Chapter 8 Preparing the Proper Ethical and Legal Foundation Entrepreneurship: Successfully Launching New Ventures Modified from Barringer and Ireland (2006)

5 Initial Ethical and Legal Issues Facing a New Firm Ethically departing a former employer Choosing an attorney Drafting a founders’ agreement Avoiding litigation Choosing form of business ownership

Issue 1: Ethically Departing a Former Employer Ethical Guidelines How to Behave in a Professional Manner Give proper notice of an intention to quit Must perform all assigned duties until the day of departure If leaving to start firm in same industry, must not take information that belongs to the current employer Be sure to Honor all Employment Agreements Honor all nondisclosure and non-compete agreements entered into at the time of employment Nondisclosure Agreement: is a promise made by an employee or another party to not disclose the company’s trade secrets Non-compete Agreement: prevents an individual from competing against a former employer for a specified period of time

Issue 2: Choosing and Attorney for the New Firm Considerations when Choosing and Attorney Entrepreneurs should select an attorney as soon as possible The attorney should be familiar with start-up issues and should have experience To manage the finances, they will often work out payment plans with entrepreneurs Criteria to consider: Contact local bar and ask for a list of start-up specialized attorneys Interview several attorneys Select an attorney who can assist in raising money for the firm Double-check the attorney’s track record

Issue 3: Drafting a Founders’ Agreement (AKA shareholders’ agreement) What is a founders’ agreement? Written document dealing with issues like: Relative split of equity among founders of the firm How individual founders compensated for cash or “sweat equity” put into the firm How long founders have to remain with firm for shares to fully vest Items to include in a founders’ agreement: Nature of prospective business Brief business plan Identity and proposed titles of founders Legal form of business Division of stock or ownership share for each founder ID of any IP signed over to business by any founder(s) Description of initial operating capital Buyback clause

Issue 4: Avoiding Legal Disputes Most disputes result from misunderstandings, sloppiness, or lack of legal knowledge Steps an entrepreneur can take to avoid legal disputes: Meet all contractual obligations Avoid undercapitalization Get everything in writing Promote business ethics via codes of ethics and ethics training

A Note on Promoting Business Ethics Promoting Business Ethics in a New Venture Code of Ethics: describes firm’s general value system, moral principles, and specific ethical rules Ethics Training Programs: formal programs teaching employees to respond to ethical dilemmas that might arise Most common ethical problems Human resource ethical problems Example: job interviews Conflicts of interest Example: hiring family members not qualified Customer confidence Example: Nike and Kathie Lee and sweatshops Inappropriate use of corporate resources Example: taking paper and pens home from work

Issue 5: Choosing the Legal Form of Business Sole Proprietorship: involves one person; the person and business are the same; not a separate legal entity Partnerships: when two or more people start a business General Partnership: two or more (general partners) pool their skills, abilities, and resources to run a business Limited Partnership: same as general but includes two classes of owners—general partners and limited partners Corporations: separate legal entity organized under the authority of a state C-Corporation: separate legal entity that, in the eyes of the law, is separate from its owners S-Corporation: subchapter S corporation combines the advantages of a partnership and a C corporation. Must meet certain standards to become S-Corp. Limited Liability Company: LLC combines the limited liability advantage of the corporation with the tax advantages of the partnership

4 Issues to Consider When Choosing Legal Form of Business Ownership The cost of setting up and maintaining the legal form of ownership. The extent to which an entrepreneur can shield his or her personal assets from the liabilities of the business. Tax considerations The ease of raising capital

Summary of Advantages/Disadvantages Associated with Forms of Business Ownership Green = positives; Red = drawbacks Sole Proprietorship General Partnership Limited Partnership C Corp. S Corp. Limited Liability Co. Cost of setting up & running Easy and Inexpensive More expensive and time intensive Liability Issues Unlimited liability to owner Unlimited liability to partners Limited partners liability limited to investment General partners liability unlimited Liability limited to investment Tax Issues Not subject to double taxation Subject to double taxation Ease of raising capital Difficult Easy (if business model is strong) Moderately difficult Other Issues Liquidity of investment low Relies on Skills of a single owner Skills and abilities of > 1 owner Stock can be liquid Ability to share stock via options can motivate employees Must meet certain standards to qualify Tax accounting complicated Governing regulations vary by state

The Legal Environment of the Internet Most new businesses use the Internet in their operations, so understanding legal implications important Type of Website Description Primary Legal Issues Involved Shop Window Web Site Provides info. about company and products Encourages little interaction Content of site must have permission Links must have permission Price info. updated often Contributed Content Web Sites Encourage visitors to interact (e.g., chat rooms; Blogs, etc.) Content of website material can create civil or criminal penalties unless measures taken to control Full-Commerce Web Sites Sell goods and services via the Web Laws are being developed and modified often Attorney should be consulted

Other Issues: Trademarks, Business Method Patents, & Domain Names The Internet has led to issues in trademark law and practice Because it’s easy to find companies with same names on the Internet, trademark disputes often arise Business Method Patents Recent court decisions allow for patents on “ways of doing business” Example: Amazon.com has patented the “one-click” method for ordering items on their website—with one click of the mouse buttom Domain Names A domain name is a company’s Internet address (e.g., www.intel.com) Register domain name through an online registration service (www.networksolutions.com) Until recently cybersquatters registered domain names of companies and people to resell the names (for profit) Example: Julia Roberts Example: Weezer.com

Other Issues: Electronic Contracts and Digital Signatures Legally Binding Contracts Online The Electronic Signatures in Global and International Commerce Act Enabled contracts negotiated online to have same legal standing as traditional legal contracts signed in ink Often signed with digital signatures Digital signature: a computer-generated block of text that accurately identifies both the signer and the content, helping to ensure the authenticity and integrity of electronic documents