Small Business Law Articles

Article / Updated 04-27-2023

The business world is full of "tough guys," and it's likely the day will come when you need to know how to recognize the tell-tale bullying behavior, and how to handle it. So here's your guide to dealing with these bullies — a skill that's sure to help you achieve your goal of becoming a successful entrepreneur. You can come across tough-guy trading partners in your contractual negotiations and tough guys in disputes, as well as tough-guy investors and tough-guy lawyers. Tough-guy behavior can consist of threats, hostility, complaints, unreasonable deadlines, and many other forms of pressure. Most such behavior is done on purpose, as a manipulative approach designed to make you feel bad and put pressure on you. The best approach is to make their behavior the issue. Stop the discussion and don't continue until the bad behavior has been raised and addressed. After you make it clear that you know what's going on, they're likely to drop the tactic. Some people find this advice puzzling and feel that they ought to be 'professional' and ignore the bad behavior, perhaps sending an "I'm not going to stoop to that level" message. But if you allow tough guys to get away with their bad behavior, they just keep doing it, making it harder and harder for you to get what you need from the situation. Also, watch out for tough guys who claim that they're being "very fair" or "totally reasonable." Usually, it's a smoke screen to mask their extreme positions. Ask them what they mean by "fair" — that stumps them. Or walk through the issue: "It's not a question of who's being reasonable, I need "x." What can you do for me?" Game, set, and match. Dealing with threats If someone is threatening you, you don't have to sit there and put up with it. You normally have a choice as to how you make the person's behaviour the issue. You can say, "We don't do business on the basis of threats, shall we start again?" If that sounds too confrontational, try, "How would it be if neither of us threatens the other in this discussion?" or "Correct me if I'm wrong, but isn't the atmosphere rather hostile?" Much gentler. Normally, threat-makers back off when you draw specific attention to their behaviour. Responding in this way may sound a bit frightening, but you have to do it only once — and it's almost certainly better than having to deal with the prospect of their ongoing and repeated threatening behaviour. Handling aggression You don't have to take aggressive behaviour. If someone is shouting at you or being hostile while you're negotiating a deal, you can handle it. You can say, "Why is the atmosphere so hostile" — that often does the trick. Too blunt for you? How about, "Can I just check we're all agreed that neither of us is going to be hostile to the other?" Or you can ask them what they'd do if they were in your shoes and feeling very uncomfortable with the ferocity of the climate. That might lead them to change their behaviour. Parrying personal attacks Sometimes so-called tough guys make personal attacks on you to undermine your state of mind and make you feel anxious. They may comment on your competence, seek to undermine your status, deliberately choose to misunderstand you to try and trip you up, keep you waiting, or choose an uncomfortable seating arrangement or a venue where you feel at a disadvantage. The answer is to make their behaviour the issue. Any of these responses can put them off their stroke, I promise: "Is there any particular reason why I've been seated in the least comfortable chair and you're sitting above me?" "What would be your response if you'd been kept waiting 45 minutes for a meeting?" "Let me check that we agree that we're going to be tough on the issues and not on each other . . . am I wrong about that?" Calling bluff on complaints Sometimes people put forward complaints opportunistically. They do so to try and gain the moral high ground in the negotiation, regardless of whether the complaint is bogus. If you encounter this approach, confront the person like this: "I propose that you stop asserting this fanciful claim, because the negotiation will go a lot better if it's grounded in reality." Alternatively (whether you think the complaint is real or not), get the person to repeat it. People often invest their complaints with a lot less energy the second time around, and so this takes the volume down. You can then reduce it further by summarising the complaint yourself ("I see, so what you're saying is . . ."). By then, the complaint is assuming manageable proportions. You then can cut through it entirely by asking the other side to state its remedy. Doing so often takes the wind out of complainers' sails completely, because if the complaint is bogus, they've been thinking only about how to put you off by moaning, and not about a remedy if the complaint was legitimate. Meeting good cop/bad cop A lot of people use this tactic, thinking that they're being cunning, but in fact it's just an annoying cliché and can quickly be countered. The "bad cop" tries to beat you up in the negotiation while the "good cop" is reassuring and even disapproving of the bad cop. The good cop then tries to soft-talk you into concessions, the seductive promise being that if you go along with them, the bad cop will leave you alone. Guess what? You can puncture this tactic by making their behavior the issue by saying: "I'm very confused here. One of you is being very pleasant, and the other is acting all tough. Why don't we stop for five minutes so you two can agree on a common approach. Then we can start again." That should sort it out. No