020- Legal Pitfalls to Avoid for New Business Owners

Nov 05, 2019

Show Notes:

When launching a new business, often founders will look for ways to cut startup costs to help stretch initial funds further. However, when it comes to legal advice, the lower cost option may be to engage early with an attorney to ensure your business structure is setup correctly. By doing so, you'll protect your business by defining internal and external contracts and help reduce the risks of major legal costs and business disruptions in the future.

Today, I interview Nate Webb and Lachan Huck, attorneys with Focal Law, to discuss legal pitfalls that many new business owners find themselves facing. Topics that are covered include:

  • Partnership agreements
  • Non-competes and IP infringement risks
  • Choosing a business entity formation with investor considerations
  • Employees vs independent contractors 
  • Usage of legal insurance plans
  • Using 3rd party applications to service your business
  • And much more

Resources:

www.FocalLaw.com

Show Transcription:

Jeremy Epp: When it comes to setting up and launching your business, one of the key areas that you want to consider is what do you need from a legal standpoint. When I think of legal, I really want you to begin to think about offensive legal help as well as defensive legal help. Think of one as being proactive and the other one being reactive. When you think of reactive, it is in response to a situation. Typically, it's probably not going to be a positive situation, but by being proactive or offensive in your legal help, that is setting you up for success. It's helping you decrease the likelihood of issues down the road and ensuring that you have a solid foundation as you move your business forward. You want to stay tuned to today's episode. There are some fantastic nuggets of wisdom that you need to know about as you launch your business. So, stay tuned.

Jeremy Epp: Welcome to episode #20. My name is Jeremy Epp, and I am here to help you set up, launch, and grow a profitable business. Well, today is a great day. You know why? Because we are launching a three-part series of attorney information that's going to help you ensure that you are protected and heading in the right direction for your business.

Jeremy Epp: Today we have on the show Nate Webb and Lachlan Huck, attorneys with Focal Law, and they're going to share with us insights and tips to ensure that as you get your business off the ground, you're doing it in such a way as to protect you as you move forward, and you can focus on your business knowing that you are set up for success. Let's get right into the interview. Here's the interview with Nate and Lachlan.

Jeremy Epp: All right. Well, welcome everybody. I am excited to have on the show today two very special guests. We've got Nathan Webb and Lachlan Huck, both attorneys from Focal Law. So, welcome, gentlemen, to the show.

Nate Webb: Thanks, Jeremy.

Lachlan Huck: Yeah, thanks for having us.

Jeremy Epp: Yeah, I'm excited here. For those of you that were wondering how we connected, I actually was referred to Nate some time ago and have actually used Focal Law for my own personal legal needs as getting my business off the ground. So, I reached back out to Nate, and he graciously agreed to come onto the show and share some wisdom with you as new business owners that are either looking to set up or have already set up and are looking to ensure that you are taking the right steps to protect your business and grow with confidence and not need to worry about any kind of issues that may come back and cause you harm down the road.

Jeremy Epp: First off, let's start off. Nate, if you could tell us a little bit about your background, how you came into law, where you're at today, how long you've been doing it.

Nate Webb: Yeah, sure. Well, frankly I originally wanted to be a sports agent, but when I graduated from law school, I said, "Well, I need to pay the bills and actually have a job." So, I ended up joining one of the large firms, actually probably the largest firm in Washington, Perkins Coie, about 20 years ago. So, I'm dating myself. Worked there, enjoyed my time there, but one thing that I wanted in my legal career was to be able to have a little bit more direct client contact in terms of working with individuals who are starting businesses and working one-on-one with senior leadership teams at growing compassionate.

Nate Webb: So, after Perkins Coie, I went in-house at a few companies, and then eventually ... Let's say this is 10 years ago. I ended up starting Focal with my business partner, Venkat Balasubramani. The primary goal of serving technology clients, first and foremost in the Seattle area but, since we've grown, we have clients all over the country. We currently have 11 attorneys. We do a little bit of everything in that we'll handle corporate governance and maintenance for startups and technology clients and entrepreneurs. We do a lot of licensing work, private placements, M&A, and then we also litigate. I'm not a litigator. I'm too wimpy to be a litigator. I'm a transactional licensing attorney.

Nate Webb: But, yeah, we're basically a full service firm, and we've also expanded beyond the reach of technology clients. We have traditional brick and mortar clients. We have clients obviously in technology. We have clients in the cannabis space. All kinds of different industries, and it's going well, and I enjoy it.

Jeremy Epp: Awesome.

Nate Webb: Maybe I should hand it off to Lachlan a little bit. So, Lachlan, you can go into your background.

Lachlan Huck: Yeah, yeah, absolutely. I've only been practicing for about five years, so Nate's got me beat. He's the graybeard around here.

