the needs of the musicians.”

 

*A Business Guide to Making Money In This Tough Economy by R. Sebastian Gibson

“The author gives his advice as to where businesses and creative persons can make money in this difficult economy and recommends trying to have an invention or an improvement over an existing invention patented. The author also provides some valuable advice of business ventures to stay away from.”

 

*A Start-up Businesses Guide to Choosing the Right Form of Entity (S-Corp, LLC or Sole-Proprietor) by Jeffrey W. Weaver

“It is impossible to make an informed decision without understanding the basic characteristics of the various kinds of business organizations established and recognized by state and Federal laws.”

“The ability of your business to raise and solicit funds, avoid unnecessary taxation, and generally operate in an efficient and manageable fashion depends upon what form of entity you choose to organize.”

The article gives the reader quite a bit of information with which to make the decisions to organize as a proprietorship, corporation, or LLC.

 

*Business Ideas For Entrepreneurs Article

“Imagine yourself being the boss. You control the business. Moreover, you own the business! In fact it is everybody’s dream to be the owner of the business and to be your own boss! A lot of American people do not want to be lorded over by somebody. And throughout the crowd of college students, being one great entrepreneur is one of their wildest dreams ever.”

 

What I Think

I think the articles posted on this date present a nice set of legal issues many entrepreneurs face from time to time. Perhaps the first issue relates to the exact point in time, or circumstances under which, an entrepreneur should seek the counsel of an attorney. Unfortunately, this question is asked by many entrepreneurs, retrospectively.

I often find entrepreneurs are pretty far down the road when they come to me for start-up legal advice. Periodically, I find they have already put their innovation at risk by disclosing it to a wide variety of sources without the benefit of a non-disclosure agreement or non-competition agreement, let alone a strategy to protect the most valuable asset of their prospective business.

As Chadwick C. Busk points out in his article, Generic NDAs: Overlawyered and Overprescribed, there is some “art” to drafting and using these agreements. Clearly, there are thousands of these agreements floating around the Internet, which entrepreneurs can access for free or a modest charge. Likewise, they can attempt to “economize” by using these generic templates for their own, more specific circumstances.

Unfortunately, entrepreneurs often do a great disservice to their new business by dabbling in areas where they have no experience or education. Part of being a successful entrepreneur is surrounding yourself with people who are smarter or more experienced than you. In some cases, you will want to do whatever it takes to hire these people. In others, it can be relatively economical to work up your own documentation and have a lawyer review it, to see if there are deficiencies. Such services are often relatively inexpensive, since the attorney is merely reviewing or editing, rather than creating something from scratch.

Herbert Chestnut’s article, Hiring An Attorney – The Five Questions You Should Always Ask, gives some good, basic pointers and threshold questions to be asked of candidates to handle legal portions of the start-up entrepreneur’s enterprise framework. Another early-stage issue for an attorney, and perhaps an accountant, is the legal form of the new entity. The various options of sole proprietorship, partnership, “C” and “S” corporation, limited liability company, etc., can certainly be confusing for the average start-up entrepreneur. An incorrect decision at this point can lead to substantial personal and company tax and accounting issues, squandering the entrepreneur’s time and money. This error is something most start-ups can ill afford, and particularly so these days.

Much of my legal practice revolves around entrepreneurs involved in buying and selling a business. In many cases, the entrepreneur is seasoned and educated as to the important points of the flow of the deal and logistics. Often they are well enough versed in what lawyers and accountants call “due diligence,” that they can handle some or all of this themselves. Sometimes, however, they simply don’t know what they don’t know.

What kind of a military strategist would call in reserves or special forces after the battle had ended? The time entrepreneurs need the experts is on the front end, rather than in the middle or end. Procrastination on such things is not the friend of the entrepreneur.

 

 

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If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.

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Posted in Applied Entrepreneurship, Business interruption, crisis, etc., Business life cycle, Buying a business, Family business issues, Growing a business, Innovation, Planning for a business
2 comments on “Lessons I Learned Today 6/22/09 – “Overlawyered” Entrepreneurs
  1. Superb website you have here but I was wondering if you knew of any forums that cover the same topics
    discussed here? I’d really love to be a part of community where I can get advice from other knowledgeable people that share the same interest. If you have any suggestions, please let me know. Thanks a lot!

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