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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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.,
Register domain name through an online registration service (
Until recently cybersquatters registered domain names of companies and people to resell the names (for profit)
Example: Julia Roberts
Example: Weezer.com

13. 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