Nate Webb: Literally.

Lachlan Huck: Straight out of law school, I jumped in in-house for startups. I worked first for a biotech company, and then I worked for a medical supplies company. Then, in the last two years, I worked for a small firm doing cryptocurrency and cannabis work. The bulk of my work was in the cannabis space. As far as practice areas go, I focus on corporate, M&A, financing, transactions. I do some B2B commercial transactions, but mostly corporate formation, M&A, and finance.

Jeremy Epp: Excellent. Well, let me just jump right in here. I'm thinking of the individual who is looking at leaving their corporate job, and they're looking at their options. They've got some ideas, whether it's a service-based business or a product-based business. They're saying, "Okay, I am wanting to start my firm, get it registered, and start to build it up on the side as I am starting to work to replace my income so that I can go out on my own." What would be some of the legal considerations that an individual in that position should be thinking about?

Nate Webb: Yeah, that's a great question, Jeremy. I think there are a few. A lot of times it really does depend on the industry and sort of what the subject matter is and what the product and service is that is being offered. However, I think one universal issue that I think obviously needs to be addressed is to the extent there are multiple founders. So, what I'm talking about there, getting at, is sort of ownership and partnership framework with any co-business partners. If I had a dollar for every time I've heard people come into my office and say, "Here's my business partner. We've been friends since high school. I've known him 20 years. We don't really need much documentation," I'd be a very rich man.

Nate Webb: One of the things that we always try to caution new entrepreneurs, specifically entrepreneurs who are working with multiple co-founders, which is often the case, is for them to think frankly about their partnership like a marriage. As we know, a lot of marriages don't succeed. So, you have to sort of plan for contingencies. I would say that's kind of the one universal issue is just making sure there's proper documentation with your co-founders, how you're structuring it, and how do decisions get made if the partners disagree or one wants to move on. It's just really important. I think Lachlan could probably talk a little bit more about that in terms of what he sees. He handles that a fair amount.

Lachlan Huck: Yeah. I don't think we made this disclaimer yet, but we're not giving legal advice here. This is just kind of general overview.

Nate Webb: Yeah. You can tell we're lawyers.

Lachlan Huck: But, just to backup a second, I think Nate could probably add a lot more color to this. If you're looking to start a business on the side and you're currently working for a firm at the same time, there are a couple more practical considerations that you should keep in mind. Whose information are you using when you start your business? You're working for an employer, and you're starting a business on the side. You want to make sure you're not violating any obligations owed to your current employer. That's a little bit more nuts and bolts before you get to the fun stuff of corporate formation or partnering to create a new venture.

Lachlan Huck: Assuming that your current job permits you to have a separate side gig and there's no issues about confidentiality or non-competes, non-solicits, anything like that, basically what Nate said is 100% true. You want to make sure that you and your founders, assuming that you're partnering with others, are crystal clear on how the company is going to work from an economics and control perspective, but also that you've thought through what happens if something goes sideways, if there is a dispute, if there is a breakup of the founders. What does that look like? To the extent you gain clarity around that, you've saving yourself hundreds of thousands of dollars in potential legal feeds down the road.

Nate Webb: Yeah. It's a frequent problem, frankly, Jeremy, in that, even as businesses grow and succeed, the goals of the co-founders can sometimes differ. When that happens, we're sometimes asked to look at sort of the inaugural documents of a company, whether or not they're articles of incorporation or a partnership agreement. We'll sometimes notice, oh, so everything's done 50/50 vote. Well, what happens if one person just always declines and nothing gets done? Looking at things such as voting rights, looking at things like redemption rights in terms of, "Okay, if I leave, can the company buy back my equity?"

Nate Webb: As I originally said, in addition to Lachlan's astute comment about kind of obviously respecting obligations you might have with existing employers to the extent that are there, is just making sure you're thinking that through. I think that's where talking to an attorney early can help you flesh that out to make sure that you're thinking about those type of issues.

Jeremy Epp: I'm going to jump in here. I must confess that I am your example. I was that gentleman in the chair, except I wasn't in the chair, but I had that situation where I joined with a partner many, many years ago. Nothing in writing, just a handshake agreement. Eventually things started to change and morph, and we didn't have the clarity of ... We had a verbal understanding, but at the end of the day, who had the voting rights? Who had the responsibility for various aspects of the business?

Jeremy Epp: It really did feel like a business divorce when we parted and separated ways. It was probably one of the worst times of my life, because employees' livelihoods were at stake. There was nothing good that came out of it. All parties went away with a loss, including employees, and so I can attest to the need to have proper clarity, written clarity, with an attorney involved at the very outset, while you're still in your honeymoon phase, before things get difficult with the business.

