5 of the Dumbest (and most costly) Startup Mistakes, Part 1

For those of you I haven’t met, I am a corporate partner at Gunderson Dettmer – a Silicon Valley based law firm that works exclusively for technology companies and VC’s. I make my living working for startup companies but I want to help you spend less money on lawyers.

I spend an awful lot of time (usually on short notice the night before an important deal is supposed to close) fixing preventable problems. An awful lot of these problems relate to hiring, compensating and incenting early employees. All of them cost money and time that I would rather see invested in building teams and product.

Over the next few Wednesdays I’ll be posting a few short pieces that may help you avoid, last minute fire drills, unnecessary accounting or legal fees, angry investors and perhaps an occasional lawsuit or regulatory audit. Hopefully by highlighting a few of the most common employment related problems I can help you avoid them.

5 of the Dumbest (and costly) Mistakes Startups Make with Their People, Part 1

1. MISTAKE # 1 OF 5: Not Understanding Obligations to Prior Employers

Anyone who has spent much time around technology companies knows that it’s a really small world and the best people tend to bubble up time and again.

Great entrepreneurs tend to be involved with several startups over the course of a career and also tend to attract top talent from prior endeavors each time they strike out on a newco.

This tends inevitably to create issues with former employers that can range from minor irritations to full blown litigation; especially when the ex-employee is perceived to be doing something competitive at their new gig.

The key to avoiding problems in this area is all about timing – look at the issues BEFORE you start coding! While California law is relatively favorable to employees when it comes to these matters, employers are not without protection; especially with respect to intellectual property.

If you’re dusting off that invention assignment agreement from your old company to read the fine print AFTER getting the “nastygram” from your prior employer it may be too late for a course correction.

Before you or anyone else starts working on your new company, you should be asking:

• Is he/she still working for someone else?
• Is there any relationship between the business and technology of that former employer and what you propose to do?
• Does that person have any non-solicit or non-compete obligations?
• Has there been an analysis of whether the work the person will be doing will entail them using proprietary information that belongs to a prior employer?
• If any of these questions raise red flags, get qualified advice on these issues and be prepared to alter your plans if necessary.

The key is to preserve your ability to make changes or adjustments before you start down a path. The cost of a mistake in this area can he huge as a material dispute over IP ownership can literally render a company unfinanceable.

Next week I will address mistake #2 of 5: Failing to be Informed About Employee Rights with Respect to Wages.