5 of the Dumbest (and most costly) Startup Mistakes, Part 13 min read

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.

Brian is a partner at Gunderson Dettmer’s Silicon Valley office. Brian’s business law practice is focused on the representation of emerging growth companies, especially tech startups, throughout their lifecycles and in the representation of venture capital and private equity investment funds. Brian is broadly experienced with business and corporate formation and governance matters, deal structuring, equity and debt financing transactions, public offerings, a variety of M&A transactions, strategic, partnering and commercial transactions and fundamental intellectual property, employment and stock and option matters.

Comments 11

  1. Thanks for the advice Brian. I imagine that many fall into these mistakes simply because they forget to take into consideration that one of these conditions may apply their new employee. I look forward to reading the next one.

  2. Right, so much of the risk in startups is not knowing what you don’t know.  Helpful article!  

  3. Thanks Brian!  IP and Non-Compete are issues I’ve gotten familiar with, it’s good to see affirmations about that.  It’s also common for companies to start with some paying contract work, and then transition into their own product – I’ve navigated that sandtrap by planning for it from the getgo, in one case by making sure the two groups of IP are clearly delineated at multiple levels, in the other by explicitly reserving all necessary rights from the contract work. 

    But Rights to Wages has got me confounded again and again.  I look forward to that next one!

  4. That’s good stuff Brian. Especially as we are out and about trying the best of the best. Equity and cash are one thing… but I don’t want to add law suits to the compensation package! 

  5. Thanks Matt.  Sometimes you can end up the same place with just a little pre-planning.

  6. Thanks Michael.  I agree, as long as the contractors aren’t moon-lighting full-time elsewhere (particularly with a competing company), using carefully constructed contractor arrangement can be a good way to go to navigate and preserve IP rights.

  7. Thanks.  Asking the right questions at the beginning is a big part of it.

    The interesting thing is that many entrepreneurs seem to be familiar with California 2870 (sorry to use geek legal speak – lol), which essentially says you can own any IP that you create on your own time (e.g., evenings), using your own equipment, etc., BUT fail to understand that this only applies if the IP created doesn’t relate to the FT employer’s business – if it does relate to the employer’s business it doesn’t matter how or when the employee created it, the employer can make a claim to it.  But, again there are sometimes ways to navigate through this with a little pre-planning!

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