Nate Webb: Yeah, exactly. Exactly. To go on with respect to your question, what we brought up is really kind of on point where there are multiple founders of a company, which is often the case. A lot of people, when they feel like it kind of reduces their risk when they enter into a new venture with someone that they trust. In the case where, let's say it's a solo owner, it's a lot easier. Then there's other issues that come up, and these issues also come up whether it's multiple founders or just one.

Nate Webb: I would say thinking early on about intellectual property protection is another common mistake. What I'm getting at there with respect to maybe some of your listeners are like, "Intellectual property? That sounds like a fancy legal term," really what I'm talking about is sort of what the company is developing that is intangible. Now, granted, IP can be related to tangible products, but what I'm talking about is sort of the copyright for work of authorships, manuscripts, photos, things like that, processes, images. To the extent maybe patents could come into play or trademarks, something as simple as a company name.

Nate Webb: I think sometimes new entrepreneurs can be kind of sloppy on that in that they're not doing what they should be to protecting their IP. If they feel like their IP has value, they should probably invest in an attorney to help them issue spot and increase their chances of protecting that IP, if that makes sense.

Jeremy Epp: Yeah, that's a really good point, because I know that, in the enthusiasm, you want to get your product out there, start to finish the development of it, and begin to market and sell it. It would be quite the shame to have all this momentum behind your back and then that get that letter from another firm's attorney saying, "Cease and desist. You're in violation of a trademark infringement," because maybe it's your company name, or your logo is very similar to another company selling similar products. Next thing you know, all your momentum ... All that air out of the balloon goes flat. You're at a loss, and you've got to pick back up and start over again.

Nate Webb: Yeah. Yeah, exactly. Exactly. It's a common question for new entrepreneurs that come in. They have great ideas. They have great content. A lot of times servicing technology companies, we're advising content producers frankly like yourself, Jeremy, and so what we do is try to help them protect that by being pragmatic and understanding kind of what their costs are and how much they can invest, but just giving them sort of basic advice so they have a leg up in protecting their IP.

Jeremy Epp: Could you talk a little bit about ... I know that I've done some episodes on choosing which legal entity, from both a legal protection as well as a tax savings mechanism ... And I know you can't speak to the tax portion. But do you recommend partnering with a CPA and speaking with somebody in the accounting field to help understand tax law or tax benefits, both obligations to the IRS and the state, et cetera, as well as do you advise clients on which formation is best for them from a legal perspective?

Nate Webb: Yeah. I think Lachlan, being our main corporate person, would be the best to talk on this. But the one thing I will say, especially for a new, small startup, in addition to sort of the tax consideration is just the kind of the legal protection that you are afforded by having a corporate entity. Sometimes we'll have entrepreneurs come in and say, "Hey, I have this business. I have a few employees. I've got a partner. We haven't incorporated or done anything like that. I'm running it as a solo proprietorship." That's risky. That can be risky. Certain corporate structures can offer some protection to the ownership group to frankly protect their personal assets, and I think, Lachlan, you could probably talk more intelligently on that.

Lachlan Huck: Yeah, absolutely. Yeah, what Nate said is absolutely a consideration. Forming an entity, one of the big benefits you get is the limited liability protection, whether or not that limited liability company or corporation, limited partnership to a certain extent. There are a variety of forms that can be used for different reasons. Whenever we get founders in our office, we run through these questions just about every single time. What entity do you want to use? Why?

Lachlan Huck: For example, a corporation has more stringent rules about how it operates. It's much more rigid. Then, just about every founder who walks in has researched online and read that corporations are subject to double taxation, which of course that's something you should discuss with your CPA. But, on the flip side, you have the limited liability company, which is the other big entity of choice, which is much more dynamic in what you can do with it. The default rule is it's subject to pass-through taxation. So, those are the two big entity choices that you have.

Lachlan Huck: When deciding on what entity you want, it's good to have a comprehensive idea of what the business is and what the roadmap is, going forward. That's where I think talking to an attorney is useful, for just being proactive and addressing "Okay, what's the two-year plan? What's the five-year plan?" Because, for example, if you're a startup and you anticipate taking on venture capital funding, 9 times out of 10 ... I would go even further than that, saying 99% of the time you want to have a corporation, just because a venture capitalist wants the comfort that a corporation brings.

Nate Webb: They're familiar with the structure.

Lachlan Huck: Yeah. They're familiar with the structure. They know what they're buying. Having somebody that can walk you through what the roadmap is, what you should be thinking about, is decently important.

Jeremy Epp: Let me ask you this, Lachlan. If I am planning to be a solo entrepreneur, and I've got my plans, and I come in and set up a particular type of entity. Let's say in this example it's a limited liability company. But down the road as my product or service begins to develop and new opportunities present themselves, how difficult is it to switch formations, switch types of business entities, down the road if there's a better fit for growth potential?

