TOP 2 PROBLEMS ENTREPRENEURS FACE

By Raees Mohamed, Esq.

"I am always doing that which I cannot do, in order that I may learn how to do it." Picasso's words reflect the risks of artists who endeavor to accomplish known ends, but without knowledge of the process to reach those ends. Picasso often did not know what his works would look like, until his final brush strokes dried. The average entrepreneur's endeavors mirror this motif. But, already laden with many steep learning curves and unknown risks, an entrepreneur cannot afford to follow an unknown road-map in hopes of relying on after-acquired foundational know-how. Therefore, the goal is to minimize risks and resolve common issues before commencing your own portrait. So your canvass is dry and your paint is fresh, now, what do you need to know? Let's start with two common brush strokes that always result in unnecessary risks and problems.

I.   Failing To Accomplish The Formalities.
If you have ever painted a picture or even done a basic sketch, there are basics you cannot ignore. Make sure your brush is moist or pencil is sharp, your paper is clean and mounted, all your mediums are in front of you, and object is in view. Entrepreneurs rarely follow such formalities. Business formalities can be expansive, but the most common are easy to identify.


A. The Art of the Agreement.
Gone are the days where stellar plans were done on the back of San Jose coffee shop napkins. Draw it up! Entrepreneurs frequently dislike writing down understandings between partners or third-parties. But well drafted agreements are foundational, and there are many. Agreements will clarify common issues such as: "Where does my liability start and end"; "Who owns the results of this work?"; "Is this confidential?"; "Can I leave this failing start-up and start a competing concept?"; and "What are the responsibilities of everyone I involve?". This is true even if you are venturing solo, because 99% of solos engage others to assist them in their endeavors.


The bottom line -- put it in writing and cover yourself. Agreements add clarity. No professional should be offended if you offer them something in writing.


B. Legal Structure.
What kind of legal entity is most appropriate for you? You cannot afford not to make this consideration. Ask yourself the following-- "Am I ok with losing everything I put into my venture and all my personal belongings, too?"; "What happens if I wanna bail?"; "Is this dude a partner?"; and "Is this dude entitled to profits or just a wage?"; and "Um, shouldn't you be paying for this too?". There are at least 10 other questions I ask my clients to consider when developing a legal structure. But the critical point is to ASK these questions and form the appropriate structure. You are risking more than you think by not.


Most entrepreneurs are all too familiar with the alphabet soup of legal entities out there, SP, LLC, C and S, 501(c)(3), P, GP, LP, LLP, and T (the basics of each legal entity would be an entire article itself). The application of each entity depends on the facts and circumstances of your situation. Sometimes, it's ok to be be a SP (sole proprietor). But the moment you engage in joint efforts with others, there's a presumption (albeit, a rebuttable one) that you are partners. Fun, right? Like Batman and Robin? You might as well call it quits now. Although certain unwritten, common law protections will exist, you don't want this to happen. The most important goal for an entrepreneur is to mitigate risks. Unsorted partnerships exponentially increase many risks. For example: unclear ownership of and access to intellectual property; no limits on entitlement to decision making and profits; unclear duties; and my personal favorite---joint and several liability---also known as "I am sued, so I am suing all of you, and we're all going down together." However, in certain circumstances a partnership structure is desirable, particularly when in combination with other entities. Thus, an entrepreneur must include legal entity deliberations as early as possible.

II. A Clear Plan Of Action.
Remember when your art teacher would ask you to "do your doodle in pencil first!" There's sound wisdom behind creating a "rough draft". The entrepreneurial process tends to turns these elementary skills off. You know you've made this mistake when your thoughts are "I'll deal with X when it happens", or "it's way too early to think about X issue." But hindsight is always 20/20, and certain mistakes cannot be undone or will cost exponentially more to fix later. A business plan is not enough. You need to think through legal solutions. For example, what kinds of issues will you have if you leave your present X job and start your own XYZ firm? Are you breaching non-compete obligations? Are you using/taking trade secrets? Are you infringing intellectual property rights? Are you tortiously diverting business? Are you breaching fiduciary duties? If your finger is on one of these issues, you likely have your hand on all!


A clear plan of action includes a thorough examination of ALL the issues, business and legal alike. Imagine the horror of presenting a business plan to an investor to only later realize that the premise of your idea is illegal! I've even seen "original" concepts that were clearly infringing another's intellectual property. Legal planning is clearly important. Sometimes the only way to undue a bad plan or no plan at all is a settlement agreement (FYI---you have been sued or the threat of a lawsuit is imminent.)


In conclusion, these issues are just an introduction to the atmospheres of risks and considerations an entrepreneur must make. Remember, Picasso was better situated than an entrepreneur to take a learn-while-you-go approach. And although business is truly an art and not a science, Picasso's artistic value never had to be "sold" like an entrepreneur.  Plus...he always had an eraser.