point in them continuing with the tactic after you've made a statement like that. Swatting away the salami slicers The subtle tactic of the tough-guy salami slicer is to keep coming back to you asking for more in a discussion or negotiation — but in such small amounts that you're tempted to agree with them each time, because the person doesn't seem to be asking for much. Salami slicers keep taking slice after slice until you suddenly realise that virtually the whole salami has gone. The way to overcome this behaviour is to say, "Is that it?" when salami slicers come back for more. If they say "yes," hold them to that agreement. If they say "no," you know they'll be back for more even if you agree to this latest round of concessions. Therefore, you can negotiate strongly on those points without feeling as though you're preventing the deal from closing. Coping with deadline pressure Pressure-merchants try to hurry up your decision, pressurising you into making a mistake or a concession that you wouldn't otherwise make by creating the fear that if you don't decide quickly the opportunity is lost. "Buy while stocks last" is the mantra of these tough guys. To bring it close to home they may say, "If you don't agree now, then I won't invest," or "If you don't concede by 5 p.m., we'll issue legal proceedings." Sometimes, they intensify this sense of panic by ignoring you for a while before and just after they set the deadline, to increase your anxiety that you may not get the deal done. The best way to deal with deadline pressure is to probe the deadline they gave you. If they tell you the deal must be done by Tuesday, say to them "so does that mean that if you get more of what you want but the deal is done by Wednesday, there won't be a deal?" If they hesitate or give you any kind of conditional response, you know that the deadline isn't real, because if they meant it the only response to that question ought to be an immediate "yes." When you know they don't mean it, their credibility disappears and you can safely ignore the deadline and any other pressure tactics they try to exert. Doing so can end up being a turning point in the discussion. Facing 'take it or leave it' "That's my final offer, take it or leave it" is meant to panic you into giving in, worrying that if you "leave it" the deal will vanish. As so often with tough guys, a good response is to probe the ultimatum to see whether the person means it. For example, you can say, "So, are you saying that if there was 1 pound of difference between your current position and the final outcome, you wouldn't want to do the deal?" or "Are you saying that even if we could expand the pie for both of us, you wouldn't be interested?" If the threat is real, the answer ought to be "yes." Unsurprisingly, however, often if you pose such an extreme question you get back a hesitant or conditional answer: "Well, I'm not saying that, I'm just saying that we need the main terms agreed in our favor" (or some such variation). As soon as you receive that signal, you know that room for negotiation remains and the ultimatum isn't as real as it sounds. At times like this, having worked-out alternatives to reaching an agreement is helpful. What would be the best alternative to not working with this partner? What would be your Plan B? If the "take it or leave it" offer is worse than your Plan B, you ought to be implementing Plan B instead. Having that alternative helps you feel stronger about resisting any "take it or leave it" ultimatum. Answering 'what's your bottom line?' This tactic is a favorite of pressure-salespeople. They try to short-circuit a negotiation by getting you to reveal your bottom line, with the intention that the negotiation travels straight to that point. Unscrupulous dealers ask you this question with a view to finding out the most that you'll spend and give you options at or just above that price rather than cheaper alternatives within your bottom line. A good tactic is to walk through the question: "It's not a question of what my bottom line is; just tell me what purchase options you have." That parks their tactic in a safe place and gets the discussion onto something you want to discuss. Responding to 'improve your offer' Sometimes you can make an offer and instead of replying with a proposal of its own, the other side simply asks you to improve your offer: "That's not good enough . . . we need a better price than that." But they don't tell you what they actually want. You may feel obliged to respond to this with an improved offer, but in fact they're just trying to make you improve your proposal still further, without needing to make any concessions of their own. This is a sneaky way to win cheap points off you, because if you make further improvements in your proposal you have no idea whether or not they're going to prove acceptable. Nothing necessarily stops them insisting again that you need to improve your offer. At that point you've completely wasted any further concessions you made. If somebody makes a vague, general demand that you improve a proposal, the best response is to make them be specific. A good answer is "What would it take to reach agreement, then?" Don't make any further proposals until they answer that question. When they've told you, at least you have some benchmark against which to evaluate what you want to do next. Maybe you want to improve your offer, propose movement on both sides or stand firm. But at least you know where you are. In telling you what you need to do in order to reach agreement, they may even make some extra concessions, taking them further towards your initial suggestion.

