Managing to Avoid Legal Issues
By: Bob De Contreras
Over the past few months we have been
running a series of articles on how management focus changes as companies evolve
through the different growth phases. This article applies to all phases, but is
probably most valuable to start-ups and companies in the first growth phase.
In this article we focus on highlighting
some of the things you need to know about legal issues, dealing with them, and
the lawyers who help you resolve them.
The major legal issues you will encounter
in business are in one of the following areas:
Protection of ideas
Types of Attorneys
Like many other professions, corporate
lawyers tend to specialize in one or more areas of the law. These lawyers are
not usually the ones who litigate. You will have to search specifically for
litigation lawyers, also in specialized areas of the law. It might not surprise
you that the specialization areas don’t necessarily match the legal issues you
face. The typical legal specialization areas are:
If you retain a reputable legal firm,
you’ll usually work with three lawyers – an incorporation lawyer, contracts
lawyer and intellectual property lawyer to handle your legal needs.
Hiring a Lawyer
When hiring a lawyer, two things are
important for your success in finding a good one. First, get a recommendation
from someone you trust. Second, have a good set of questions for your interview
with the candidate lawyer. The answers you get will help you make the best
decision on whom to hire. The questions to ask should include:
Are you experienced with
my issue? How much experience do you have?
Are you well-connected?
(Within the legal community, business community, courts, etc.)
Do you have other clients
in my industry? What have you done for them?
Are you a good teacher?
Will you help me better understand the legal issues and alternative
Are you a finder, a
minder or a grinder? (lawyer who sells, lawyer who supports existing
clients, lawyer who cranks out the paper)
Will you be flexible in
your billing? Will you work on a fixed retainer?
You should ask yourself some questions
too. What do you need from your lawyer? What should you watch out for in a
lawyer? Some examples include:
Is this a frustrated
business person disguised as a lawyer? A lot of lawyers give you business
advice when you think you’re getting legal advice.
Does this person
communicate well? Are you getting the whole story or just what the lawyer
thinks you need to know?
Is the lawyer’s office
conveniently located? You may need to frequent the lawyer’s office.
Do I like the person?
You’ll probably be working through some tough issues. You need to have
trust and confidence in your lawyer – start with liking the person.
What Will You Need
a Lawyer For?
Prepare and file your
articles of incorporation.
Create your company
Prepare initial board of
Create the documents that
support the company’s capital structure.
Draft initial contracts
and sales agreements.
Prepare employment offer
letters and agreements.
File original copies.
Yes, you can work off of fax and photo copies, but for important documents
that might be needed in court – file an original copy.
Use blue ink for signing
documents. This is a good way to see that you have an original copy.
Don’t save draft versions
of documents. They can be captured for a deposition and the history of
changes may lead the court to a different view of the meaning of the final
Only accept changes if in
writing. English is an imprecise language that often leads to
miscommunication. Written legal phraseology is standardized and clearly
defined to avoid confusion and lost meaning.
Initial all pages. It’s
all too easy to change pages in an agreement. To protect yourself, counter
parties should initial each page and sign the last page of the agreement.
Staying out of
To avoid issues, plan ahead and get legal
If threatened with legal
action make an early response to avert a legal suit.
Use a face-to-face
settlement meeting to prevent court.
arbitration to avoid court.
Always use a sales
agreement to avoid issues of ownership, license, intellectual property,
liability, confidentiality, and more.
Don’t save too much paper
– it will make it more difficult for you to find the documents you need when
you want them.
Don’t save too much email
– it will make it more difficult for you to find the notes you need when you
Beware of outsiders
pitching ideas to you – if you have it in design and then release it to your
clients they can claim it was their idea.
Have a buy/sell agreement
– you never know what’s going to change in the future.
Have a partner agreement
– you never know how the relationship is going to change over time.
