Wednesday, June 18, 2014

Mobile Monday Knows Your Startup's Top Legal Mistakes

I attend Mobile Monday Silicon Valley events even though I don't work in the mobile sector's ecosystem.  I keep my finger on the pulse of mobile action and meet the folks who put those fancy apps on your smartphone.  The event this week was a chance for aspiring entrepreneurs to hear from attorneys on how not to make common legal errors.  I did not make any errors when I wrote my nametag.  It is truly a state of perfection.

The panel attorneys from Arent Fox and elsewhere handed out free wisdom like candy.  There was also free candy available from the Tea Room where they infuse their chocolates with green tea, oolong tea, chai tea, and other stuff.  I had my fill of chocolate and took the legal stuff seriously.

Following one's own privacy policy and assigning founder ownership stakes early are pretty basic things.  The preponderance of lawyers with diverse specialties makes me think there's a disruptive opportunity for an online lawyer rating and referral service.  Call it the attorney version of Yelp.  It's too bad Yelp has such a poor reputation that even lawyers should be reluctant to use it.

I hate to admit that likability is a factor determining whether VCs invest in a startup.  Investors believe in founders more than tech and will push them to pivot if Plan A doesn't work out.  I learned long ago that physical attractiveness and pedigree are key to likability.  The guest lecturer in my 2002 MBA venture capital class told us about how her high heels, fishnet stockings, and revealing cleavage helped her close several rounds of funding as a serial entrepreneur.  I have told several female entrepreneurs that leveraging sexuality is a successful tactic.  That's one reason many attractive women flock to me for wisdom, and other means of stimulation.

I liked hearing the tidbit about structuring owner and advisor equity stakes to align with those parties' fair time commitments.  Linking the vesting of an advisor's shares to their fulfillment of agreed objectives is an acceptable practice.  Setting term limits on an advisor's board participation is a helpful way around the discomfort of firing them for non-performance.  I remember last year when a startup I was mentoring through an accelerator demanded that I violate the accelerator's rules on time commitments and complete all of their worksheets for them.  I refused to violate the rules and the startup fired me as a mentor.  They retained a former poet with no entrepreneurial experience as a mentor.  That startup never made it through round one of the accelerator and the founder failed to commercialize any of his inventions.  I don't think it's difficult at all for an advisor to perform well for an ethical entrepreneur.

I learned a little bit about the culture of Silicon Valley.  The Valley ethos of "pay it forward" favors gratis introductions to build relationships.  Any startup advisor who demands compensation in exchange for introductions to investors raises a red flag in the Valley.  That alert must propagate through the Valley's networks like wildfire when it happens.  I marvel at the persistence of some "pay-to-play" entities that knowingly flout this ethos.  Their excuse is that many hopeless startups benefit from paid exposure to well-heeled groups even if no investment is forthcoming.  The reality is that naive startups get fleeced by paying entry fees to pitch fests where no serious investors will be present in the audience.

Some top-drawer law firms do demand a cut in exchange for investor introductions, but they can get away with that because they have access to so many real venture investors who look to them for deal flow.  I've also noticed that the top law firms will accept equity compensation from cash-poor startups.  I say that's a fair way to comply with the Valley's culture of mutual helpfulness.

I'm not going to castigate the legal climate of California.  I trust my state's business laws and I don't need a legal domicile in any other state that would subject me to an unfamiliar jurisdiction.  I unwound my LLC structure and Alfidi Capital is now a sole proprietorship because incorporating just didn't benefit me.  I don't know how California law treats employee non-agreements but plenty of Valley firms poach from each other constantly, so I suspect those agreements aren't worth much outside of something extraordinary.  The attorneys present at this Mobile Monday panel viewed non-competes as a form of golden handcuffs enforceable during corporate acquisitions.

Startups can protect their IP with a "file patent, sign NDA" approach.  Tech developers under contractual employment agreements may be tempted to leave early and take that tech to a competitor.  Filing a patent on that tech keeps it with the startup that agreed to pay for its development.  Requiring the contract engineer to sign an NDA clarifies their role as an employee hired to perform a specific service.  The disclaimer language assigning IP ownership to the startup, and not to the employee, should be airtight.  Don't ask me how to write it; I'm not an attorney.

I'll close with a video parody one of the attorneys liked.  Check out an imaginary Nikola Tesla pitching Silicon Valley VCs.  This never happened in history but some future super-genius will relate to the process.  All of the Silicon Valley biases are there.  Teams, lead investors, and pitch decks matter for any startup that isn't run by Nikola Tesla.  Those self-absorbed VCs like teams.  I don't like teams unless they leave me alone to do my thing.  I think Nikola Tesla would have loved to speak at Mobile Monday.