Article / Updated 04-18-2023

When you're exiting (that is, selling) your small business, you need to know what's required legally. At last — the finishing line is in sight. Like an over-heated decathlete you can't stop extra disciplines being added to your list of events, including: Raising lots more money for significant growth Creating exponential growth through partnerships and joint ventures Buying or merging with other firms Repeating previous stages of the business with other products (diversifying) Preparing the business for expansion or sale Selling shares or assets Exiting the business When plotting your path to blazing success, take note of this checklist of legal issues to consider: Implementing significant "A" or "B" funding rounds Entering joint venture agreements with other partners Constructing acquisition or merger agreements with target companies Implementing legal steps from previous stages of your business's growth for new diversified products Dealing with terms sheets and any buyer's due diligence Contracting to sell all or part of the business as shares or assets

Cheat Sheet / Updated 12-21-2021

Entrepreneurs in the United Kingdome don't normally think about planning their legal journey alongside planning other aspects of the business. Here are five typical life stages of a small or medium-size enterprise and their associated legal issues that you need to address. They form a map that may just stop you from losing your way in the middle of nowhere and driving your business into a legal muddy field — with a bored cow staring at your crying children in the backseat and a stony-faced spouse Googling "quick divorces" on your smart phone.

Article / Updated 12-21-2021

Sometimes activities involved in raising finance can actually create problems for your small business. Take a look at this simple quiz and see whether you're a smooth operator or a proper Charlie as regards raising finance. In this fictitious scenario, London-based Ever Hopeful Limited, has two directors, Roger Branston (the chief executive officer, or CEO) and Donald Trumpton (the chief financial officer, or CFO). Each holds 40 percent of the existing share capital and angel investors hold the rest. The company has decided to take on 1 million pounds of funding from a venture capitalist to further develop its social-gaming platform. Ever Hopeful has problems, though. A dispute is simmering with a rival software business that claims infringement of its software copyrights, and it's also the subject of an ongoing investigation by the Data Regulator for alleged mishandling of customers' personal data. It's hoping to keep these matters quiet in case they put investors off. Ruthless Ventures, a renowned venture capitalist with a reputation for backing early-stage businesses, wants to invest and take a 40 percent stake in the equity of the company. This offer values the company at 2.5 million pounds post-funding. Ruthless presents the two Ever Hopeful directors with a term sheet, which it says is in its standard form and always gets signed containing this wording. The term sheet says that Ruthless will take its shares "with the usual anti-dilution ratchets." Going forward, the directors' shares will be subject to "standard leaver provisions," as will the directors to "standard non-compete provisions." In addition, the term sheet grants the venture capitalist an exclusivity period of four months following the date of the term sheet so that it has time to do its due diligence. The term sheet is subject to due diligence and "standard warranties." Issues with the proposal Did you spot issues with the proposal? Here are several: If the venture capitalist takes a 40 percent shareholding, it can block special resolutions that Ever Hopeful may want to pass, which gives the venture capitalist a lot of control. When the new shares have been issued to the venture capitalist, Roger and Donald are going to be diluted to below 50 percent ownership of the company overall, and so other shareholders can gang up and out-vote them. They'll also be powerless to stop special resolutions being passed unless they combine their votes, because they'll each own only 24 percent of the new company. The reason for this: As a result of the new investor coming onboard with 40 percent of the overall shares, Roger and Donald between them now only own 80 percent of the remaining 60 percent of the shares, which comes to 24 percent each. You need more than 25 percent to block a special resolution. Four months of exclusivity for the venture capitalist is a long time — during that period, Ever Hopeful is kept out of the market and can't talk to other investors. Has it got enough cash of its own to keep going without further investment for that period, and for any longer period that may be required if this deal doesn't get completed? "Anti-dilution ratchets" mean that on a subsequent investment round Roger and Donald will be further diluted by new investment, but not the venture capitalist. This puts Ruthless in an even stronger position and may discourage other future investors from coming onboard. Roger and Donald need to be very careful about agreeing to "standard leaver provisions," which mean that if either of them leave the company they may have to sell their shares back at a price below market rate. The two directors also need to be careful about signing up to "standard warranties" because these have no cap on their potential liability if one of their warranty promises to Ruthless proves to be untrue. Given that the deal is subject to due diligence, Rog and Don need to disclose the issues in relation to the potential lawsuit for copyright infringement and the alleged mishandling of personal data. They should disclose them in a disclosure letter. The two directors are only protected from a warranty claim in relation to these issues if they're disclosed upfront.