Clearly there are many more considerations,
issues, needs and obstacles that require you to retain legal council. This
article is just an attempt to help guide you on the path to retaining the proper
legal council to protect you early and before you have a need caused by
Managing to Avoid Legal Issues Case Study
By: Bob De Contreras
Similar to the main article in this
newsletter, this talk with Paladin presents three situations, experiences and
issues Paladin has worked with our clients that could have been avoided with
proper legal protection and better understanding of the legal advice.
Many of you have heard of common law
marriage – a situation where two people are considered legally married after
they have lived together for a specified period of time. This doesn’t seem fair
if there was no contract coming out of the process of acquiring a marriage
license and signing the “marriage agreement” at the end of the ceremony
officiated by an officer of the court. But, it happens and it’s legal.
A similar situation can arise in business.
One of our clients hired an executive (employee) to manage operations. In the
conversation during the hiring interview the CEO said that he would make this
new executive a partner in the company if he satisfactorily contributed to the
business growth. Within the second year of employment this operations executive
decided to leave the company and pursue another opportunity. He told the CEO
that he had contributed to the business growth and therefore he was a partner
and he wanted half the current value of the company in a cash settlement on his
departure. There was nothing in writing on the topic of partnership.
The legal advice our client received was
that he had a verbal contract with the employee and that the employee would
prevail in court. The legal advice – settle out of court. The result is that
it cost the CEO a quarter of the value of the company to settle with the
“partner.” In hind-sight, our client learned to not say anything he didn’t plan
to execute on immediately and get every agreement on paper.
Works for Hire
One of our
clients is in the consulting services business. She lost some of her
intellectual property because she didn’t understand the services agreement she
uses and didn’t understand some basics of contract law.
Her lawyer helped her develop her services
agreement and because of the type of work her company did the lawyer wrote what
is known as a “works for hire” service agreement for her company’s use. This
type of agreement says that anything developed while working on the contracted
services is owned by the client.
On this engagement our client’s company
used one of their “tools,” intellectual property that the company had developed
on it’s own. The company would have been safe in using the tool on this
engagement and there would have been no change of ownership because the tool was
developed prior to the engagement with this client.
The problem was that the company modified
the tool during the engagement to better fit the project. Because that
modification was made during the project, the entire tool became “works for
hire” and therefore a copy was now owned by the client.
The Partner Retired on the Job
This CEO had a partner for the past 17
years. The business was a success and they had a good installed base of
customers. The problem was that the CEO’s partner was not doing much work these
days. The partner was collecting a healthy share of the profits, but he was no
longer contributing to the company success – in fact he was causing degradation
When we were engaged the CEO and his
partner were a long way down the road of debate, lawyers, and buy out options.
They were clearly fighting a war based on emotion and ego. They were only a
hundred thousand dollars apart on their buy out negotiations on a settlement of
three million dollars.
The partner was ready to take the CEO to
court. They had stopped talking to each other and had relegated negotiations to
flaming emails and blazing letters. Interestingly the lawyers were helping
escalate the debate and adding to the environment of hostility.
The interesting thing in this case is that
human nature was getting in the way of these to executives being human to each
other. We suggested that the CEO back off and take a friendly, reconciliatory
and apologetic posture in his negotiations. We suggested that the CEO talk
about his affordability of the settlement. We wanted the CEO to discuss his
sorrow at having to come to this very stressful situation. We suggested that
the CEO talk about how paying the buy out amount was jeopardized by the
affordability of the settlement amount. In other words we suggested that the
CEO make this a business discussion rather than hand-to-hand combat.
The results were amazing. The CEO sent one
letter incorporating the suggestions we had made. The partner phoned the CEO as
soon as he received the letter and after a short discussion agreed to final
terms. The moral of the story is that sometimes we can solve very difficult
legal problems by talking through the issues with an open mind and
When it comes to the law, contracts,
agreements, and people – nothing is obvious and common sense does not always
prevail. Get agreements in writing and get good legal advice early in the
process. Be reasonable and talk through issues early with your counter party.
Brought to you by:
Bob De Contreras
RTBA | Cary | Greensboro | Raleigh | Research Triangle Park | North Caroliina
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