Lachlan Huck: I would say it's not difficult, the actual mechanism of conversion. The difficult bit is how you structure the relationships between the founders, for example, and the expectations around that. Just to put some color on that, say you have a LLC, and you've got two 50/50 members. How do those rights convert into the corporate form where you've gone from two members, 50/50 owners, to a corporation that by default has a board of directors? Okay, who's on the board? Has shareholders. Okay, you've got 50/50 rights as shareholders. It's more of a translation issue and not so much going through the conversion process, for example, with the Washington secretary of state.

Nate Webb: It's a great question, Jeremy, in that it's actually a situation that happens quite a bit in that you'll have people, entrepreneurs, who will kind of do a quick and dirty LLC. They'll log onto the secretary of state website and just do some one-page filing, and then it's, as you said, takes off. Then a sophisticated angel investor or, even better yet, a VC firm comes in and wants to invest. As Lachlan suggested, if the ownership isn't too complicated, it's relatively straightforward.

Nate Webb: But the business owner sometimes loses some momentum when they're talking to the investors. The investors are like, "Oh, great. I'd like to get some series A stock or some common stock," and then they break into, "Oh, I'm an LLC." Then the investor's like, "Oh, okay. What's that? Can you explain that you me, how that works?" Then you go into this long conversion process, which, again, at the end of the day, isn't overly complex, but it kind of slows things down.

Nate Webb: So, that's why, when a new entrepreneur comes in and they ask us about the entity, one of the questions we typically ask is "Okay, what are your fundraising goals, and how are you financing this? Is this a family business where all the money is coming in from friends and family? It's going to be closely held, you don't anticipate taking on outside investment?" In those cases, we might say, "Okay, I think maybe and LLC will work in this scenario."

Nate Webb: Being in Seattle in an area with a lot of technology startups, which have kind of more traditional internet fundraising approaches, in terms of angel investors, accredited investors, sophisticated venture capital firms, and they very much know that's the road they're going down, then we'll learn towards let's do the corporation to get you set up with your articles of incorporation, then anticipate, for example, preferred shares. Then basically a structure that's going to enable you to move quickly once you do raise money, if that makes sense.

Jeremy Epp: Absolutely. Okay. We've talked about ownership, ownership and partnership. We've talked about intellectual property, and we've talked a little bit about future growth, investors. What would drive somebody, or what do you see is the individual that comes to you guys and says "I've got a problem" ... What are the mistakes, other than those three main areas, that you guys see on a frequent basis from new business owners?

Nate Webb: Yeah. I would say probably number one is, and this will somewhat crossover to the IP issue, the handling of employees and independent contractors. I think that's definitely number one. To backtrack on the IP issue, having proper documentation with your employees or independent contractors is pretty important to protect your IP. Again, I got to do my lawyerly caveat. I'm not providing legal advice here, but I will say, generally speaking in many jurisdictions, if an employee is creating intellectual property while being employed by a company, the company owns that intellectual property.

Nate Webb: That's not necessarily the case with independent contractors. Typically with independent contractors, something needs to be in writing that says, A, with respect to copyright works of authorship, that the company owns it--so, it's a work for hire--and if it isn't copyrightable subject matter, that the independent contractor is assigning their IP rights to the employer.

Nate Webb: That is the number one issue. It's been litigated in some very big-time cases that we've all heard about. It happens at a much smaller level with small startups and things like that where they're hiring people, they're signing people up to help develop the code or the product or the service, and then, when they have an investment round or an exit event, while the buy or the investor is doing the due diligence, they're saying, "Well, when I'm looking at your employment documentation or your contractor's contracts, I'm not sure you own what you say you're owning."

Nate Webb: You also come into situations where ex-employees or ex-contractors are sort of coming out of the woodwork when a small company soon becomes large, and then they're like, "Well, hey, what you developed, I own." That causes problems.

Jeremy Epp: Interesting.

Nate Webb: That's probably, I would say, up there as one of the most common mistakes on the IP side and employment side and contractor side. I see it a lot, and that's why it's important kind of to talk to a lawyer to get your ducks in a row if you're going to start hiring people to make sure that what's being developed you own. Do you agree, Lachlan?

Lachlan Huck: Yeah, definitely. I can't speak to the employment side and the ownership advice to the extent that you can. You are much, much better at that than I am. But I think the underlying point of just making sure that the documentation is clear is a lesson for whatever you are doing. In my practice, I think the most common mistake is people issuing equity to employees and independent contractors, new owners that they want to bring in, issuing equity without knowing how to do so or how to paper it up. But similar, I think, root issue is they just haven't documented it properly.