Article / Updated 12-17-2021

It's important that you remember to take important legal steps when you're growing your small business. When your business is really flying, you're rushing round excitedly like a howling dervish doing the following simultaneously: Securing your next round of funding for sales and marketing. Consolidating your supply chain. Developing user growth and/or revenue. Obtaining market validation. Developing sales and distribution channels. Expanding into new markets and territories. In your quieter moments, here are the legal priorities you have to contemplate as your business takes off: Agreeing terms for "series A" funding and signing agreement(s). Negotiating and agreeing trading agreements for manufacture, distribution and licensing, wholesaling, and retailing. Negotiating and agreeing service agreements for sales agents, sales affiliates and using software as a service (SaaS). Contracting with consumers. Applying consumer law properly (for example, the Consumer Rights Act, 2015). Putting a proper process in place for dealing with consumer complaints. Contracting abroad — exporting, franchising, licensing and setting up subsidiaries.

Article / Updated 05-05-2021

If you think that you're a VIP with regards to IP (intellectual property), why not test that confidence with the following quiz. Check out this scenario: Social-gaming company Ever Hopeful Limited has created a series of Hairem Scarem games with different monsters featuring in each one — from vampires to zombies, from cyborgs to internet trolls. The firm has even created a "dripping blood" logo to go with the Hairem Scarem brand. The company's latest creation for the series is an animated character, Spike the Lovable Werewolf. The company considered getting trademark protection, but a relative of the founder said that this could cost 20,000 pounds and would be difficult to enforce. So it decided not to apply for a trademark. The helpful relative told the firm that in any event it doesn't really need this protection, because it's protected by the law against "passing off." Also, Ever Hopeful Limited uses consultant developers to design and create its characters but has traditionally engaged them simply on an invoice basis, feeling that the legal expense of entering into contracts with them isn't worthwhile. The company has invented a new way of rendering its computerised characters, giving much more realism to sequences in which the characters bite their victims. The firm calls this enhanced technology process "the Suarez Effect." It believes that patenting this technology should be possible, because it's ground breaking. It set aside a budget of 5,000 pounds to obtain worldwide patents. Meanwhile, a crisp-making company making a brand of crisps called Sharem Scarem has written to Ever Hopeful saying that it owns a trademark in Sharem Scarem and telling Ever Hopeful that it must stop using the Hairem Scarem name because it's infringing. Can you identify any issues regarding the company's intellectual property portfolio? Trademark protection doesn't cost 20,000 pounds and would potentially be valuable for the Hairem Scarem game and/or the individual characters such as Spike the Lovable Werewolf and/or the dripping blood logo. "Passing off" is a much harder legal remedy to enforce than enforcing a trademark. Ever Hopeful should be entering into written agreements with its developers, assigning all IP to the company; otherwise the consultant developers may end up owning that IP instead of the firm! Leaving aside the issue of using Luis Suarez's name without his permission, Ever Hopeful is unlikely to get anything patented worldwide for as little as 5,000 pounds. The crisp company is unlikely to be able to win a claim for trademark infringement against Ever Hopeful unless it has a trademark in the "class" of goods that covers the activities of Ever Hopeful. Potato crisps are in Class 29, which doesn't cover software.

