Business development is by no means easy, especially when companies are developing innovative products and services. Learning from the mistakes of other companies can save time, money, and a lot of frustration. Over my 15 years of practice representing emerging technology companies, I have seen companies make a number of similar mistakes. While these pitfalls can be easy to slip into, emerging from them can be time-consuming, costly, and divert focus from core business objectives.
Here are 7 of the most common pitfalls I’ve observed and how to avoid them:
- Company / Product Names
- Intellectual Property
- Too Many Business Models
- 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.
- Selecting the wrong names for your company, products 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 company and/or product 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 if any names are required to be modified or abandoned. In light of this, newly formed companies should competently screen and register trademarks in all major countries where the company plans to do business in the foreseeable future.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) as well as Internet search engines (such as Google) or domain registrars such as (Godaddy.com). Finally, it is advisable to select a name that functions on the international market (i.e. something easy to pronounce, without negative connotations, with letters existing in the English alphabet).
Advised Actions: Your company name and product/service names should be screened and registered for the markets within which you plan to do business. Further, all names/marks should use English letters and function well in target markets.
- 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 generally must be carried out to produce a prototype and ultimately a product or service. Naturally, for the company to be able to fully commercialize the finished products or services, the company must own (or have sufficient rights to exploit) all of the IP subsisting therein. 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 IP used by the company. 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 or its owners and the founder consultant(s). Further, any open IP issues will frustrate your company’s ability to achieve an exit (a.k.a. company sale) or obtain sought after financing (at reasonable valuations) as exits and investments typically require all relevant IP to be unequivocally vested in (or exploitable by) the target company as a condition of purchase or investment.For software companies, an additional issue can relate to the commingling of open source code with a company’s own proprietary code. Anytime open source will be used, the open source license must be reviewed to ensure (i) the proprietary code will not lose its proprietary status (i.e. be required to be contributed to the open source community) and (ii) that the finished product or service will be saleable as intended given the inclusion of the open source code.
Finally, with regard to any innovations it is advisable to document the developmental process. This will be crucial evidence to present in the event a third party claims your company has unlawfully used or misappropriated any of its IP in developing your product or service.
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 reasonably safeguard critical IP from misuse or misappropriation.Advised Actions: Ensure your founder agreements, employment agreements, and consulting agreements include legally enforceable IP assignments / confidentiality undertakings covering all IP necessary for the business. Also, ensure you have a competent process in place for documenting developments and be sure to register IP as necessary to secure rights in the geographic regions of interest for your business.
- 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 evaluate whether such deviation is in the best interests of your company’s growth. All too often, a company’s growth potential becomes compromised when precious corporate resources are diluted over a broad range of specialized projects that prove 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 exit 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).
- Giving away Shares or Stock Options. In an effort to recruit staff and obtain necessary services during a company’s start-up phase when capital is scarce, companies often elect to offer shares of stock in the company for little or no money. Doing this, without appreciating the full implications, can cause unintended and unwanted commercial, legal, and tax consequences for the company and even for the recipients of such rights. For instance, failing to value such shares or options sufficiently can diminish the value of subsequent investment opportunities. Further, failure to offer a prospectus or enter into shareholder agreements can create legal liabilities in the future or pose challenges to corporate decision-making or problems in cases when 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 impeded by unexpected tax impositions.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 professionals to ensure your corporate objectives will be achieved in connection with such offerings.
- Granting Exclusive Rights. To close a deal or enter a foreign market early on, tech companies may hastily grant 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) for such exclusive rights fail to be achieved on an ongoing basis, your company musthave 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 having the right to convert exclusive rights to non-exclusive rights may be risky given such an approach will prevent 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 and/or under applicable law. 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, additionally, mean your company agrees to itself refrain from 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 interfere with your company’s ability to terminate such exclusive rights and even impose substantial damages regardless of the terms written in the contract.
Advised Actions: Consult with a competent advisor prior to granting any exclusive rights. Further, ensure the party receiving such rights has sufficient capital, skills, and networks to service the entire territory for which such rights are granted. Finally, establish aggressive milestones that must be achieved to preserve such rights and appropriate consequences in the event the targets are not reached.
- 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 naturally a number of risks with this strategy. The agreements being referenced may not be authored by lawyers, may relate to different industries and/or markets, may have been originally drafted for and therefore disproportionately favor the counterparty’s position 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 IP resulting from the relationship. Any such clouds on your company’s IP can undermine investment and exit opportunities. Another common issue 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 actual risks of 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 legal liabilities 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, whether internal or external, 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 and contribute to a global legal strategy for business development. A workshop can be a useful method to discuss the agreements and to ensure sales, procurement, tech, finance, business, and legal representatives understand each other and concur with the approach to be taken.
- 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, when 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. The concept of a losing party paying the winning party’s legal fees is not an implied right in many countries. 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 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.
There are other issues that can adversely affect your company’s business development. We aim to simplify these complexities and help you navigate your course in a creative, efficient, and competent manner. Feel free to Contact Us to learn more about how we can help you. Also, visit our testimonial portfolio to see what we have been doing: http://www.b2world.com/testimonial-portfolio/.
Thank you for your interest and best of luck with your business!
*This article is not legal advice and is provided for general information purposes only.