Lachlan Huck: At the end of the day, I think something that gets lost in the noise is that we're not always talking about disputes where these issues pop up. We're also talking about if you want to do financing or if you want to sell your business, a buyer's going to come in, and they're going to look at your employment contracts. They're going to look at your IP and try to determine if you actually own it. If they can't figure it out, there's a chance that they're either going to discount the purchase price or just walk away. It's not worth it.

Nate Webb: That's a really good point that Lachlan made about equity issuances. I was involved in a case many moons ago where the people on the senior leadership team of a company that was about to go public ... They found out that they were giving out equity. I think there was one example where they literally wrote it down on a napkin, saying "This is how many shares we're going to give you. Congratulations." [inaudible 00:25:08] properly documented. Then it kind of comes out of the woodwork before the company goes public. So, it happens more than you think.

Nate Webb: One thing with entrepreneurs and their thirst to move quickly and to get resources and human capital to work on their business, they sort of treat their equity like candy, sort of giving it out to everybody, not thinking about the ramifications and how properly to do that, if that makes sense.

Jeremy Epp: That makes absolute sense. One thing that came to mind, Nate, as you were talking about independent contractors, in my space in online businesses, I know there is a big push to hold off from hiring employees and instead go out and hire independent contractors. With that being said, I know there's a whole area of the law that talks about independent contractor restrictions and requirements that deal with the dos and don'ts of how you can engage with an independent contractor, what you can require of them. If you don't understand that, you could easily violate that unbeknownst to you and find yourself in hot water down the road.

Nate Webb: Yeah. Yeah. Good point, Jeremy. Though it varies from state to state in terms of how granular they get in terms of describing what the difference is between an independent contractor and employee, it is an issue. I like to sometimes just give the pragmatic advice. If it looks like a duck, if quacks like a duck, and it sounds like a duck, it's probably a duck. I think that's the same thing when it comes to employees. It's something that people have to be careful with, because frankly the employment litigation bar is aggressive. It can be an issue.

Nate Webb: I will say this. I'd like to think that we're pragmatic lawyers, and so the plaintiff lawyers and states that kind of aggressively police that, they're usually looking for bigger fish to fry, the large companies who have thousands of quote/unquote contractors. They look at that as basically just trying to avoid employment taxes and things like that. If it's a super small company and you're just getting off the ground, and you're trying to use a contractor, and maybe they could be construed as an employee, as lawyers, we're going to be risk averse and say, "Hey, that sounds like and looks like an employee." But if we're talking one or two people who are kind of supplementing the employment team, I'm not really losing sleep over that.

Nate Webb: If it's a client who's coming to me and saying, "Hey, I've got these 300 independent contractors who are punching in with time clocks and showing up at the office every day. Do I have a problem?", I'm telling them, "Yes, you have a problem, and we need to talk."

Lachlan Huck: Or referring them to another firm.

Nate Webb: Yeah, exactly (laughing). I think you did an excellent job of spotting an issue. It's an issue that I think people need to be aware of. But I think context is also important with respect to that issue as well. That probably goes into some other questions that you're going to ask, in terms of when to call a lawyer, et cetera, et cetera.

Jeremy Epp: That was my next question. Is there a business, and I know I am talking to two attorneys. But is there every a business and an owner that would not need to engage initially in legal services?

Nate Webb: Oh, you should always have a lawyer on retainer for $20,000. I'll provide you the wire information now for your listeners.

Jeremy Epp: That was a trick question that you're a partner and made me ask (laughing).

Nate Webb: But, no, speaking honestly and frankly, when you're talking to lawyers, we're risk averse. Taking self-interest away from this, I still would advise new entrepreneurs to talk to an attorney to talk about some of the basic things that we discussed earlier during this podcast in terms of forming the company, dealing with the employees and contractors. We really haven't touched much on the contracts related to the products and services you're offering, which is one issue. So, I always lean towards at a minimum just talking so somebody to at least issue spot, not necessarily to be on retainer so you can spend a lot of money.

Nate Webb: With that said, I'm also pragmatic. If a friend comes to me and says, "Hey, I'm manufacturing out of my garage these slippers that I'm going to sell at Pike Place Market. Do I need to retain you?", I would probably say no, you know? I think context is important. If we're talking about the situation I just said in terms of selling slippers at Pike Place Market, that's entirely different than "Hey, I'm soliciting personal information from people on my website to eventually process and sell that information for advertising leads." Then, it's a different conversation where I'm like, "Okay, I do think that you have to consider a lot of different things like privacy, your contracts with your customers, and stuff like that." I'm talking somewhat lawyerly, and I can't give you a yes or no answer.

Jeremy Epp: I understand.

Nate Webb: I think context matters, but I think what you want is to, at a minimum, find a lawyer that's pragmatic. You can get a sense if the lawyer's pragmatic fairly early on when you're talking to them.