Article / Updated 05-05-2021

Here's your chance to see how good you are at spotting issues when contracting with trading partners. Test yourself with this quiz on licensing contracts. No cheating now. The UK-based social-game production company Ever Hopeful Limited wants to license some software from a Ukrainian developer, Kiev Dynamo, to embed in Ever Hopeful's computer games and to enhance its platform. Kiev Dynamo claims the software contains breakthrough technology that significantly enhances graphics and animation. Ever Hopeful has limited resources in-house for technology development and limited cash. The directors, however, are keen to launch three new games within the next three months, and to redevelop the platform to leverage potential additional investment or even a quick sale. They also believe the software is an important and potentially unique component, though it may need to be adapted for Ever Hopeful's platform. Given the innovative nature of the software, Kiev Dynamo has asked for a 20,000-euro upfront payment and a revenue share of 10 percent in return for the license. The directors of Ever Hopeful have agreed in principle to some initial payment and some ongoing payment in email correspondence, but the details aren't too clear. They've now been sent a draft agreement. What particular issues does this agreement need to address? Does the whole payment of 20,000 euros need to be paid? If so, does it all need to be paid upfront? How about holding some of it back against future performance by Kiev Dynamo? Are the rights Ever Hopeful is acquiring exclusive or non-exclusive? For the amount of money being demanded, Ever Hopeful doesn't want the same technology being licensed to its competitors. What does 10 percent of net revenue mean? Can any deductions be made before net revenue is calculated — such as taxes, discounts, free goods, marketing costs? How often does Ever Hopeful have to account for royalties? What happens if the technology from Kiev Dynamo doesn't work, despite its bold claims? Does Kiev Dynamo have to repair it or fix bugs at its cost? If so, what's the process for this happening and what are the time frames? Can Ever Hopeful get its money back or at least terminate the agreement? If Ever Hopeful needs to adapt the technology that it's licensing, does it have this right in the license agreement? If this agreement says that the technology can't be adapted without Kiev Dynamo's consent, that would be a problem, especially because Ever Hopeful is in a hurry to get the products containing the software out in order to raise investment. Does Kiev Dynamo wholly own all the software? The agreement should contain a promise that this is the case, or else, a promise that it has properly cleared all rights in relation to any third-party software included within its technology. Which law governs the contract if a dispute arises: UK or Ukrainian law? Where do disputes have to be resolved — in the Courts of the Ukraine or the UK? If no agreement is reached on disputes, can they instead be resolved using a mutually agreed international arbitrator?

Article / Updated 03-26-2016

During the launch stage of your small or medium-size enterprise (SME), you need to consider a bunch of legal issues. A whole host of issues are going on at this stage in your small business, including: Hiring additional members of the team, whether as contractors or employees (make sure that you know the legal difference). Acquiring or creating key assets (software, content and so on). Creating a marketing plan. Adding non-execs to give you more perspective and wider contacts. Developing software – whether for your website, apps or programs. Developing and launching a Minimum Viable Product to get you into the marketplace. You have plenty to do just juggling these priorities. But don't forget your legal priorities at this stage, otherwise all those plates you're spinning risk crashing to the ground. Here's your legal to-do list during this stage of your business development: Creating contracts for your contractors and consultants. Creating contracts for your employees. Implementing share option schemes for employees or anyone else you need to incentivise. Adding non-exec agreements. Hiring temporary staff. Setting out your online trading terms/privacy terms. Complying with trading laws, such as the Electronic Commerce Directive, 2002. Complying with employment legislation (for example, Health and Safety at Work, 1974, Pensions Act, 2008, Data Protection Act, 1998). Contracting for premises for your business. Reviewing and protecting your intellectual property, such as the potential for trademarks, patents, design rights, database rights and copyrights. Entering into software-development contracts.

