Q&A talks with John Gerber, founder of UpStartLegal.com, about real-life lessons entrepreneurs can learn from the movie “The Social Network.”
Q: As you point out, “The Social Network” is an excellent example of the perils of going into business with friends. Granted, most business dealings don’t end up with $65 million settlements (or the subject of movies). What are the pratfalls to doing business with friends?
A: Even if your business isn’t destined to be the next Facebook, it’s important to treat it like a professional enterprise. With friends, in particular, there is often the inclination to skip some of the formalities. Problems arise when there are misunderstandings around the scope of work, deliverables, ownership of work, and a whole list of other issues. If there isn’t something in writing that spells out roles and expectations and lists payments and consequences, there could be big problems. The reality is that uncertainty regarding the nature of business relationships, even with friends, can lead to unclear rights and responsibilities and potential liability. These issues can lead to arguments over the roles friends play in the business, what they are entitled to, and ultimately lawsuits or the end of a friendship.
Q: What is an important lesson or two a budding entrepreneur could take away from a movie like “The Social Network” — either good or bad?
A: Get your own lawyer. There is a scene in the movie where Eduardo Saverin, one of the co-founders of Facebook, signs legal documents and contracts related to a venture capital investment. When more capital is infused, his share of the company drops from 30 percent to less than one percent. He famously says that he thought the company’s lawyers in the room with him were his lawyers. As a partner in a company, and many are formed this way, it’s important that you get independent counsel to look out for your individual interests in big deals and let the company’s attorney look out for the company. This leads to a clear understanding about right, liability, and ownership that avoids problems down the road.
Q: You promote “basic contracts” that deal with ownership of intellectual property. Can a basic contract handle what seems like a complex issue? Wouldn’t a flesh-and-blood lawyer be better for something like that than a website?
A: For many businesses, there are basic elements of intellectual property ownership that can be addressed in form contracts. If, for example, you hire someone to build your company’s informational website, write copy for your blog, or shoot photos for your marketing materials, you can ensure that your business owns the rights to their work by describing it with sufficient particularity and clarifying your ownership in the agreement. These provisions can be fairly standard and certainly are better than the alternative of leaving the question of title unaddressed. On the other hand, when the intellectual property you are contracting for will be the key asset of the company or the basis for significant investment, I would recommend engaging the services of a seasoned IP attorney.
Q: Basically, most entrepreneurs are risk takers. Does that make them averse to having contracts with friends? Isn’t a handshake good enough for these types?
A: Even the biggest risk takers don’t want to lose their friends. Across the board, entrepreneurs who are serious about their businesses and operate them professionally use contracts. It’s simply a good business practice.
Q: A radio interviewer asked you a good question worth repeating. What kind of legal documents should new entrepreneurs have in their toolboxes when starting out?
A: That’s a great question. There are two categories of legal documents entrepreneurs need — those needed to organize the business and those used to run it once organized. To start the business, owners need the filing document required by the applicable state to form the legal entity, whether an LLC or corporation, and the necessary state and federal tax registrations. Local permits and licenses, if any, are also needed. And if the business has more than one owner, a governing / partnership agreement (an LLC operating agreement or corporate shareholders agreement) should be in place to address issues including control, profit allocations, and divesting of ownership interests should certain events occur.
To operate the business, for “entreprofessionals” (my word for people who are offering their personal services as a business), also need a services agreement for providing services to clients, a subcontractor agreement to get others involved with the delivery of the work, a referral agreement to pay others for sending business, and a non-disclosure agreement.
Q: Your blog touches on non-disclosure agreements. Do these provide effective protection in the real world?
A: For many entrepreneurs, their ideas are their business. If someone is set on stealing an idea, no contract or NDA is going to stop him or her. That said, it does give you certain protections and lets others know you are serious about preserving your ideas, products, and business.
