Lesson 5: Three Rules for Legal Domination

If you tallied up how many times we’ve said the phrase “start early” (or some version of that) over the course of this Master Class, we’d be well into double digits! Hopefully, instead of annoying you, you have to come realize that it is truly important.

Opening your own business or founding a start-up requires more than just a good idea and a positive attitude. Once the initial excitement of a venture simmers down, most founding teams and entrepreneurs will be faced with the daunting realization that there is a mountain of logistical, administrative, and legal hurdles they’ll have to overcome.

It’s kind of like signing up for a marathon... the more work you put into your training early, the better you’ll perform in the long run! Get it? Because a marathon is a long run? Anyway, much like early training, the legal decisions you make at the outset of your business will have resounding impacts down the road when it matters most.

The smart business owners at Ice Cream Co. know this concept. They’ve done their research, brushed up on their legal understanding, and thought about the future goals of their company. They realize their business has a propensity towards risk and their long-term business goal is to expand operations nationwide, so they incorporated their company right from the very start, instead of operating as a sole proprietorship or partnership.

They also face tough legal decisions head-on, recognizing that brushing them aside only delays and multiplies the cost of dealing with them later. They decide to start early, have an uncomfortable conversation with the founding team about equity splits and founder proofing the company, and apportion shares in a way that is conducive to long-term corporate sustainability. All using a well-drafted Shareholders’ Agreement.

On the flip-side, the ill-informed entrepreneur doesn’t address legal issues early, often skirting responsibilities and legally required tasks as there aren’t any “serious” repercussions (on the surface). Sure enough, months go by without any major issue! Bullet dodged right? Let’s say the responsibilities our entrepreneur pushed aside were minute book requirements, founder proofing, and annual corporate maintenance for their company. Let’s say they’re looking for funding from angel investors to get some more runway to keep the business afloat in a capital intensive stage of the business. The very realistic outcome is that an angel investor takes one look at the state of their corporate affairs and gets out of there as fast as they came in! They don’t have the right kind of shares to take investment, their minute books are in disarray, and there are no mechanisms in place to save the company if a founder leaves.

Even if the angel really wants to invest, a total overhaul of the inner workings of the corporation has to be undertaken, costing potential thousands of dollars and countless hours better spent developing the business instead. And that doesn’t even consider the fact that annual corporate maintenance is required by Canadian law and your company can be formally dissolved by the government if you don’t file your corporate returns. Talk about a whoopsie!

This is a rule that has its applications beyond the legal context or even in the business world. Talking to a lot of clients and lawyers, the same characteristic that separates the ones who find long-term stability and success are those that have gotten there with the help of others. You might be an expert in developing computer software, but no single person can be an expert in everything that it takes to build a thriving business. That’s why the best leaders know how to delegate tasks to those who are in the best position to achieve successful results. As a business owner, knowing that other people have the expertise to help you more than you can help yourself is important. Especially when we talk about legal.

A big part of this rule stems from something we’ve been touching throughout our lessons as well: recognize that you don’t know what you don’t know. Spending some time and taking stock of your own limitations isn’t meant to demean or discourage you, but instead provide an opportunity for growth in an area that you aren’t familiar with. This can even apply to areas that you may actually consider yourself an expert in too!

Let’s come back to our smart business owners at Ice Cream co. They are extremely well-versed in the culinary arts having gone to one of the finest ice cream universities in the world. Even though they know the ins and outs of the ice cream they’ve created, they have the wisdom to understand that creating their intellectual property (the ice cream in this example) is not the same as protecting their intellectual property.

Instead, they realize that things like intellectual property assignment agreements, licensing and royalty agreements, and patent or trademark registration processes are all required to protect the business. Instead of bankrolling the entire value driver of their company on an (at best) educated guess or doing it themselves, the well-informed founding team recognizes that they are out of their depth, so they contact a respected intellectual property lawyer to get their secret sauce protected. Additionally, they are in regular communication with their lawyer and never hesitate to ask them for help!

On the other hand, the not-so-well-informed entrepreneur takes a different approach. They have a team of contractors who are still extremely gifted at making ice cream, but due to a lack of research and information, they assumed that whatever was created in their company belonged to the owner of the company! I mean it makes sense right? If someone paid by the company creates something on the company time and dime, it would be logical to assume that the IP goes to the company owner.

But, there’s a bit to unpack here: if an employee creates IP for the company, there is a presumption that the owner of the IP is the company itself, not whoever founded the company. That’s why there are IP assignment agreements and special clauses in service agreements that would make these clear! Now this business owner might have to spend thousands of dollars and jump through hoops just to ensure they own the IP that their contractors created on the job. It could have all been avoided if they had just talked to a lawyer!

So you see? Listening to your newfound legal spidey sense and putting our three rules into practice means you don’t have to be scared of your legal work anymore. We’re proud of you for making it through this course and you should be proud of yourself too. You just became a smarter business owner.