Venture capital investment opportunities can be among the more intriguing features of the alternative investment landscape, combining the potential for outsized investment returns with the excitement of being part of game-changing scientific and technological innovation. Increasingly, family offices are expanding their investment horizons to include venture- and early-stage companies. While these opportunities can present attractive options for investment and direct engagement in the growth and direction of a new enterprise or technology, venture- and early-stage companies fall prey to a number of legal pitfalls that are uniquely theirs.

Here, we explore 10 of the most common legal mistakes made by venture- and early-stage companies – for family office investors considering venture capital investing, regard this a “field guide” that we hope will help you identify, and avoid, these common legal pitfalls that can impair, delay or jeopardize the ultimate success of an early-stage company.

1. Postponing Proper Legal Action And Advice

Many entrepreneurs, understandably, focus on their technology, products and services and the business of developing and commercializing them, and postpone getting appropriate legal support. They avoid speaking with a knowledgeable lawyer, assuming that their fledgling business cannot afford it. Instead, they may take advantage of do-it-yourself legal products or copy documents they find on the internet. This approach may save money in the short term, but it can create insurmountable problems down the road.

Avoiding lawyers and using standard forms increases the chance that entrepreneurs will not address critical legal issues in a timely fashion. Do-it-yourself legal products can address a number of common situations, but may or may not work for the particular set of facts that entrepreneurs face. An entrepreneur needs to first identify the legal issues to be addressed, and this will typically require an assessment by a knowledgeable lawyer. This should be done in a timely fashion because fixing mistakes is almost always more costly than avoiding them in the first place. Indeed, there are some mistakes, such as the failure to file for intellectual property rights in a timely fashion, that cannot be fixed. Be on the alert for do-it-yourself legal documents and “we haven’t involved a lawyer yet” explanations.

2. Making Legal Solutions Too Complicated

Entrepreneurs are, by their nature, creative people. This can be a great attribute for product development and determining how to access markets to make their business successful. However, sometimes this creativity can lead to a start-up company adopting legal solutions that are too complicated, or at least not taking a well-traveled legal path when one is available. Legal solutions, even those that address complex problems, do not necessarily have to be complicated. We find that, especially with start-up companies, a complex legal solution can often lead to more problems than it solves. Complex solutions may be harder to understand and implement and, therefore, may be viewed by investors with skepticism. They may also be harder for a court to understand and, therefore, run the risk of being construed contrary to the parties’ intentions. Instead of developing complicated legal documents, the key challenge is issue spotting, so that the company can identify critical legal issues and make good, informed decisions about its legal options—ideally with clear, simple and easy-to-understand legal documents. Seemingly undue complexity can mean something is being hidden, or it can just mean that extra time (and money) will be required to unscramble that egg.

3. Failing To Identify Intellectual Property And Protect It

Most entrepreneurs know the value of patent protection for their intellectual property (IP). However, obtaining patent protection can be an early-stage company’s single largest legal expense—and for that reason, it is often deferred. But waiting to file a patent application can mean not getting a patent. This is because U.S. patent laws have changed in recent years and it is now the first inventor to file for a patent that gets the patent—not the first person to make the invention, as used to be the rule. This timing can be critical if more than one person has invented the same thing, and that risk increases the longer one waits. If there is ostensibly patentable technology but applications have not been filed, ask why.

More generally, companies should consider all the options for protecting their intellectual property and develop an overall IP strategy as early as possible. This is particularly important where a start-up’s business is built around an abstract idea or a naturally occurring process, which may not be eligible for patent protection. But every company can benefit from a strategy for the complementary use of trademark, trade secret, copyright and patent protection. Doing so early helps ensure that trademarks, which generally go to the first to use them, are available, that trade secrets are not lost through disclosure and that patents can be obtained. Find out what the company’s overall IP strategy is, and how this suite of assets—often the only meaningful assets in an early-stage company—is being protected.

First « 1 2 3 » Next