Jeremy Epp: I think the correct answer is "it depends".

Nate Webb: Yeah.

Jeremy Epp: With expenses being top of mind, because I know when people are looking at launching, there's a lot of initial expenses to get off the ground, I want to talk a little bit about some of these services that offer insurance, legal insurance. What's your experience in working with those firms or maybe cleaning up the mess from those firms, versus somebody that's working directly with a firm such as yours? What's your experience, and what would be your advice of these legal insurance types of companies versus a traditional firm?

Nate Webb: Frankly, it's funny that you say that, because my experience is I just found out that my dad has a Prepaid Legal service that he pays for, and I'm like, "You realize your son's an attorney." But I guess that's neither here nor there. That's my experience. I thought that was humorous when he told me.

Nate Webb: But I'll be honest. I'm not too familiar with those services. I think something is better than nothing. The one thing that I would worry about with kind of getting the insurance or prepaid legal ... Not to disparage the actual company prepaid legal, but something that offers sort of like a pay-as-you-go legal service. Maybe you're not getting kind of the personal attention that you might need. Recall that I mentioned how context matters, and having lawyers that are pragmatic matters. I think, by having a relationship with a firm that is experienced, who knows you, who is there on call, and you're just not one of a million different subscribers ... I think there's value in that.

Jeremy Epp: Yeah, absolutely. I think I held Prepaid Legal ... It must have been 15 years ago for a short duration. I'm going to call it a very low cost retainer. With that, you'll get minimal support. It's very transactional. If you need any kind of ... I don't even want to use the word in-depth, but beyond just a very high-level transaction. Basically you get a 10 or ... You get a certain discount off of traditional service. So, I don't know if it's more peace of mind than anything, but at the end of the day, I think you hit it on the head. It's all about relationship, and it's about ensuring a partnership in your business, in your growth. If you understand what the clients' goals are, you can advise them appropriately on a particular matter, because you see linkages between other things that maybe that client doesn't see when they come to you for aid.

Nate Webb: Yeah, exactly. Exactly.

Jeremy Epp: Let me switch gears here. I want to talk a little bit about some copyright and other information when it comes to getting a new business off the ground, specifically websites. What's coming to my mind right away is terms and conditions, privacy policies, kind of the standard behind-the-scenes thing that nobody really pays attention to. But, if you're setting up your own website, you better be paying attention to them. Can you talk a little bit about the value of that as far as ... I know it's very tempting for others to go in and just copy or use a quote/unquote shared legal version that they just add their name in and instead say "This will be good enough for now." Can you talk a little bit about that a little bit?

Nate Webb: Yeah. Yeah. It's something we see a lot frankly. I think what happens is, as you suggested, entrepreneurs are just trying to bootstrap, right? So, they're sort of going online, cutting and pasting, putting something together, thinking, "Okay, I'm good." But it's dangerous, especially when you're talking, for example, about cut and paste privacy policies, for example. I mean, private policies can get very granular with respect to how they handle personal information.

Nate Webb: If you're not thoroughly reviewing and analyzing and evaluating your privacy policy and comparing it to your internal processes, that's a problem. It's a problem with respect to the customers, the people visiting your website for example. It's a problem to the extent you're going through an investment round or an exit event, in that sophisticated buyers and investors are going to notice it. There's risk there in that the plaintiff bar is aggressive with respect to those things. I would caution against it.

Nate Webb: On the terms of service, it's the same thing. Now, terms of services ... They come in all shapes and sizes. Again, it's a common statement that I'm making, but context matters. So, hey, this is my personal website with my photos. I hope you enjoy them. Pay $19.99 to access everything. The terms of service is going to be pretty basic, and frankly there are entrepreneurs out there who are sophisticated and smart enough to cobble something together by looking at what's on mine.

Nate Webb: Now, if you're offering a software as a service where you have some complex software that is doing something for the customer, handling sensitive information. You're using this information in a wide variety of ways. Cutting and pasting isn't the way to go. We see this a lot in that entrepreneurs and investors and buyers who we represent are noticing young entrepreneurs doing this. Unfortunately, it causes more legal fees because we have to fix things.

Nate Webb: Finally, you have brought up sort of copyright protection in conjunction with sort of copying privacy policies and terms of services. One thing you've got to be careful of is copying a terms of service or anything on a website that you see online or an image ... You've got to be careful with infringement. Sometimes we get entrepreneurs come in, and they say, "Hey, I'm looking at my website. I've got some great photos on here. I found them in the quote/unquote public domain online. So, I assumed it was okay to just post these." Frankly 99% of the time it wasn't okay.

