When starting a company, every decision is important. Part of the journey, unfortunately, could be dealing with daunting legal issues.
C. Andrew Keisner, an attorney in the Intellectual Property (IP) and Litigation Practice Groups of Davis & Gilbert LLP, wants to help you avoid these common pitfalls. At RoboBusiness 2014, Keisner shared the “Top 10 Legal Pitfalls for New Robotics Companies.”
1. Giving Equity Without Appropriate Conditions on Performance/Commitment
All robotic companies face some degree of employee turnover, and it is not uncommon for some employees to leave after a short period. As a general rule, businesses should not offer a percentage of the company without terms or conditions. In operating agreements, buy-back provisions with equations for calculating valuation are often worthwhile, and vesting schedules for employees are a must.
?A lot of people don?t think they?ll ever have this problem,? Keisner says. ?We?re both reasonable people, we both work really hard. Well, they might be reasonable, but you?ve still been working hard and trying to round up investors three years after that person left.?
2. Overstating a Product?s Performance Capabilities
Many roboticists do not understand what is considered advertising in a legal sense, and they also incorrectly believe the mantra ?don?t lie? is sufficient guidance to those touting a robot?s capabilities.
Yet, consumers often have heightened expectations for products labeled as ?robots,? which is problematic because anything that consumers consider materially misleading about the product could subject the company to investigations by regulators (FTC, Attorneys General), litigations and/or NAD proceedings by competitors, or consumer class actions.
?Any publicity is good publicity, right? That?s just not true,? says Keisner. ?Advertising isn?t just TV and print ads. From a legal standpoint, it?s also YouTube videos, tradeshow materials, press releases, and these are all highly regulated. There are tons of ways you can be sued for false advertising. And that?s usually where honest companies get in trouble.?
Keisner referenced the March 2014 Darisse et al v. Nest Labs, Inc. lawsuit that claims Nest allegedly misled customers about the amount of energy and money it can help save. Keisner says that if you?re promising something to customers, make sure you have a way to prove it if someone decides to challenge you.
3. Ignoring Potential Disputes
A dispute can quickly turn into a lawsuit if ignored, and litigation can cost the company far more time and money to resolve than if the issue had been quickly addressed. Most disputes can be resolved quickly on amicable terms before emotions or an overzealous lawyer get the attention of the potential plaintiff.
4. Failing to Foresee Regulatory Requirements
It is important to know what regulations apply to your company?s product (e.g., FDA, FAA, FTC or state laws). Not being aware of regulations applicable to your industry, your product, or your customers can upend a company?s budget, delay product releases, or worse.
?If you don?t know whether or not you need FDA approval, investors are going to think the worst,? Keisner says.
5. Employees Not Knowing IP Basics
Failure to formulate an IP strategy and educate employees on the basic rules can lead to unintentionally forfeiting the company?s valuable IP. An IP-savvy startup needs to know how to protect the company?s core IP assets, further the company?s objectives, and even identify ways the company can monetize its IP in other industries.
Knowing the basics isn?t necessarily easy, Keisner admits, but it?s a must and is expected by investors.
?Everyone is extremely passionate about the robotics industry, and they?re in the industry for a reason. A lot of times, they want to talk about what they?re interested in and tell their friends about something they?ve been working on for the past three years. I worked with a company that had its engineers posting videos on YouTube about its IP. It happens.?
6. Not Understanding the IP Landscape
What happens if your company is successful? Are there any IP roadblocks? It may not change your company?s decision to press forward with a product, but what IP already exists (and who owns it) might change what your company does proactively to reduce risk and increase its valuation.
?I see companies getting so far into their product without doing their due diligence when it comes to IP,? Keisner says. ?I?m a big advocate of knowing the risks and making a smart decision based on those risks.?
Moral of the story: work with an IP expert. Don?t navigate this complicated landscape on your own.
7. Assuming Unpaid Interns and Highly Paid Employees Are Exempt From Overtime Pay
Not knowing the applicable federal and state standards to determine whether an intern or employee is entitled to overtime pay is a common and costly mistake. It is crucial for companies to understand the applicable standards in their state. However, for those interns or employees that are exempt, it is also important to memorialize the roles and responsibilities of these individuals, including in employee/intern agreements and the company?s employee handbook.
8. Not Documenting Poor Employee Performance, Grievances
It can be emotionally taxing to deal directly with an employee?s poor performance or inappropriate behavior. Nonetheless, it is important to document all issues that could be the subject of potential future disputes. Failure to document such issues or address them with the employee can expose the company to unnecessary risk in the event of a separation/termination.
?When you have a team of 10 people, you know everyone. It stinks to go back and document someone who?s doing a bad job,? says Keisner. ?It stinks. But once a month, ask yourself if that person isn’t doing something well, document it, and it?ll protect you down the line? if something comes up.
9. Ignoring Privacy and Data Security Issues
No company is too small to worry about data security and privacy requirements. Ignoring these issues can taint your data and company?s value. It is critical for a company to know when permission is required before collecting data, and to be cognizant of employees using personal devices, email, and Dropbox for company purposes.
10. Non-Disclosure Agreements (NDAs)
Taking an all-or-nothing approach is never correct. There are circumstances where an NDA is appropriate and circumstances where it is not. All startups should be savvy about NDAs, including when and how to use them without getting in the way of business.
He uses the term ?FrieNDA? in regards to being too casual with friends about confidentiality agreements. Nobody wants to have that uncomfortable conversation with a close friend, but Keisner says it has to be done. He says send an email memorializing a confidentiality agreement so it?s tracked. ?Just find a cool way to get this done with friends.?