It’s never OK to Toss your Crème Brulee

Entrepreneurs face many threats that can affect the timing and the success of their businesses.  The most obvious threats are external ones – the economy, changes in regulations that directly affect your industry, the threat of competition, or worse yet, someone stealing your ideas.   For this reason, most entrepreneurs that come to me for the first time are looking to protect themselves from external threats – a standard non-disclosure agreement, a trademark or patent filing – as it is generally believed that having NDAs in place and IP pending approvals demonstrates the company has created value and is protecting it diligently.

But consider this: most investors would cite as the most compelling reason they invest in a company is the management team yet, strangely enough, these relationships are usually the least protected of all the company’s assets.

According to the National Venture Capital Association, you and your partner will have a falling out within a month of working together and it is commonly known that 9 out of 10 startups fail within the first 2 years.  (as per Forbes Invest In Startups, if You Dare, to Balance Your Portfolio, Sept. 21, 2012).

Over the years, I’ve been asked to intervene on a variety of disputes – worst of which include: one Founder emptying out bank accounts, changing office locks or another taking company equipment to use as negotiation leverage. Fortunately, there are laws to deal with these situations but no one really wants to go there when starting up a new business.

A Founders Agreement is akin to a prenuptial agreement for startups. Without them, points of contention with respect to management responsibilities, share ownership, terminating of employees (or co-founders), contract details, and personal investments can disintegrate great partnerships.

To bring home the point of why Founder’s Agreements are so critical to any new venture, I will share with you my experience when I was just the proverbial babe in the entrepreneurial woods.

In spite of precautions – NDAs, trademarks, privacy and disclaimer statements, the founders of my startup up didn’t have any formal agreement that addressed the issue of termination (or break-up of the Founders). We simply assumed we’d address these critical issues at the time of funding (a/k/a let the investor decide).

So clearly, a Co-Founder falling out on the eve of signing a Term Sheet with an Investor is probably the worst thing any entrepreneur could imagine.  Yet, this is exactly what happened.

After many months of investor presentations and continuing to personally bootstrap the company, my partner lost faith and patience.  So instead of shaking hands and parting ways, unbeknownst to me, he began to circumvent our business relationships for his own personal gain. He began contacting a couple of my longstanding clients to handle their business directly.  I had just gotten off a phone call with a trusted colleague advising me of this offensive behavior, when a fax came in from an investor I had previously met, setting forth terms of a very attractive offer to fund our company.

The following day I was scheduled to speak at a conference. Afterwards, a banquet was planned and there sat the traitor wearing a name badge with my company’s name. He was smiling and had no idea I knew of the wrong he had done our little company.

As I looked over at his goofy, crooked toothed-smile I felt my blood pressure rise.  I wish I could remember the exact words that set this entrepreneur into a psycho tailspin but all I can recall is reaching down for the Crème Brulee at my place setting and without so much as a blink, dumping it directly over his head. Seeing his look of astonishment (and the startled expressions of those who witnessed this display of assault) I knew there was no way we were going to resolve our co-founder disputes.

So that left me with 2 choices:

1.  Fight him in court to enforce the NDA (putting company business on hold and likely losing the investor);
2.  Make him a buyout offer and move on.
   

(On principle, the lawyer in me really wanted to take him to court but the CEO in me had to be commercial and do what was best for the company and the rest of the staff.  All in all, was not an easy pill to swallow). 

 

I decided to be candid with our investor about my co-founder conundrum (which, by the way is always good business practice). Turns out, not only were they willing to invest, but they also agreed to buyout his shares.

Takeaways:
 

The most commonly overlooked area in need of protection is the co-founder relationships.

A Founders Agreement is the single most important thing to do up front. The first year is make it or break it so-- set yourself up for success by promoting a culture of clear communication. Otherwise, disputes can often lead to litigation or otherwise, as in my case, tossing Crème Brulee.  

It sounds so simple – so, why do so many startup teams go without internal agreements? Subscribe to my blog to receive next week’s installment on this topic.

Want to read more about Startup Agreements? Here is a blog I like from Simeon Simeonov that talks in more detail about Founders roles and agreements. I also like this book The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton University Press, 2012).

Thanks for stopping by!

Disrupting the NDA

Brillson’s Law on Non-Disclosure Agreements (a/k/a Neurotic Delusional Approach)

 
Since mere ideas cannot be protected with patents, trademarks or copyrights, to get a concept off the ground with the support of others involves a certain degree of risk. You may need to share your ideas with vendors, investors and maybe a partner or a mentor. So how do you protect your ideas at this critical stage of development? Most would reply:  sign an NDA.

