The One Mistake Startup Entrepreneurs Always Make - A Legal Perspective...

by JD Supra Perspectives

Incentivize your team like crazy and really get everyone rowing in the same direction. That’s what creates a culture and an environment for radical success... - Michael Esquivel at Fenwick & West

In your experience working with startup entrepreneurs, what's the one mistake they make time and again?

The answer to that question of course varies greatly, depending on whom you ask - and, for a legal perspective, we put it to startup attorneys writing on JD Supra.

Yes, the myriad concerns (legal and otherwise) of business formation are complicated, more so than what can be summed up in a single line item. Even so, there's much to consider in the diversity of responses when we ask attorneys well-versed in startup life to commit to just one idea. Here is what we heard back:

They Sign Contracts Too Quickly

From Nancy A. Park, of counsel in the business services practice group of Best Best & Krieger LLP: "Entrepreneurs are often so anxious to seal the deal due to the unequal bargaining positions that they tend to sign contracts too quickly, without reading them or considering all of the possibilities. They may check the economic terms, although even sometimes that is not checked carefully, and think that the fine print is unimportant. First timers are often leery to expose their lack of knowledge, mistaking careful attention to detail in contracts for busywork or boilerplate. Costly errors, which are hindrances to business success like expense, prepayment penalties, division of duties and other important requirements, are often hidden deep in the fine print. This is especially true for loan documents and leases, which entrepreneurs sign often and early. They should read the contracts, ask questions if it doesn’t make sense, and think about the what-ifs of extreme success as well as the possibility of failure, and ask what might happen in each instance, which can be done without triggering alarms. Such careful attention to detail is the mark of a prudent business person rather than an inexperienced pessimist."

They Fail to Properly Document Deal Terms

From Joy Dixon and Chris Hennen, members of the Startup Group at Chambliss, Bahner, & Stophel, P.C.: "Without a doubt, one mistake that we see startup entrepreneurs make repeatedly is failing to properly document, or failing to document at all, the terms of a deal. The failure to properly document deal terms does not necessarily refer to documenting prices and deadlines, but can refer to a wide variety of aspects of the business deal. While it is always a good idea to focus on crucial deal terms such as pricing and deadlines, it is important to pay attention to other vital deal terms which can often be overlooked, such as who owns rights to certain intellectual property (e.g. logos, websites, programs and other content) and the specific rights and obligations of the various parties involved in the deal (e.g. management rights or obligations, equity interest or independent contractor status).

Startup entrepreneurs are often so overwhelmed in the initial planning and development stages and so focused on the product or business idea itself that they can inadvertently neglect to document important details that will help them avoid conflict, and preserve the value of their idea, later on. Thus, it is important for startup entrepreneurs to make sure they document in writing all aspects of their agreements with other people. While a written document signed by all parties involved is preferable, at the very least entrepreneurs should practice following up with a simple summary email setting forth the key terms."

They Don't Put Together That Business Pre-nup, the Shareholders Agreement

From Keli Whitlock, partner at Duane Morris: "Entrepreneurs are extremely passionate about their ideas. When they embark on a new venture with their co-founders, they often get caught up in the moment and forget that things change. People run out of money, get distracted by another idea, have marital problems, develop drug or alcohol problems, get sick, die or simply change their minds about what they want to do with their time. When those things happen, if the entrepreneur has not put together the business form of a prenuptial agreement in advance, it can cause a drag on the company in terms of time resources and capital resources. It can also sometimes call into question the ownership of the company’s intellectual property and create various problems that make it less attractive for investors. These issues often delay the forward progress of the company and sometimes lead to its demise. A simple shareholders agreement detailing what happens when a founder leaves, whether or not by choice, is critical to keeping the company on the right path when the things that inevitably will change actually do."

From Ashley Dobbs at Bean, Kinney & Korman: "Too often, entrepreneurs start out doing business on a handshake, rather than getting important agreements detailed in writing. For example, offering a friend 'a stake' in the business in exchange for 'sweat equity' contributions of marketing, programming, web design, etc. Or simply paying a web designer or marketing professional to create content, without ensuring there is a written 'work for hire' agreement in place before the work begins.

Verbal agreements not only open the entrepreneur up to disputes over what 'a stake' means … a share of the company? Membership and voting rights?  … but also loss of control of the intellectual property inherent in such materials. Unless the person is an employee of the business, the copyrights in the materials vest in the creator, not the company, unless appropriate written agreements are in place. This puts the entrepreneur at risk for the person to resell, reuse, or otherwise compete with the entrepreneur using the very materials created for their venture.

They Fail to Secure Intellectual Property

From Trent Dykes, Chair of the Northwest Emerging Growth and Venture Capital Practice for DLA Piper: "Everyone knows that it is critical to protect your company’s intellectual property, but the first step is making sure your company actually owns the intellectual property. In the flurry of activity surrounding company formation, an often overlooked step is to make sure all founders and consultants assign their work product (both initial and going forward work product) to the company before they begin work. Attempting to obtain retroactive assignments of intellectual property can be difficult and expensive.

I recall one situation where two founders developed some technology and then formed a company to commercialize the same. Fast forward a year later, and while the technology was gaining significant customer traction, the relationship between the two founders was becoming increasingly contentious and the founders (not-so-amicably) decided to part ways (one founder left the company and the other stayed put). Neither founder had properly assigned their ownership in the underlying intellectual property to the company. The founder who left the company then licensed the intellectual property to a competitor."

It's Not Always a Legal Issue: Focus on Technology and People

And a good, parting reminder from attorney Michael Esquivel at Fenwick & West. It's not always a matter of focusing on legal issues: "I have two suggested guiding principles that help to solve 90% of the various legal challenges startup entrepreneurs frequently encounter.  First: The right place to be aggressive and to take risks is on the game-changing technology and disruptive go-to-market strategy at the core of your company. That’s where you can experiment, get creative and really push the envelope. It’s tempting to translate that same mentality into other areas of the business, but when it comes to legal you’ve got to keep it simple. Be plain – be vanilla whenever possible – a startup generally isn’t the right place to break new ground in the law. That’s just a recipe for frustration and additional expense and unnecessary complication. Second:  Within the bounds of reason, be generous to your team. Incentivize your team like crazy and really get everyone rowing in the same direction. That’s what creates a culture and an environment for radical success."

What's your view on this? Send a note to and we may add it in an update to the post, with credit to you.


Written by:

JD Supra Perspectives

JD Supra Perspectives on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.