Keeping Your Startup Heading Up: Avoiding Common Small-Business Pitfalls
In 2013, Boulder topped national lists of metro regions with the highest density of startup companies. Three other Front Range cities made the top ten. Since then, Governor Hickenlooper and Colorado legislators have made it a priority to make Colorado friendly for entrepreneurs.
The last thing that most startup owners want to imagine is that there may be bumps—or chasms—on the way to success, or that he or she and a business partner may have a falling out. As a result, many entrepreneurs avoid meeting with legal counsel to strategize for the future. Unfortunately, while the nascent stages of a business are often exciting, they are also generally when a startup is most vulnerable. Initially, many startups survive off outside investments and risky loans with personal guarantees. Most startups haven’t established the steady, reliable cash flow necessary to deal with a lawsuit brought by or against a client or business partner, which may cost a new business owner $50,000 or more in legal expenses to prosecute or defend.
With through, careful planning and proper legal counsel, many of the common snags startups encounter can be avoided, saving you time and money you can put toward growing your business. Even in small businesses, such as fix-and-flip projects you may undertake with a family member or friend, amicable contracts and paperwork can help ensure that your business (and just as importantly—your relationships with those family members and friends!) are long-lasting. Below are a couple examples of how proper document drafting can benefit your business.
Operating Agreements. Every startup should have an operating agreement detailing the rights and obligations of the members. For illustration, an operating agreement can set forth how and when profits will be distributed to or contributions collected from members, providing clarity to all business partners at the onset in order to avoid conflicts later on. Operating agreements are also useful for setting contingency plans in the event of future disagreements amongst partners, such as provisions for partners to buy one another out in certain circumstances, procedures for doing so that lessen the financial burden of court proceedings, and agreements on how payment is to be received.
For instance, if you and a friend want to buy real estate property together as an investment, you might want to include a provision that necessary expenses and taxes on the property will come out of the profits prior to any distributions being made to partners, or that in the event of a major disagreement, one partner has the ability to buy the other out at a price to be designated by an appraiser or a specific appraisal firm, whom or which the two of you can agree on at the outset, avoiding arguments over how the appraisal process should occur later on, when tensions may be high.
Moreover, having clarity in your business dealings can help avoid the cost-benefit analyses that plague many small businesses. For example, if you believe you are owed $10,000, having a clear operating agreement indicating when and how you should have been paid can help avoid ever stepping into a courtroom, where you might spend more than you’re owed to get a ruling.
Employment and Independent Contractor Agreements. When your business grows to the point that you are employing others, it is important to have concise contracts setting forth their compensation arrangement. For example, if your business works closely with photographers as independent contractors, you may want to clarify in a contract that the photographs they take while working for you are the property of your company, not the property of the photographer. You may also want to specify when and how employees and independent contractors will be paid, how vacation or PTO will be handled, and how to handle future disputes (e.g. a provision requiring mediation and/or arbitration) to avoid surprises later on. Depending on the company, you may also want to require that your independent contractors carry certain types of insurance or otherwise agree to reduce your liabilities as a business owner.
Tradenames and Intellectual Property. It is not uncommon that small businesses across the country, and sometimes even within the same state, choose similar names. For instance, a coffee shop in Boulder may decide to call itself The Brown Bean, not knowing that a coffee roaster using that name already exists in North Carolina. If one of those two companies expands into the other’s market, there may be a dispute as to who has the right to do business as The Brown Bean, requiring not only potential court proceedings and litigation, but also the rebranding of one of the companies entirely, leading to a loss of goodwill and brand recognition. An attorney can help you think through such scenarios, stake your claim to your tradename or other intellectual property, and ensure you don’t have to give your business a makeover down the line.
SLBTW has drafted documents for a wide array of startups in Boulder, Vail, and along the Front Range, including real estate LLCs and partnerships, contracting businesses, coffee shops and restaurants, wholesalers, tech startups, and others. If you’ve put your time, energy, and investments into your business, you don’t want to lose it due to an unforeseen and avoidable circumstance. Consulting with counsel to help guide you through the process of starting your business is the first step in creating a stable future for your company.