9 What Startups Should Know About Litigation | Burford Perry LLP

Burford Perry LLP represents owners and companies in all types of small business litigation. Many times, the problems we deal with in litigation could have been avoided by making better, informed decisions when the business was in the startup stage. We often represent small and startup businesses whose owners are unfamiliar with our state and federal legal systems.

When forming a startup company, founders need to think about steps they can take to help avoid later disputes and unexpected costs. Lawsuits are all too common in the startup industry and can quickly derail a new business endeavor. The founders of a startup company should be knowledgeable about their litigation risks and take necessary precautionary steps. Having legal counsel with extensive litigation experience ready to advise and represent your company can help a startup stage company avoid disputes in advance and understand the litigation process when it is unavoidable.

The litigation process begins when parties know they have a dispute and are defending or considering filing a lawsuit or claim in arbitration. Litigation can be incredibly time-consuming, expensive, and can take years to conclude. A startup company can lose valuable time and money and, more importantly, lose its focus on its business—the reason for its existence—when litigation or arbitration occurs. There are some steps to take that can help a startup avoid litigation, including consulting with a reputable business litigation lawyer, choosing the right type of business entity for company operations, and having the right kinds of insurance coverage to protect the business’s finances and reputation.

Hiring a Reputable Business Litigation Attorney

Having the right attorney on the company’s side can help protect a startup from expensive lawsuits and arbitration. A business litigation attorney should be willing to listen to you and learn how your business operates and help you understand litigation risks specific to your business. Your lawyer should have the specific experience needed to represent and defend a startup business. The experienced trial lawyers of Burford Perry not only have the necessary skills to advise business owners in dispute negotiations and settlements, they also have the specific courtroom knowledge that is vital to obtaining the best results for their clients.

When forming a startup, founders will often seek the advice and counsel of attorneys who focus on business transactions, intellectual property, employment law, or tax law. Seldom are these attorneys the best choice for a lawsuit or arbitration. Besides successfully resolving lawsuits, a business litigation attorney can advise a small business startup on ways to protect the company in the future, including possibly restructuring the startup, improving the company agreements or contracts, or revising employee handbooks. Our team can also identify potential issues others may not notice.

Choosing the Right Type of Business Entity

The formation of a startup generally involves choosing what form of business entity the company will use. It is important to choose a business entity and operating structure that separates the business from the personal finances of the owners or ownership group. Not doing this can unintentionally expose the owners and investors to litigation risks that include personal liability. Lawsuits can attack not only the company assets but also the owners’ personal assets. We often see businesses that adopt a proper form—like a limited partnership, limited liability company (LLC), or corporation, but then fail to separate their personal finances from the company bank accounts. The corporate form, which should reduce or eliminate individual liability, can leave owners at risk when they are not careful. Startup founders can reduce or avoid this risk by consulting with experienced legal counsel on how to appropriately structure and operate their business. No owner wants to hear they are facing individual liability for their business disputes.

Investing in Thorough Insurance Coverage

Some startup owners do not realize that they need to invest in the right types of insurance that will protect their newly formed company and their personal finances. Having proper liability insurance can protect a startup’s founders, investors, and officers, as well as the company itself from the risks involved with a lawsuit. Having liability insurance from the inception of the startup will help the company avoid financial ruin if a lawsuit is brought. Startups should look into acquiring adequate insurance coverage which can vary depending upon each business’ stage of development, including:

  • Comprehensive General Liability insurance
  • Property and automobile insurance
  • Workers compensation insurance
  • Director and officer liability coverage
  • Life insurance for owners, often known as key man (or person) policies

Other Startup Litigation Concerns

In some unfortunate situations, the startup founders end up in litigation between themselves over company finances and operations. Many of these lawsuits could have been avoided if the founders had clear and detailed operating and shareholder agreements with specific terms laid out that anticipate and avoid potential conflict. Some terms to consider including in these agreements include:

  • Percentage ownership (often expressed as shares or interests) by each founding member
  • Required financial contributions and work roles for each founding member
  • Buyback options for company shares (often called a right of first refusal)
  • Compensation and salary agreements
  • Detailed accounting for the separate assets invested by each founding member

Documentation and planning are often key to avoiding litigation. All startups should have their employment documents reviewed by an appropriate business attorney to ensure they comply with all federal and state laws. Non-competes and non-solicitation agreements should also be considered if the startup shares confidential information with employees, contractors, and vendors.

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