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Attorneys warn startups of potential missteps

By   /   Wednesday, October 12th, 2011  /   Comments Off on Attorneys warn startups of potential missteps

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Starting a small business is expensive enough without tacking attorneys’ fees onto the budget, but Santa Barbara lawyers say quality legal services are a critical investment for every startup.

New businesses benefit from partnering with legal counsel for a few main reason: It’s more expensive to fix legal mistakes down the line than to ensure above-board practices from the beginning, and business owners should know about regulations surrounding their particular industry.

“Lawyers are a necessary evil,” said David Lafitte, a partner at Santa Barbara-based Stradling Yocca Carlson & Rauth. “Every new venture needs legal advice. Anyone interested in the emerging growth or startup market knows that you need to pay attention, and sometimes pay money, for the privilege to make more money later.”

Lafitte spoke to a crowd of about 80 local residents at a presentation put on by nonprofit networking organization MIT Enterprise Forum on Wednesday. The program, called “Top 10 Legal Mistakes Startups Make and How to Avoid Them,” was targeted towards community members who are either in the process of starting a new venture or currently running one.

According to Lafitte, cost isn’t the only reason new business owners often don’t hire lawyers at the outset — in fact, many corporate and intellectual property attorneys only bill small business owners once their enterprise starts making money. Lafitte said many business owners believe they don’t need lawyers because their businesses are successful from the beginning.

But even companies that earn money from the beginning can hit legal hurdles down the road if they run into financing, intellectual property or tax problems. Jason Spievak, the co-founder and CEO of call performance technology company RingRevenue, said he has firsthand experience with the problems new business owners face.

“As the guy who pays the bills, I don’t think there’s anything evil about legal services,” Spievak said. “I’ve seen every single issue these lawyers are warning against become a deal-killer. Building a company is a chess match. You need to partner with an attorney who can help you strategically.”

Most of the mistakes startups make, Lafitte said, involve corporate formation, financing, taxes and stocks, and intellectual property. From selecting the corporate entity to administering stock options to new employees, starting a business is fraught with legal issues. Lafitte said business owners should consider the long-term impact of every decision they make.

He said his firm recently reviewed two of its business clients’ standard employment contracts and found glaring mistakes. “We made them go back and change everything,” he said.

As SoCal IP Law Group partner Steve Sereboff said, one of the most important things new business owners can do is spend the right amount of money at the right time. He said many of his corporate clients run into copyright, trademark and patent problems because they didn’t invest in basic legal services.

“Intellectual property work is like plastic surgery,” Sereboff said. “Anybody can go down to the hardware store and buy a knife, but if you do it wrong, you’re going to mess up your face. Lawyers are here to help you avoid that scarring.”

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