legal

The legal challenges that face startups are vast and often unexpected. 

By Kristin Hackler

Startups, from a blossoming Etsy storefront to the latest tech emerging from the bay-side glimmer of Silicon Valley, often begin like a fairytale. Unfortunately, the growing trend is a not-so-happy ending.

Internal wars over intellectual property rights, financial troubles due to lack of a business plan and established processes, or infighting sparked by potential liabilities associated with partnerships-by-default are all unfortunate scenarios that can emerge.

In short, the legal challenges that face startups are vast and often unexpected. Repairing the damage precipitating from the fallout after the end of the rose-colored honeymoon phase can range from legal reorganization to full-blown bankruptcy and even (though rarely) criminal action. And in the course of litigation, an attorney may recommend an expert witness. Here are three examples of why:

Disagreements with a financial backer

Automotive fans are likely aware of the hiccups faced by luxury EV startup Faraday Future, which hit the scene with promises of high-end vehicles to rival anything in the Tesla line. The first body-in-white (full body of the car completed through the production line) of their first model, the FF91, was completed. Soon after, it ran into financial disagreements over withheld payments with one of its largest financial backers, Evergrande Health.

Where an expert witness could help: An expert experienced in large financial agreements and transactions (particularly from the finance/banking end) would benefit a litigation team by offering perspective on industry norms and best practices. They will also have specialized knowledge about how large finance companies operate, as well as how they approach risk management.

Company name and mark infringement

It was obvious when nascent bitcoin company Cobinhood infringed on the more established bitcoin firm name, Robinhood, forcing Robinhood had to send a cease and desist order. Cobinhood replied, “Cobinhood is not associated with Robinhood in any way, but are as legitimate as them.” But in other cases, the name might not seem as close and yet may still infringe on trademark rights – particularly if the two companies are in the same industry.

Take the dispute between Health Clubs “Fit U” and “You Fit”. In granting an injunction to the plaintiffs, a Florida judge ruled that the Fit U company name and trademark infringed on the You Fit health club, citing, among other things, the company’s intent, the confusion of Yelp.com reviewers between the two organizations, and their similar marks.

Where an expert witness could help: An expert with detailed knowledge of the Lanham Act would offer great insight into the claims of infringement or defenses thereto. The Lanham Act provides a national system of trademark registration and offers protections to the owner of a federally registered mark. Using a former USTPO attorney or official as an expert witness would be ideal.  While they can’t reach a legal conclusion, they can use their knowledge of complexities of the law to present the facts of a party’s case in the best light. The consequences of infringing on a registered trademark are severe – much more than just ceasing to use the mark. If the infringement is ruled as willful, the court can award actual damages, statutory damages, and costs, including the opposing party’s expert witness fees.

The importance of setting ground rules (and roles) before launching

When they founded Advantex, brothers David and Stephen O’Connell had the same goal for their burgeoning IT and communications company—to become ISO:9001 accredited and deliver exceptional services to their partners. The brothers had entirely different ways of approaching it. It took four years after the launch of their business to come to an agreement as to each other’s roles and responsibilities in the business – a contract formally known as a Founder’s Agreement. It has been a “game-changer” according to Stephen O’Connell, who told the Financial Times that it allowed the company to build its staff up to 50, and growing.

Establishing defined roles and expectations allowed the O’Connell brothers to survive this hurdle. For most high-potential startups, however, the odds are against them when it comes to co-founder disagreements. According to Harvard Business School professor Noam Wasserman in his book, The Founder’s Dilemma, 65% of these kinds of startups fail due to co-founder conflicts.

Where an expert witness could help: Assuming one party had the responsibility to act in a certain way, such as keeping proper books, the aggrieved party could hire an expert to testify that best accounting practices dictate the books be kept a certain way, and the opposing party failed to do so based on the facts in evidence.

Kristin Hackler writes on behalf of GLG Law, a platform that connects lawyers with expert witnesses in complex fields. Kristin was formerly a content writer for an international civil plaintiff’s firm and is also an award-winning ghostwriter. Her ghostwritten works include multiple legal publications, as well as books on entrepreneurship, leadership, and family business.

Legal stock photo by Alexander Kirch/Shutterstock