Nate Webb: It's good again to just have an attorney to be able to sort of advise you on that and say, "Oh, okay, where did you get this?" and "Hey, this is an image, a work of authorship. That doesn't necessarily mean ... That does mean you can't basically copy it, which is an exclusive right to the copyright owner. If you are taking something online, be sure to look at sort of the terms and conditions with respect to what you're taking, whether it's given to you as an outright assignment or it's a license or something like that." That's a common misstep.

Jeremy Epp: That leads me to my next question, which is there's so many applications that are available online. If I've got my website, and I want to take, let's say for example, online payments ... As somebody that's saying, "Well, I don't want to be the expert. I don't want to manage that. Let me go hire a company, whether it be PayPal, Stripe, or some other firm, maybe it's through my bank directly, to accept that, to take the privacy risks and have all those policies in place," what should I be thinking of as far as ... Okay, I'm covered. I'm trusting that they're covered, but how do I verify that to ensure that, if that information is compromised in this world of identity theft, and misplaced information, whether it's a laptop or breaches of security, et cetera ... What should I be thinking of I am going to outsource that to a third party?

Nate Webb: This isn't frankly even a legal answer. The first piece of advice is read what you're signing up for. I mean, it's funny, but heck, I'm a lawyer, and sometimes I will forget to, in my personal life, say, "Yeah, maybe I should read what this 8 point font at the bottom of the website, what it has to say." That's really the best advice I can give in light of the context. I think a lot of times new entrepreneurs who are looking to outsource and use third parties to process payments or handle fulfillment, et cetera, they're just kind of signing up, putting on links, and then they think they're home free. That's not necessarily the case.

Nate Webb: So, I think, again, the first order of business is just reading what you sign up for, because a lot of times ... For example, let's say you're setting up an Amazon storefront. There's going to be specific obligations that you have. There's going to be specific remedies, whether that's refunds to customers or have to handle claims to the extent a dispute arises, et cetera, et cetera, et cetera. That's the first piece of advice frankly is just know what you're signing up for by reading everything. Lachlan?

Lachlan Huck: I would just tag onto that it's not always forgetting to read the terms, just making the informed decision whether or not to read the terms in the first place. If you're talking about a third party service that's integral to your business, go line by line. There's no reason not to. But if you're talking about some ancillary service that you're porting part of your blog to Facebook. It's not that big of a risk. I would definitely say it's a risk/reward type of analysis. But, again, that all goes back to make an informed decision; don't just make a blanket decision.

Jeremy Epp: I know, as I've purchased different products off of various websites, part of the trust factor is ... Okay, for payment, we're transferring you to PayPal. Okay, I trust PayPal. I've worked with PayPal over many, many years, versus something within the site itself that maybe I'm questioning the protection of that as well. So, maybe that third party actually does add that validity for the customer, gives them a peace of mind as well.

Lachlan Huck: Well, yeah, that's a good point. The deeper the pockets, the more incentive a company is going to have to not do something sketchy or unethical. For example, Microsoft has a lot of incentive to implement best practices, because, if they don't, they've got a big, red target on their back; whereas, if you're porting to some small payment processor that's located-

Nate Webb: In the Cayman Islands.

Lachlan Huck: Yeah. In the Cayman Islands (laughing), even Siberia. It's not the same. Same goes for PayPal. It's a big-

Nate Webb: Amazon Web Services.

Lachlan Huck: Amazon Web Services. They're big, respected companies that don't have a whole lot of incentive to do something unethical or something that's considered shady.

Nate Webb: Yeah. I think where entrepreneurs get in trouble is, in the effort to reduce costs, they're using SaaS providers, data storage providers, things like companies that offer services that are important but handle by larger, more established companies, but they end up going with smaller providers or unknown providers. They think they know what they're getting or what they're providing, but they really don't. So, you've got to be careful there.

Jeremy Epp: That's a good point. Let me ask you this, Lachlan. Is there every such a thing as over-lawyering?

Lachlan Huck: Absolutely. 100%. Yeah. We like to think that we're, as Nate said, pragmatic attorneys and that we try to tailor the solution to the problem. That includes keeping in mind resources dedicated to the particular problem. But we have come across situations where, for whatever reason, somebody's throwing a boilerplate solution at a problem and generated a 70-page agreement that could have been done in two pages. Sometimes it's just mind-boggling, the thought of how much an attorney's fee goes towards something like that, for correcting something like that.

Jeremy Epp: Yeah, that makes sense.

Lachlan Huck: So, yeah, in my experience ... Nate, it sounds like you're about to jump in. Absolutely.

Nate Webb: Yeah. Also, another issue that I've found ... And this is not to disparage my large firm colleagues. But I think sometimes entrepreneurs can get kind of starry-eyed at sort of quote name brand firms, i.e., very large firms. At the end of the day, I like to tell entrepreneurs, potential clients and clients, your business isn't going to succeed, you're not going to get investment, because of the name brand attorney you're using. I think sometimes entrepreneurs are like, "Well, I'm going to be the next billion dollar company. Therefore, I need this 800-lawyer firm that everybody knows to get me off the ground." I always caution against that.

