Venture Capital: Investor (and Investing) Nightmares

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If you want to be sure and have your VC's 'do the deal' you have carefully negotiated, make sure that you do not have any of these skeletons in your start up closet. I am no lawyer, but have paid lawyers plenty for advice on these subject. Be sure and check with your lawyer often to make sure you are in compliance.

These are critical parts of a due diligence review done by VC's:

1. informality in equity arrangements with co-founders--promise that co-founder 50% verbally? better get it into an agreement; verbal agreements are valid. and what if you have a falling out? how does the exit happen? who gets sued? You
2. use of pseudo lawyers--don't borrow your friend's start up documents and revise them to be your own; laws vary among states and change over time
3. NEVER, EVER accept money from unaccredited investors--you might love Uncle John and want to take his $5K, but his net worth is no where near $1million and he makes $50K a year; The SEC frowns on this big time, and will fine you
4. port all IP from founders and licensee's into your entity--use 'assignment of invention' documents; simple but critical if you want to raise funding, but the entity does not have the right to use the IP; also have 'work for hire' agreements in place with all employees
5. IP ownership does not equal freedom to operate--be sure that your legal documents and licenses allow you to do what you are/want to do with your services and products
6. employment contracts and offer letters are the same in the eyes of the law--whatever you promised in the offer letter rules; make sure all is correctly memorialized in the contracts; termination with cause clauses need to be in the contract; all employees are at-will and this needs to be clear in the contracts; employment lawsuits can result in triple damages and you having to pay all the legal bills
7. W-2 employees versus 1099 contractors--it's simple, if you tell a 1099 employee he has to work for you on Fridays, he is considered an employee by the IRS; the contractor must have full ability to work when he or she wants and for how long; most companies screw this one up and the IRS will fine you big time
8. must pay minimum wages to interns and employees--no, interns are not free under most circumstances (check with your employment lawyer on when it's legal); also, you cannot wave employee salary and tell them you will pay later when the money comes in; all employees, except founders, need to be paid at least minimum wages every week; again, triple damages and legal fees if employee reports you.