Legal Tips for Lean and Agile Emerging Companies

April 2014

By: John A. Leonard

  1. Limit Your Liability Now.  Business Models may come and go, but your liability starts with your first day and can stay with your forever unless you act to prevent personal liability.  A typical first step is to form a limited liability company or corporation.  An LLC or corporation, if run correctly, will shield owners, officers and board members from personal liability.  If you form an entity, be sure to do all business in the name of the entity, rather than your individual name.  Get tax advice on how your entity will be taxed.
  2. Use Lean Techniques to Preserve Value for Founders.  Preserve value and reduce risk by implementing lean and agile techniques.  Raising money for an unproven business plan means more documents and greater risk – resulting in higher legal costs and greater dilution to owners.  Owners who develop and test Business Models before raising significant amounts of capital can keep more of their company.
  3. Capture the Value of Important Iterations and Pivots.  Iterations and pivots are the result of validation testing.  Whether you are validating Customer Discovery or a Business Model, there are multiple pieces of valuable data and intellectual property that can be preserved and protected.  Some data may have little or no future value (e.g. A/B testing on page layouts).  Some data may go to the core of your Business Model or intellectual property.  Before collecting important data, ensure you can use and own important suggestions.  On-line suggestions should only be submitted after a user has agreed to terms of use which transfer suggestions to the company.
  4. Consider the Impact of Agile Development.  Frequent and rapid changes call into question whether a emerging company should enter into long term or exclusive agreements early in the validation process.  Business partners, particularly software developers, may have certain expertise which may not apply to later iterations or pivots.  Test and validate prior to entering into long term agreements with Key Partners.
  5. Disclose the Agile Process to Investors.  Under securities laws, you cannot make a material misstatement of fact or omission of fact in connection with the offer or sale of securities.  When raising capital, be sure to disclose the process of iterations and pivots.  Investors may have heard these terms, but may not appreciate how agile development differs from waterfall development.  A subscription agreement with risk factors and a short summary of how you will use the investors’ money is an important step to protect your company (and yourself!).
  6. Have an Equity Plan.  There are two important issues.  First, as the company iterates and pivots in search of a viable Business Model, skill sets will become more or less important.  The people that start a company may not be the same people who are needed to run a viable business mode.  Second, the tax and securities aspects of issuing equity are huge.  Get advice before you promise equity to anybody and learn how and when to use options and restricted stock to minimize taxes.
  7. Pick and Protect a Trademark Early.  Not all trademarks are available.  The shorthand test for infringement is:  “Likelihood of confusion in the same stream of commerce based on sight, sound or meaning.”  Be sure to Google a mark to see if there are existing uses of a confusingly similar mark and check the federal trademark database.  Try to pick a “strong” mark and protect it with federal registration.  Click this link as a guide to strong marks.
  8. Hire People Correctly.  Common costly mistakes include misclassifying independent contractors who are really employees; “deferring” compensation instead of structuring compensation as minimum wage with a possibility of a wage increase in the future; and hiring people who violate pending non-competition agreements or non-solicitation agreements.
  9. Protect Your IP.  All intellectual property originates as a trade secret.  From there, you can choose to migrate it to a registered trademark, copyright or patent.  Employees, independent contractors and anyone else who comes into contact with your IP creation or protection should transfer IP to the company and keep the IP secret pursuant to a technology transfer and non-disclosure agreement.
  10. “Deconstruct” User Stories and Protect Value.  Agile development is based on validated User Stories.  Every User Story consists of the following elements: Hypothesis + Positive Testing Data with Actionable Metrics = Validated User Story.  Each User Story is implemented in one or more iterations.  Each element may be the basis of trade secret, copyright, trademark or patent protection.  Initially, treat all elements as a trade secret and migrate important elements to registered copyrights, trademarks or patents.

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2014 Fairfield and Woods, P.C.,ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:

John A. Leonard