Nate Webb: Yes, it might sound somewhat self-interest ... I'm not even saying use Focal Law. Sometimes I think these entrepreneurs ... I tell them, "Listen, you don't need $900 an hour lawyers to incorporate your three-person venture without any assets or IP or anything like that." Be pragmatic. Use a smaller firm, more affordable firm that you can trust. I mean, you can trust the big folks, but obviously, if you're going to get a smaller firm, make sure you trust them, they understand you, you feel like they're pragmatic, and pay less attention to the quote name brand behind the firm. I think that's a common mistake.

Nate Webb: Frequently, we will get clients who are established who left their large firms because it was frankly just too expensive. Then they come to us, and they're like, "I'm paying you a quarter of what I was paying, and I'm getting the same level of service, if not better." Sorry, that sounds like a plug. Again, you don't have to use Focal, to your listeners. Just find a small firm out there that's more agile and more affordable, because you're at risk for over-lawyering and overpaying.

Jeremy Epp: Well, I'm plugging you guys. But, if somebody finds themself, whether they're outside of the US, or for whatever reason they want to have a local attorney that they can be face-to-face with and they're outside of your region, what would be some of the things that they would want to look for when seeking out an attorney to work with?

Lachlan Huck: First, I actually had this interesting conversation with a German attorney who was recommending clients ... His clients were operating in Russia, the United States, and Germany. The German attorney was recommending clients to the United States because of Brexit. He walked through a couple different points that was interesting.

Lachlan Huck: So, first he was trying to put together a team. He wanted a roster of attorneys that could handle whatever issues that the potential company might run into. I think that's an important aspect, making sure whatever attorneys you do retain have that expertise to handle your specific problems for your industry. I have a background in cannabis and cryptocurrency. If you tried to walk into my industry with no background knowledge, you would get blindsided. I think that's a big first consideration.

Lachlan Huck: Then, flying off Nate's point, I would also try to find a firm that has a culture and an outlook that matches your company's. It doesn't have to be perfect, but, just for example, if you're a nimble, agile startup, again, you probably don't want the legions of Big Law at your back just because that culture is not going to be conducive to what you are trying to do. Of course there is a time and a place where you want to do the scorched earth policy and cost is no object. So, those are two considerations. I'll let Nate jump in.

Nate Webb: No, I think you answered it well. If I'm understanding the question correctly, I think another issue to consider, if we're talking sort of like a non-US company looking for US counsel, things like that, is familiarity and expertise with respect to privacy issues. Obviously, context matters in that case as well in terms of the products and services being offered by the company seeking counsel, but it's something we see pretty regularly. We have three people in our privacy group. Two are certified privacy professionals.

Nate Webb: A lot of times we're dealing with sort of international issues, because the way the US regulates personal information, health information, information pertaining to minors, et cetera, et cetera, can be entirely different than how it's handled in the UK, China, Europe, et cetera. It's just being able to spot that issue and working with a firm that has expertise in those issues is important.

Jeremy Epp: Excellent. And you guys can help people across the United States. Is that accurate?

Nate Webb: Oh yeah. Yeah. The caveat there is we're only licensed to practice in certain states. We have lawyers licensed in California, work in Washington, and maybe a few others. But by and large we have clients all over the country, yes.

Jeremy Epp: Okay. In wrapping up, thank you so much for coming on. I've learned a lot, and I appreciate both you, Nate, as well as Lachlan sharing your advice and your wisdom ... Or your non-legal advice, just to be clear. But where can somebody go, if they want to learn more about your firm and get in touch with you guys for support and some help?

Nate Webb: Yeah, I think our website is a great place to start. It's www.focallaw.com. That's F-O-C-A-L-L-A-W.com. We have our lawyer roster on there. We have a means for people who visit the website to contact us. And we're open for business. So, yeah.

Jeremy Epp: Excellent. Thank you so much, both of you, for coming on. You've been great service and help to the clients and the listeners of the show. Thank you.

Nate Webb: Great. Thanks.

Lachlan Huck: Thanks, Jeremy.

Jeremy Epp: There you have it. I hope you enjoyed having both Nate and Lachlan from Focal Law on the show. I learned a lot, and I am sure you did as well. If you like this content, make sure you tune in next week. We've got part two of our attorney series, and we're going to dive deep into trademark law, which is very important for branding your company for success.

Jeremy Epp: If you enjoyed this information, be sure to head on over to jeremyepp.com and subscribe to the show. That way, you'll be kept informed of information that will help benefit you and your company. I appreciate you, and I look forward to speaking with you on the next episode.

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