Many emerging technology companies make the same business development mistakes time and time again. We know this because we are often hired to deal with the consequences of these mistakes. While these pitfalls may be easy to fall into, emerging from such situations (if possible) may be time-consuming and costly.
Let’s discuss the following 7 common pitfalls and how to avoid them:
- Company / Product Names
- Intellectual Property
- Too Many Business Models
- Giving Away Shares or Stock Options
- Exclusive Rights
- Doing Business Without Proper Agreements
- Dispute Resolution
A few simple measures can help your company safeguard its intellectual property, avoid unnecessary lawsuits, and promote investor and acquirer interest at a favorable company valuation.
Intellectual property (“IP”) refers to patents, copyrights, trademarks, and/or trade secrets.
1. Selecting the wrong names for your company, products, and/or services. One of the first decisions a new company makes is the name to use for the company. Shortly thereafter it is common to select names for products and services to be offered by the company. Often, such names are selected merely from a marketing perspective and the legal consequences are not taken into consideration. If a name chosen turns out to be the same or confusingly similar to another existing name in commercial use (or registered) in any of your company’s target markets, this can result in liability for your company and serious branding and marketing setbacks as a result of having to change the name(s). In light of this, it is strongly recommended that a newly formed company retain the services of a legal professional to both screen and register trademarks in all relevant countries where your company plans to do business.
To keep costs down, a company can often eliminate many names itself by searching for the same or similar names on Internet search engines, at the United States Patent and Trademark Office (www.uspto.gov), or at the European offices for trademarks (www.oami.europa.eu). Finally, it is advisable to select a name that functions on the international market (i.e. something easy to pronounce with letters existing in the English alphabet).
Advised Actions: Your company name and product/service names must be competently screened and registered for the markets within which you plan to do business. Further, all names/marks should use English letters and function well,
linguistically and phonetically, in target markets. Feel free to Contact Us if you would like additional information regarding how we can advise you.
2. Securing all intellectual property (“IP”) rights. Companies are generally founded upon an innovative idea with commercial potential. In order for the idea itself to become a commercial reality, research and development must be carried out to produce a prototype and ultimately a finalized product. Naturally, for the company to be able to fully commercialize the finished products, the company must own (or have rights to exploit) all of the IP subsisting in the products. Two key problems commonly arise, one regarding founders and another regarding work undertaken by consultants. All too often founders of a start-up have developed some essential IP prior to the formation of the company. Additionally, the company may have retained consultants to develop key aspects of the business. In both cases, the IP will belong to the founder and consultant(s) respectively, unless such persons have provided a written IP assignment of such rights to the company. If this has not been done, the consequences can be severe if a dispute arises between the tech company and the founder and/or consultant(s). Further, any open IP issues will undoubtedly undermine your company’s ability to achieve an exit (a.k.a. company sale) or obtain sought after financing as exits and investments require all relevant IP to be sufficiently vested in the target company as a condition of purchase or investment.
Note also that all IP must be registered, as required, in all jurisdictions where your company aims to do business and, furthermore, founders, employees, and consultants should be bound to maintain critical IP information as confidential.
Advised Actions: You must ensure your founder agreements, employment agreements, and consulting agreements include legally enforceable IP assignments / confidentiality undertakings covering all results necessary for the business. Also, ensure you register all IP as necessary to secure your IP rights in all geographic regions of interest for your business. Feel free to Contact Us if you would like additional information.
3. Too Many Business Models. Emerging companies must engage in a constant balancing act—i.e. being attentive to market requirements for products and services but also avoiding a situation where the company’s business lines are at the mercy of customer whims. In order to scale the business (i.e. to develop a refined product/service range as opposed to being perpetually in the business of performing tailored services), a tactical roadmap must be crafted and resources will have to be focused and channeled to ensure the road map is realized. In light of this, when deal opportunities arise requiring your company to depart from its defined business models and roadmap, it is imperative to pause and evaluate whether such deviation is in the best interests of your company’s growth. All too often, companies’ growth potential becomes compromised when precious corporate resources are diluted over a broad range of specialized projects which are problematic to administrate and prevent a scalable business from coalescing.Advised Actions: Work with your team to define not only a specification of what products/services currently exits but also the products/services to be developed in the foreseeable future. Such a roadmap should not be viewed purely from a technical perspective but also from a monetization vantage point. Essentially, how will such developments optimize the company’s revenue generation capabilities without compromising defined corporate values. What is more, policies should be defined for the types of custom projects deemed acceptable (i.e. advancing the roadmap) as opposed to unacceptable (i.e. causing delays and/or compromising the roadmap). Feel free to Contact Us if you would like additional information.
