Editor’s note: A Quora user recently asked, “What is the most common legal mistake that attorneys see laypeople make?” This great answer was written by Adam Nyhan, business attorney for Opticliff Law in Portland, ME, and is reposted here with his permission.
I’m a business lawyer, so my answer will reflect the types of mistakes that clients of mine make. I work mainly with software companies and various small businesses, from lawn care companies to graphic designers. Common mistakes:
1. Two people start doing business together without writing up a clear agreement that spells out their understanding of what they’re doing together, and what that means for who gets paid what, and when, and who owns any intellectual property that the project might create and who has what rights to make decisions about it. Bottom line: if you’re working with somebody else, write up a detailed written agreement that explains all of this. Ideally use a lawyer. If you can’t afford one, do your best, and do it in writing. Not just so you have “proof” later, but (a) because the process of writing it down will help you make sure to address the key terms of the deal and (b) so you both will remember a few years later what you agreed to today. It’s not actually that common for one person to just lie later about what the agreement was; much more common are failures of memory and failures to address the key terms up front. For example, Susan and Joe might agree they will be cofounders of a company, but they don’t discuss what happens when (not “if”) one of them quits later to take a new job. Will the departing co-founder get a cash buyout? By what valuation method? Who pays for the outside expert to do analyze the company’s value? Far better to agree on this today than argue about it when a co-founder gives notice.
2. A company does not research trademarks before sinking time and money into marketing the company or one of its products, and then gets a cease-and-desist letter from the owner of a similar company or product name. As a result, the company now needs to re-brand and start building their reputation again largely from scratch. Not too bad if you’re a service company, but if you’ve already paid to stamp your logo on a few thousand t-shirts or stickers or already shipped out physical products to customers, it’s a huge loss. Bottom line: when your budget permits, ask a trademark lawyer for a search to determine whether your name is going to buy you trouble. This is less important if you sell a product or service only locally, but if you sell anything online, it’s key.
3. One person/company hires another to create something (software, a website, a graphic design) and they don’t have a clear written agreement that says who owns the resulting work and/or who has a license to it. Bottom line: the person who created the work generally owns it unless she and the person who hired her signed a fairly specific written agreement that transfers the ownership to the client. Which means if you hired that graphic designer and didn’t have that agreement with her, then you don’t actually own that cool design she made – you just have a license that she can revoke at any time, which is the least useful type of license to have. Have a lawyer write an agreement for you—ask one for a “work for hire” or “I.P. assignment” agreement. It will cost you a fraction of what the designer will charge you for the design itself and is the only way to make sure you just bought what you meant to buy.
4. Company A sells products or services, but rather than having its own standard template contract that it uses to sell them, it always agrees to sign contracts drafted by the companies that want to buy those services. As a result, Company A signs a clause that, to its surprise, gave away rights it couldn’t afford to lose. Maybe A accidentally gave away ownership of its software rather than a mere non-exclusive license. Maybe A agreed to subject itself to the jurisdiction of courts in Grand Cayman or Kansas in the event of a dispute. Bottom line: have a lawyer draft a standard agreement for whatever you sell, and use that agreement wherever possible. When you start selling to larger companies, they’ll insist that you sign their agreement, but that’s fine. Often they claim they can’t deviate from their standard terms, but if you make some reasonable suggestions for edits, they’ll agree to them after all. Your lawyer can help you “sell” those changes to the lawyer for the other side.
5. A company hires a freelancer to do some specific type of work for them, and they don’t realize that a state labor or tax agency may later look at that relationship and determine it’s an employment relationship and not a freelancer relationship. As a result, the company now may owe back taxes, health care benefits, unemployment benefits or overtime pay. States are increasingly cracking down on these arrangements, and there are usually pretty easy ways to avoid this situation —they may include insisting that the freelancer create her own single-member LLC to do her business through, and they may include language in the contract clarifying that she may work for your competitors. This depends on state law. But it’s no joke. I realize people in these situations are not deliberately trying to “take advantage” of anybody —they just are not aware of how the law works and don’t realize they should take steps to reduce these risks. Bottom line: if you hire a freelancer, talk to a lawyer in your state about how to set up the relationship between the two of you. Most business lawyers have a simple independent contractor agreement that they can tailor to your situation for a few hundred bucks. Well worth the risk reduction that it brings.
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