Thursday, December 11, 2008

Legal Misfortune: “Playing Lawyer”: Lost $1,000,000 of VC Funding

Entrepreneurs are boot-strappers, often with shoestring budgets requiring them to use (or develop) new. I’ve been there. I’ve designed websites, set up computer networks, designed logos and graphics, built walls and installed tiles to move my businesses along.
In the long run, I built a lousy website, did not have adequate backup when the network crashed, my logos looked like clip art, my walls were not level and my tiles cracked.
Thankfully my legal skills are much better than my other “professions”.
We self sufficient entrepreneurs often try to “play lawyer” much like I tried to “play computer network professional”. That is, until the network crashed and my business was shut down for two days. So much for the money I thought I saved by doing it myself.
Playing lawyer is a high stakes game, especially for a growing business. Often times, a legal task (like drafting a contract) that would have cost less than $1,000 to complete, can turn into a 7-figure tragedy.
Business lawyers frequently advise clients to complete certain legal actions in their business. You should have written agreements with vendors. You should have IP assignment agreements with your employees and consultants. You should maintain proper books and records and follow corporate formalities. You should have contracts with your partners. Sometimes I think that business lawyers fail to connect the dots for clients about what could happen if they fail to do these things. I’ve certainly been guilty of this.
In this market when investment capital has all but dried up and M&A deals are largely on ice, growing companies can’t afford to have legal screw-ups jeopardize a potential opportunitiese. You may not get another chance.
For the next month or so, I am going to share with you some real-life examples of how “playing lawyer” cost entrepreneurs major opportunities.
Here’s one to get you started:
To “save money” on legal fees, one of our clients failed to consult with an attorney while raising the initial capital for his business. The client sold shares of his company’s common stock without first increasing the company’s authorized shares, essentially, selling stock that didn’t exist--which is fraud. The client was close to closing a critical financing with an VC investor for up to $1 million in funding. When the investor discovered the problem, he got cold feet and took the offer off the table. Additionally, the mistake cost the company $10,000 in legal fees to remedy the problem. Incidentally, the cost to amend the company’s certificate of incorporation, including legal fees would have been no more than $500.
Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit to get a copy of our free mini course.


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