4. Giving away Shares or Stock Options. In an effort to recruit staff and to obtain necessary services during a company’s start-up phase when capital is scarce, companies may elect to offer shares of stock in the company for little or no money. Doing this, without appreciating the full implications thereof, can cause unintended and unwanted commercial, legal, and tax consequences. For instance, failing to value such shares or options sufficiently can undermine the value of subsequent investment opportunities. Further, failure to offer a prospectus or enter into shareholder agreements cancreate legal liabilities in the future or pose challenges to corporate decision-making and if a shareholder decides to sell his/her holding to someone not operative in the company. Finally, grants of stock or stock options often carry a variety of tax implications. If not handled correctly, the aim of incentivizing the stockholders may be frustrated by oppressive tax impositions on the recipients of such rights.
Advised Actions: Be cautious in granting stock or stock options to anyone. If you deem doing so essential, you must retain the services of legal, tax, and financial experts to ensure your corporate objectives will be achieved in connection with such offerings. Feel free to Contact Us if you would like additional information.
5. Granting Exclusive Rights. In a zealous effort to close a deal or enter a foreign market early on, tech companies may be hasty in granting exclusive licensing and/or distribution rights to third parties. Any exclusive rights must be carefully scrutinized and commercially justified. Further, if the commercial justifications (e.g. minimum sales commitments) for such exclusive rights fail to be achieved on an ongoing basis, your company must have the right, at your company’s discretion, to either terminate such rights entirely or convert such exclusive rights (in whole or in part) to non-exclusive rights. Merely converting exclusive rights to non-exclusive rights may be risky given such an approach will preclude your company from being able to grant exclusive rights to another more worthy party for the same region and/or product coverage.Additionally, the word “exclusivity” is frequently used without realizing the word may have varying meanings to different parties. For example, the granting of an exclusive territory may mean the supplier (e.g. your company) will not appoint any other party distribution rights in that territory or it may mean that the supplier itself will refrain from directly doing business with customers in the territory.
Finally, in many countries when an exclusive agent is appointed, implied agency laws in the relevant jurisdiction may frustrate your company’s ability to terminate such exclusive rights regardless of the terms written in the contract.
Advised Actions: Consult with a competent advisor prior to granting any exclusive rights. Feel free to Contact Us if you would like additional information.
6. Doing Business Without Proper Agreements. When resources are scarce, it is all too common for start-ups and emerging companies to find agreements online or to reference other contracts from past business experiences to piece together contracts with counterparties. There are several risks with this strategy. The agreements being referenced may not be authored by lawyers, may relate to different industries and/or markets, may disproportionately favor the other party in your contemplated agreement, may have gaps which will be filled by applicable law, and may, simply put, be of poor quality. The effort to save money and resources up front can have severe legal and financial consequences down the line.Some of the common exposures can relate to contaminated IP—i.e. that the agreement with the customer, partner or supplier in question creates uncertainty regarding which party owns the IP resulting from the relationship. Any such clouds on your company’s IP can destroy investment and exit opportunities. Another common issues may arise in connection with whether or not and to what extent your company may be liable in the event of a default (or alleged default) under the contract. A qualified attorney will be able to isolate the probable risks from the transaction and exclude the assumption of some liabilities while limiting the potential damages for other liabilities. Failure to understand what and how to disclaim a broad range of implied legal liabilities as well as other liabilities inadvertently accepted under a contract can result in significant damages being awarded against your company.
Advised Actions: To keep costs down, we suggest including an attorney into your executive team. Such attorney should have business and legal know-how and should be capable of helping you distill your IP, your products and/or services, as well as your primary anticipated agreements with suppliers, customers, and partners. Further, such attorney should
develop a core legal infrastructure of contracts for your business. A workshop can be a useful method of discussing the agreements and ensuring sales / procurement staff not only understand but agree with the approaches to be taken. Feel free to Contact Us if you would like additional information.
7. Dispute Resolution. The ostensibly simple governing law section in a written agreement can create a host of issues for you if you do not heed a few important points. Firstly, in deciding whether or not to use arbitration or courts to settle disputes—you must ensure that a court or arbitral award, if granted to your company, will actually be enforceable against the counterparty where the counterparty has assets. Secondly, if you are dealing with a counterparty of scale—if you do not include a clause that the losing party shall pay the prevailing party’s attorney’s fees, the counterparty of scale will have a tremendous economic advantage over your company and the party with the most money, as opposed to the party being legally correct, will likely prevail. Finally, in international agreements, it is wise to reject the counterparty’s home court as the venue for dispute resolution as the proximity to and familiarity with such venue will undoubtedly favor the counterparty. Advised Actions: Ensure you have done your homework regarding whether or not a court or arbitral judgment in the venue in question will be effectively enforceable against the counterparty where the counterparty has assets. Further, ensure the venue and governing law does not create any unfair advantages for the counterparty. Feel free to Contact Us if you would like additional information.
Naturally, there are other issues that can adversely affect your company’s emergence as well as business / legal interests. We aim to simplify these complexities and help you navigate your course in a bold and responsible manner. Feel free to Contact Us to learn more about how we can help you.
We wish you the best of luck in seizing the many opportunities awaiting your company on the global marketplace!
*This article is not legal advice and is provided for general information purposes only.