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

2. 1.Ethically departing a former employer 2.Choosing an attorney 3.Drafting a founders’ agreement 4.Avoiding litigation and promoting business ethics 5.Choosing form of business ownership 5 Initial Ethical and Legal Issues Facing a New Firm

3. Issue 1: Ethically Departing a Former Employer Ethical Guidelines 1.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 2.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; applications; resume “padding” –Conflicts of interest Example: hiring/contracting with family members not qualified –Customer confidence Example: Labor practices; handling recalls; resume verification; misrepresenting competitors –Inappropriate use of corporate resources Example: taking paper and pens home from work

8. Civil Rights Act (CRA, 1964), Title VII Prohibits discrimination in employment based on race, color, religion, sex and national origin Covers –Private employers with 15+ employees –State and local governments –Private and public educational institutions –Private and public employment agencies –Labor unions with 15+ employees –Joint labor/management committees that govern apprenticeship or training programs –Foreign subsidiaries of U.S. organizations employing U.S. citizens Created the Equal Employment Opportunity Commission (EEOC)

9. Age Discrimination in Employment Act (ADEA, 1967) Prohibits discrimination in pay, benefits or continued employment for those 40+ –Exceptions: BFOQ (bona fide occupational qualification) Prohibits mandatory retirement ages, except in cases of public safety (e.g., airline pilots)

10. Pregnancy Discrimination Act (1978) Prohibits discrimination against pregnant employees –In hiring or employment decisions (promotion) –Employer cannot determine dates of leave –Employer cannot provide health plans that do not cover pregnancy Requires pregnancy to be treated as any other medical disability Does not require reinstatement to the same job –Requires reinstatement to an equivalent job

11. Americans with Disabilities Act (ADA, 1990) Prohibits employers with 15+ employees from discriminating against qualified individuals with disabilities –Disability – a physical or mental impairment that substantially limits one or more major life activities –Qualified individual – one who is able to perform essential functions of the job with or without accommodation Employer required to make “reasonable accommodations” for qualified, disabled, employees “Reasonable” means that it must not put an undue hardship on the employer –Making facilities readily accessible to/usable to disabled –Job restructuring, modifying work schedules, reassignment to other position –Acquiring or modifying equipment or devices, adjusting or modifying examinations, training materials or policies, and providing qualified readers or interpreters

12. Family Medical Leave Act (FMLA, 1993) Covers private employers with 50+ employees –Employee must have minimum of 25 hrs/wk or 1,250 hrs/yr Provides employees up to 12 weeks unpaid leave per year for: –Birth, adoption or foster care of child w/in 1 year of child’s arrival –Care for spouse, parent or child with serious health condition –Employees own health condition prevents working Requires –Continuation of group health coverage during leave –Employee allow to return to same or equivalent job

13. Guidelines to Employment Inquiries Subject of Inquiry It may not be discriminatory to inquire about … It may be discriminatory to inquire about … Name a. Whether applicant has ever worked under a different name a. The original name of applicant whose name has been legally changed b. The ethnic association of name Agea. If applicant is over the age of 18 a. Date of birth b. Date of high school graduation Education a. Training applicant has received, if job related b. Highest level of education attained if a certain level is needed to perform the job a. Date of high school graduation Residence a. Applicant’s place of residence b. Alternative contact information a. Length lived at current and previous address Race or color a. Applicants race or color of applicant’s skin

14. Guidelines to Employment Inquiries Subject of Inquiry It may not be discriminatory to inquire about … It may be discriminatory to inquire about … National Origin and Ancestry a. Applicant’s lineage b. Nationality of applicant’s parents or spouse Language a. Language(s) applicant speaks and/or write fluently, if job related a. Applicant’s native tongue b. Language used at home Creed or religion a. Applicant’s religious affiliation b. Applicant’s church, parish, mosque, or synagogue c. Holidays observed by applicant Physical limitations a. Whether applicant has the ability to perform job-related functions with or without accommodations a. Nature/severity of illness/conditions b. Whether applicant has ever filed a workers’ compensation claim c. Any recent or past operations, treatments, or surgeries and dates

15. Guidelines to Employment Inquiries Subject of Inquiry It may not be discriminatory to inquire about … It may be discriminatory to inquire about … Sex and Family Composition a. Sex of applicant b. Marital status c. Number of dependents or child care arrangement Height and Weight of Applicant a. Any inquiry into height and weight of applicant, unless BFOQ Photographs a. Photographs with application or resume before hiring

16. 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; applications; resume “padding” –Conflicts of interest Example: hiring/contracting with family members not qualified –Customer confidence Example: Labor practices; handling recalls; resume verification; misrepresenting competitors –Inappropriate use of corporate resources Example: taking paper and pens home from work

17. Customer Confidence Issues dealing with appropriate labor practices –Nike and Kathie Lee and sweatshops Handling issues requiring recalls –Tylenol –Lead in children’s toys –Tainted food Employer responsibilities to customers in hiring employees –The Washington Post –George O’Leary Misrepresenting competitors –Amway vs. Proctor and Gamble

18. 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; applications; resume “padding” –Conflicts of interest Example: hiring/contracting with family members not qualified –Customer confidence Example: Labor practices; handling recalls; resume verification; misrepresenting competitors –Inappropriate use of corporate resources Example: taking paper and pens home from work

19. Inappropriate use of Corporate Resources $40 billion is stolen annually from US businesses via employee theft. Around 75% of all employees steal from their employers. Employee theft has been cited as the reason why between 30-75% of businesses fail. Employee theft includes: Embezzling cash, taking office supplies/equipment, photocopies, phone calls, taking extended lunch breaks/personal time, etc. Preventing Employee Theft Pre-screen people Use interviews, trust tests, psychological tests, as appropriate and legal Effective prescreening has been found to reduce firm losses by as much as 70% Utilize prevention and detection methods to combat existing employee theft Surveillance cameras, financial controls, anonymous 800 numbers, informer drop boxes, etc. Handle all employees consistently Engage in ethics training 80% of employees admitting to stealing regularly, do not believe they are doing anything wrong Suggests misunderstandings of what constitutes ethical behavior Monitor ethics programs on a regular basis

20. 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

21. 4 Issues to Consider When Choosing Legal Form of Business Ownership 1.The cost of setting up and maintaining the legal form of ownership. 2.The extent to which an entrepreneur can shield his or her personal assets from the liabilities of the business. 3.Tax considerations 4.The ease of raising capital

22. Summary of Advantages/Disadvantages Associated with Forms of Business Ownership Green = positives; Red = drawbacks Sole Proprietorship General Partnership Limited PartnershipC 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 Not subject to double taxation Ease of raising capital Difficult Easy (if business model is strong) Easy (if business model is strong) Moderately difficult Other Issues Liquidity of investment low Relies on Skills of a single owner Liquidity of investment low Skills and abilities of > 1 owner Liquidity of investment low Skills and abilities of > 1 owner Stock can be liquid Ability to share stock via options can motivate employees Stock can be liquid Must meet certain standards to qualify Tax accounting complicated Governing regulations vary by state