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September 2000
Roundtable: An Ounce of Prevention
By Nethea Fortney-Rhinehardt

If you don't have good legal representation, you may be in for a surprise. Intellectual property, non-compete agreements, institutional investors, hiring practices and a host of other complexities can thwart promising ventures.

Robinson, Bradshaw & Hinson, P.A. is no stranger to growing businesses. This 40-year old firm serves as counsel to some of the area's most successful public and closely held corporations, limited liability companies, partnerships and more. This breadth of experience has equipped the firm to anticipate and respond to the needs of emerging companies.

Greater Charlotte Biz recently met with three Robinson, Bradshaw & Hinson partners, all experts in their respective fields: Bob Bryan - intellectual property, technology, computer, corporate and international law; Haynes Lea - private equity financing, private placements, taxation, corporate and commercial lending law; and Mark Merritt -antitrust, securities, complex litigation, and employment law. This legal dream team offers their perspective on issues facing early-stage companies.

What's the most important thing for an emerging business owner to be aware of?

Bob Bryan: The most important thing is to have a good solid business plan first, then decide how the Web or e-business can help implement that plan. There are a surprising number of people who skip that first step. Technology itself is not the business, but simply a means of implementing the business.

How does a business owner find the most appropriate counsel for their type of business?

Bryan: If you already have a good lawyer that you have confidence in, and who is knowledgeable and competent in all the aspects of your business, then there's no need to change lawyers. But if your business is in an area outside of your attorney's comfort zone, you might consider a change.

Haynes Lea: I suggest getting referrals from other business people and meeting with two or three law firms. Important questions to ask are: How will my work be done? How will it be executed within your firm? What is the way in which you operate within the firm to see that my work gets done timely and cost efficiently?

Mark Merritt: It's important to interview different firms to find lawyers you have a good rapport with. Ask them hard questions about their expertise. What deals have you done in this area? What kind of financing have you done? What anti-trust problems have you taken a look at? Tell us about your experience and how you have moved your clients down the path to success. People shouldn't be shy about asking those kinds of questions.

Do businesses hire a law firm or do they hire a lawyer?

Merritt: Often the entry point is a lawyer with particular expertise who does the job well and gets the law firm's foot in the door. But I have found that if one lawyer is doing a good job in the firm, it ends up expanding the relationship to meet the broad needs of the client.

Bryan: I think most people hire a lawyer, but it's the firm that retains the relationship. I have found that most owners of emerging businesses are not interested in having the traditional kind of legal relationship. They want a core group of people who are part of their team, who understand their business and are interested in their success.

Lea: The makeup of that team is going to vary from client to client, and maybe from project to project. It's the responsibility of the main relationship attorney to assemble the right people to build that team so they get that kind of representation.

What type of business structure is best for a start-up?

Bryan: There really are a lot of factors to consider. Early stage companies tend to be very frustrated with the amount of time and expense involved in organizing the company properly. But this is one area where if you don't do it right, it can cost you a lot of money later on.

Lea: There isn't an automatic answer that applies across the board to every situation. However, we do see a lot of deals where a company has had a number of angel investors and are now seeking institutional investors, but the company structure is in disarray. There are securities law issues, corporate formation issues - organic problems. And before the institutional investment, attorneys have to repair the problems. It's really a more expensive proposition than if it had been done correctly at the beginning.

I've developed a great business plan, selected my attorney, and I'm about to seek investors and raise money. What should I be concerned about at this stage?

Lea: Your business model must show how you're going to make money. There are a lot of companies that come forth with a business plan that doesn't really specify how the technology will generate revenue. Investors look more closely at how quickly companies generate not just revenue, but also operating profit based on realistic assumptions.

Bryan: Investors are also looking for some proprietary edge that can keep you at the forefront and minimize competition. Before you show that business plan to anyone - and this is where your lawyer comes in - you need to make sure that it's really proprietary. If trade secrets are the key to your success, then you must take necessary action to protect those secrets. If it's a patentable idea, then you need to make sure that you're not losing your chance to get a patent by marketing your idea. If it's a catchy name you're using, file for trademark protection before you present your plan.

It is very difficult to protect against intellectual property theft. Every potential investor could sign a confidentiality agreement, but it is extraordinarily difficult to prove that someone really got a high-level idea from you. So you need to take appropriate steps to protect yourself before you go out and start publicizing your plan and your idea. Merritt: A trade secret is something that can't be reverse engineered. You have to have taken appropriate steps to maintain its secrecy throughout the lifecycle of the idea or trade secret, or those rights are waived. If you're in a lawsuit over a trade secret, you'll be asked, 'Did you keep it locked in your desk? Within the company was it restricted as to who could see it? When you gave it out to potential investors did you have them sign confidentiality agreements and did you have them give it back when they didn't make the investment?' I don't think people understand the degree of burden the law puts on someone who's trying to protect a trade secret.

How important are confidentiality agreements and non-competes in protecting my business interests?

Lea: As Bob mentioned, protection of ideas and proprietary information is important, but there are practical as well as legal limitations on these agreements. For instance, institutional investors do not typically sign confidentiality or non-disclosure agreements while you are under consideration. They are not out to steal your ideas and apply them somewhere else. It's just that they review so many business plans and cannot be restricted in any way or exposed to a lawsuit. However, once they sign onto a deal and invest, then typically you can negotiate a reasonable confidentiality agreement.

Merritt: Institutional investors invest in people as much as intellectual property. They want to know how you are going to keep key employees. Are they subject to an employment agreement or non-compete? As an investor, I want to keep key employees. I want them subject to a three-year employment agreement and a year covenant not to compete after terminating employment. Your attorney can help balance some of those risks and create a package that's fair to both the employees and the investors.

A lot of emerging companies are using incentives like stock options to lure qualified employees. Is that an avenue a business owner should consider?

Lea: Investors like to see that a young company is not using cash to pay big salaries. Stock options encourage employees to work hard and stay with the company for a longer term.

Bryan: But there's a real danger there if you don't maintain a balance. If you're paying someone a salary well below the market, often the only reason they're staying is in hopes of cashing in on stock options. This can breed temporary, disloyal employees. If your prospects suddenly take a dip, you can lose workers. But if you strike a proper balance between a reasonable salary and an incentive to share in the upside, employees tend to be more patient and loyal.

What legal issues does e-mail create?

Bryan: E-mail is a part of a company's records. In the recent Microsoft litigation, the careless e-mails were pivotal in losing the lawsuit. It's astounding the things people will say in an e-mail that they would never put in writing. My view is that any company, even in an early stage ought to think through its e-mail retention policy and decide how long they want to keep these e-mails.

Merritt: When the FTC and the Department of Justice conduct an investigation into a merger or acquisition, they always ask for e-mails. We are aware of cases when in excess of 100,000 e-mails have been reviewed.

Nethea Fortney-Rhinehardt is a Charlotte based freelance writer.
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