Article / Updated 03-26-2016

When you start on a long journey to somewhere new in your small or medium-size enterprise (SME), you need a map to follow. You need to consider some of the legal issues before you embark on that journey. At the initial stage of your small business, you have the following aspects in place: An idea for a potentially scalable product/service idea with a big enough target market. Some initial revenue models for how it can make money. A business plan with milestones. An idea of how much funding you need. Initial core management (maybe only one or two people). If you feel that don't have the head-space to think about legal issues at this early stage, you may need to grow a bigger head! Here's what you need to consider: Reviewing your potential legal structure: Do you want to be a sole trader, a general partnership, a limited company or a limited liability partnership? Checking Companies House and trademark and domain name registers: Search for competing trading names that may stop you using the name that you want. Setting up your business structure: Implementing your decision as a sole trader/limited company/partnership structure. You also need to comply with formalities, such as registering your new enterprise with Companies House, filing resolutions and appointing directors. Drawing up and entering into agreements: Shareholder and/or partnership ones. Deciding what kind of external funding you require: Loans, equity funding from angels, crowd funding? Raising funding: Plus closing the funding agreement(s) for your seed-funding round.

Article / Updated 03-26-2016

Are you a Steady Eddy or a Risky Rupert when protecting your business from harm? How good are you at addressing risks to your business before they turn into trouble? Take this simple test and judge for yourself. Ever Hopeful Limited, a UK-based software social-gaming company, works with a leading online sales agency, Smooth Talker, which makes its games available through online gaming sites. The sales agency collects revenues from the sales and accounts to Ever Hopeful once every quarter for accumulated sales, after deducting its own commission. Initially the arrangement works well — especially as the person who runs Smooth Talker is an old friend of Roger Branston, the Ever Hopeful chief executive officer (CEO). But now Smooth Talker has defaulted on its latest payment to Ever Hopeful. The default causes a problem, because it owes Ever Hopeful 30,000 pounds for sales made in the previous quarter and Ever Hopeful had budgeted to use that amount to pay wages, a Value-Added Tax (VAT) bill and bank interest on its current loan. Now Ever Hopeful is being chased by its staff and the VAT inspector for payment, and the bank has called in a 20,000 pound loan as a result of failure to pay the interest on time. Smooth Talker has promised to pay Ever Hopeful ahead of other creditors given the relationship between its owner and Roger, and so that has reassured Ever Hopeful. Roger is a bit nervous, however, because the bank loan is backed up by a personal guarantee from him. What could Ever Hopeful or Roger Branston have done to avoid ending up in this position? Carry out credit checks on new customers to make sure that they're creditworthy — even if the customer organisation is run by a friend. As part of this analysis, find out whether you're dealing with a partnership, a limited company or a sole trader. The latter are potentially personally liable for their debts but are often considered less creditworthy than companies or partnerships. Get your customers to agree to Terms and Conditions that protect you. In this case, an upfront payment to Ever Hopeful against future sales would have been useful; or perhaps a cap on the amount of credit Smooth Talker was allowed to run up in any one quarter, as well as interest on late payments as a deterrent against non-payment. Ever Hopeful could've discounted or factored its invoice to Smooth Talker before the latter ran into trouble. This action would've been a good way of minimising its risk, because Ever Hopeful would already have received the bulk of what was due on the invoice from the discounting or factoring firm. (In that case, the money invoice discounter would initially be responsible for collection of the monies, and if Ever Hopeful used a 'non-recourse' factorer it would no longer be responsible for collection of the monies if Smooth Talker defaulted.) Ever Hopeful could take steps to put financial pressure on Smooth Talker — issuing a statutory demand for the debt, initiating a compulsory liquidation or starting a process of administration. Don't rely on the agreement with Smooth Talker to pay back Ever Hopeful ahead of other creditors. This kind of 'preference' for one creditor over another isn't lawful. Roger could've avoided giving a personal guarantee in respect of the bank loan to Ever Hopeful; at least then he wouldn't be personally liable for the repayment of the loan.