What are legal ramifications of launching a startup in Northern Nevada?
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On June 3, 2017, Gov. Sandoval signed Assembly Bill 276 into law. The law protects against discrimination by employers whose workers voluntarily discuss their pay.
“There are certain requirements through that new law that startups should be aware of,” said Fennemore Craig attorney David Lewandowski. “The risk is if you don’t follow the statute, you're at risk of that non-compete being unenforceable.”
RENO, Nev. — Years before becoming an attorney at Fennemore Craig, David Lewandowski, an entrepreneur at heart, started and ran an online marketing company for a separate tour company that carried busloads of people through the greater Reno-Lake Tahoe area.
By law, Lewandowski was in a general partnership — two or more people that are in business, sharing a profit — with the tour company. Consequently, Lewandowski, though simply working out of his home, was responsible for the risks and liabilities of the tour company.
This was a fact Lewandowski didn’t know at the time.
“I didn’t have a written agreement with this company that I was working with and, by law, we were deemed to be a general partnership,” said Lewandowski, while nestled inside Hub Coffee Roasters set near the Truckee River in Reno, in an interview with NNBW. “The problem was, if someone was injured on that tour, for instance, I was potentially at risk for that, even though I wasn’t the one driving the bus or owning the bus.
“Luckily nothing happened with me, but it definitely could’ve and I could’ve been pulled into a lawsuit and exposed.”
For Lewandowski, it’s a microcosm of how important it is for creators and innovators to legally dot their i’s and cross their t’s during the formation of their business.
This often requires the need for legal services, despite the fact that many entrepreneurs approach seeing an attorney like seeing a dentist: something to do another time, or if they’re in pain — in more ways than one.
“Unfortunately, startups are tight with cash so it’s hard for them to feel comfortable picking up the phone and spending the money on legal services,” he said. “But there are certain things that startups should definitely pull in legal services for, rather than try to do on their own.”
Paperwork in place
Out of the gate, startups need to establish a legal foundation and entity, whether it’s an LLC or S corporation or C corporation, that will protect their assets, Lewandowski said.
“There are a lot of factors that go into deciding what type of entity to be. It’s really thinking about your company and what needs your company has,” Lewandowski said. “Are you planning to have a bunch of employees and need to have an employee stock option plan? Do you have shares that you can issue to these key employees as you grow? Are you looking to raise money from outside investors?”
Simply put, startups must think of where they’re at and where they want to go in terms of what makes sense in structuring the entity.
Moreover, entrepreneurs need to ensure that their company fully owns and controls all of its intellectual property (IP). With that, Lewandowski said making sure that the software engineers and developers that are hired assign all rights of the IP to the company is “tremendously important.”
When an entrepreneur goes to sell a company, he added, the company buying the startup will ask if they have confidentiality agreements and invention assignment agreements in place with all of the founders and employees.
“So the company buying your startup,” he said, “knows that they have all rights and there won’t be a lingering rogue angry employee that says, ‘well, I actually created that and I never assigned it to the company.”
Teams and agreements
In addition, putting together a strong team is vital to a startup’s success, he said.
“Bringing in co-founders and putting together a strong management team makes a lot of sense not just operationally but as you’re raising money,” Lewandowski continued. “If you’re a startup looking to raise money, one of the first things that investors will look at is ‘who am I investing in? You can have the greatest idea, but if you have the wrong people, you may not be successful.”
Another crucial aspect is making sure agreements are in writing and properly documented, Lewandowski said. This includes, but not limited to, a founders agreement (who owns what and how much of it), an operating agreement for what happens in the event of big life changes (death, disability, divorce), and a buy/sell agreement if the founders decide to split up.
“You hope for the best but you have to plan for the worst,” Lewandowski said. “And if you don’t have anything in writing, it becomes very difficult to sort things out on the back end.”
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