What are some of the most common lawsuits against startups?

Alidad Vakili / January, 2018

Description

Alidad Vakili, Associate at K&L Gates explains the most common lawsuits against startups such as disagreement in shares, incompliant with regulations, and employment-related, and how you can prevent them.

Video transcript:

What are some of the most common lawsuits against startups?

I’m a firm believer of preparation and making sure you do your homework in beforehand, and that’s probably one of the best ways to avoid getting sued is know what you’re getting into and properly plan any sort of endeavor the startup is going to be doing. So, getting back to you earlier discussion about founders’ agreements and shareholders’ agreements, having agreements like that in place would be one way to minimize one very common lawsuit that I see, which is a lawsuit that occurs between founders, where there is some sort of disconnects and tension that creates a dispute between founders.

And the best example that I’ve seen it over and over again is: either a very poorly drafted founders’ agreement or shareholders’ agreement or no agreement that’s prepared and the founders that started the company down the road after the company now has either proven its success, or is looking very likely that’s going to be very successful. There is a difference in opinion as to who owns what share in the company. One founder may think that they had 60% and the other founder had 40% and that view is not shared by the other founder. That bad often times would create a lot of tension and have led to a number of disputes that end up in a lawsuit.

Other sorts of lawsuits that we see common for startups, again if the company is not properly prepared and doesn’t do its homework, and doesn’t have good advisors and some sort of regulatory issue that comes up. So, depending on the space that startup is in if it’s in a very heavily regulated space and those laws aren’t applied with or complied with, there may be a lawsuit that comes from a regulatory agency. So, for example, if your company that manufactures electronics goods and you don’t get the proper FCC clearance, the FCC can take action to potentially fine and penalize the company if it’s not in compliance and potentially even shut down the company if it’s in serious violation of the various regulations governing that.

Other types of common lawsuits would be employment-related lawsuits. Employment laws are very critical, especially for startups, as soon as you start employing people, then you have obligations to maintain and to comply with various labor laws and employment laws. So we oftentimes see someone that join the company doesn’t feel that they are being paid properly or there is some improper act or violation, and if that employee ends up leaving oftentimes they would file a complaint with the regulatory agency, labor commission, and that can generate a lawsuit against the company. Or a lawsuit brought by a disgruntled employee who leaves and then sues the company. Those are probably some of the more common types of lawsuit I’ve seen that come up from time to time.

And again, the best way I’ve seen to protect against that is really to make sure you get good advice from outside and inside advisors to the company. Making sure the Board is aware of what’s going on and making decisions appropriately and that you have good solid contracts that oftentimes one barrier to having a lawsuit is to making sure that the agreements you have with various parties, be the employees, consultants, vendors, even investors, are very well drafted, well negotiated and cover sort of issues that might otherwise would lead to some sort of dispute or lawsuit. 

 

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