5 Legal Tips To Save Startups Money & Headaches

Being smart about legal matters can make a huge difference in the value of your company. Each legal decision you make — each strategic partnership, each trademark or patent filing — can add or subtract from it.

During the ’90s, my law firm worked with an internet software company whose proposed $400 million sale was stopped dead because of an ill-considered distribution deal it had signed for an Asian market. To the would-be acquirer, the deal was a fundamental obstacle to its own use of the startup’s technology. We eventually fixed the distribution deal, but not in time to save the $400 million deal. It took another 10 years to sell the startup at a favorable price.

Entrepreneurs aren’t typically well-versed in legal issues, and few have deep enough pockets to have lawyers evaluate the implications of every decision they make. That’s why I wrote a book that tells entrepreneurs what they need to know about technology law. As an example, here are five vital legal strategies every digital entrepreneur should know:

5 Vital Legal Tips for the Digital Entrepreneur:

1. Mix open-source with proprietary licensing.
MySQL offers both open-source and proprietary licenses for the same code. Why would companies pay for free software? Some large companies want to create derivatives, but not disclose trade secrets, and so will pay for proprietary licenses. Red Hat supplies Linux under the GPL, but gives paying subscribers a suite of proprietary tools for installing and managing networks that run Linux.

2. Secure startup IP.
Any code you wrote before you incorporated your startup is not automatically property of your company. You must formally transfer pre-existing code to your company to secure ownership. Failure to “tie down” IP to the business can be problematic, especially when early employees leave the company. It can also block a VC investment.

3. Police user-generated content. While valuable, such content can expose your company to copyright owners’ claims. Help yourself by adhering to “Notice and Take Down” procedures of U.S. copyright law. But these protections don’t apply if your company benefits financially from the infringing material, such as through download fees tied to it, or payments for ads that are played or displayed with the infringing content. Protect yourself by publishing FAQ for your users on how to avoid submitting infringing content. Terminate repeat offenders who regularly submit infringing content

4. Avoid “right of first refusal” clauses.
Many licensees, customers and distributors want a “right of first refusal” (ROFR) on your company’s products, future opportunities — even the sale of your company. Don’t grant them. ROFRs assume you will fully negotiate a deal with one company, then offer it to the bearer of the ROFR. The problem is that no company will invest time and effort in negotiating a deal with you if there’s the risk another party could just snatch it away. ROFRs freeze out opportunities this way.

5. Register Multiple Trademarks.
Technology is international, so you’ll need to register your trademarks in every market where your products will be sold. But be careful. Some English words may sound odd or offensive in other languages. The Chevy Nova automobile became a joke in Spanish-speaking countries because no va means “it doesn’t go.” In countries that don’t use roman letters, also register local language versions of your trademarks. In China, Microsoft trademarked the two characters, pronounced wei ruan, that mean “small and delicate” and “soft.”

Gene Landy is Chair of the Technology Business Group at the law firm of Ruberto, Israel & Weiner, in Boston, Mass. His book, The IT/ Digital Legal Companion, provides comprehensive guidance, including many more tips like these, for how you can use the law to maximize the value of your business.