Yet, the NDA is the most overrated document in today’s business. Its purpose is to discourage someone from sharing or using your ideas under “penalty of law” but it does not prevent unlawful disclosure.  Indeed, in the age of digital communication where we can easily email, post or tweet, it may be nearly impossible to track (or prove) the source of the information leak. Yet lawyers continue to encourage the use of NDAs as a precautionary measure, in spite of its questionable effectiveness.
Protecting Information Internally. As far as Employees, directors, attorneys, accountants and other individuals that have been placed in a position of trust, state law imposes upon them a duty of loyalty — an implied obligation to keep your trade secrets and internal communications confidential and to not take actions that will cause your company harm. While confidentiality agreements are useful insofar as they specifically spell out the obligations of confidentiality and/or non-compete, even without a signed NDA, you take legal action against them to enforce their obligations.
Protecting Information Externally (e.g. contractors, potential investors, suppliers and other third parties). While there are limited state laws that impose obligations on third parties, An NDA is only as valuable as your ability to enforce it. For example, if you can’t afford to hire a lawyer to sue someone in court, chances are, you won’t be able to stop their unauthorized disclosure or theft of your ideas. And even so, can you prove it? The most common defense is that the information was developed independently. Let’s assume for a moment that you were to win your case, while you may be able to stop them from exploiting your ideas, damages may be hard to calculate – particularly if the information leak at issue is a plan or a concept that has no value other than the idea itself.
In short, NDAs are the equivalent of a handshake in documented format. It may have the effect of deterring someone from sharing your confidential information but it does not prevent it.
In my opinion, the main value of an NDA is to act as a starting point for new business discussions. It also provides verification of each party’s identity (corporate details, state of incorporation, the name and signature of an authorized representative.
In the context of today’s business environment, one may think of NDAs as a Neurotic Delusional Approach toward innovation:  an illusion of greatness in one’s ideas that gives rise to insecurity that the idea will be misappropriated.
NDAs are not a substitute for trust or good judgment. Use discretion regarding who and what to share – if you don’t think you can trust them, they are not the people you want to work with.
That being said, a great idea is worth sharing and innovators need to open up conversations with industry much earlier and disclose knowledge-based propositions pre-contract. Otherwise, be willing to put your idea in the public domain and let innovation take its course.

Leave me a comment and share your thoughts with me on the value of NDAs.

The Compassionate Leader

 

As an attorney and executive adviser, I have been regularly called upon by management (or their boards) to manage crisis. Whether it is an employee or director matter, a falling out between partners, a threatened litigation, or breach of confidentiality; all companies face crisis from time to time. While external issues are not always in the control of management, internal issues typically are. Whether internal/external, how these threats are handled are indicative of the type of leadership skills management possesses. In a recent workshop at the Thiel Foundation’s 20-Under-20 Retreat, I asked 30 new entrepreneurs and mentors what they thought was one of the most important qualities in a Leader.  The responses I received ranged from:  a hard worker to a multi-tasker to having a vision.  While these are all important traits, in my opinion, one of the most important ones is compassion and here’s why:

• Employees know whether or not you really care about them – if you listen to their ideas, communicate openly, understand their key strengths, and compensate them fairly.
• Clients will  know if you truly care about them -- if you are responsive to their needs, provide proactive customer service and offer solutions that help them work better/smarter/faster.

Sure, management is under a great deal of pressure to meet sales objectives and satisfy their Board of Directors.  At the same time, startups are generally cash strapped and may try to do things on a shoe-string but what are some of the real underlying problems that generally lead to crisis mode?

1. Shutting out those who know the problem best.

Employees are generally aware of the issues at hand and some may have good suggestions on how to turn things around; after all, they are the ones in the trenches who have a vested interest – a continuing paycheck and a potential payout on their stock options. Keeping them in the dark creates an environment of distrust and insecurity.
In one case, the CEO held a weekly conference call with the team. The majority of the time when someone voiced an issue the response would typically be: “This isn’t relevant to the rest of the group; let’s take this out of band.” Needless to say, that offline conversation rarely happened.  After awhile, the weekly conference calls were nothing more than a cheerleading session where most people were on mute (e.g., doing other things) while the CEO congratulated himself and the team or staying in business for yet another week.

2. Promising what you can’t deliver.

Employees and consultants share the same ongoing objective – getting paid for their work and having access to necessary resources. Unfortunately, management doesn’t always get the memo.

In one startup, consultants were rarely paid on time and employees’ expenses were not readily reimbursed.  They’d hear the “check is the mail” and then two weeks later, nothing. “ One employee who reportedly emailed the CEO on a daily basis to let him know there was still nothing in his mailbox finally received his check with an added bonus: a termination notice inside.

In another instance, the product specs were oversold; customer deadlines were not being met and the CEO’s phone went straight to voice mail. Employees had no idea what to communicate to their accounts and so eventually, their business began migrating elsewhere.

3. Gossiping about others.

To me this is probably the worse offense I’ve witnessed in a company -- the CEO who gossips about his employees, his board members and even his customers.   Sure it’s hard to be the CEO when you’re at the top of the food chain and no one to gripe to but hey, haven’t you heard…. it’s lonely at the top.
A recent Randstad survey of more than 1,500 U.S. employees found that three out of five workers listed gossip as their top workplace pet peeve. If the CEO is gossiping to me about someone else…what is he saying about me to others?  In that environment of distrust, everyone’s watching his back and not the bottom line.
Compassionate leaders can avoid or manage crisis best when they listen to the concerns/feedback from the team, communicate expectations clearly and honestly and doesn't disrespect others by gossiping.  A leader that chooses to cultivate compassion will have a significant advantage over those that do not. Business owners may consider this "Dalai Lama approach" to be too touchy-feely, but in truth, cultivating positive relationships is at the core of any successful business or relationship.

What are you thoughts on compassionate leadership? I'd love to hear from you! www.paulabrillson.com