Chapter 7 Preparing the Proper Ethical and Legal Foundation

1. Entrepreneurship: Successfully Launching New Ventures Some Sections Modified from Barringer and Ireland (2008) Chapter 7 Preparing the Proper Ethical and Legal Foundation

2. 5 Initial Ethical and Legal Issues Facing a New Firm • Ethically departing a former employer • Choosing an attorney • Drafting a founders’ agreement • Avoiding litigation • Choosing form of business ownership

3. Issue 1: Ethically Departing a Former Employer • Ethical Guidelines • How to Behave in a Professional Manner • Give proper notice of an intention to quit • Must perform all assigned duties until the day of departure • If leaving to start firm in same industry, must not take information that belongs to the current employer • Be sure to Honor all Employment Agreements • Honor all nondisclosure and non-compete agreements entered into at the time of employment • Nondisclosure Agreement: is a promise made by an employee or another party to not disclose the company’s trade secrets • Non-compete Agreement: prevents an individual from competing against a former employer for a specified period of time

4. Issue 2: Choosing and Attorney for the New Firm • Considerations when Choosing and Attorney • Entrepreneurs should select an attorney as soon as possible • The attorney should be familiar with start-up issues and should have experience • To manage the finances, they will often work out payment plans with entrepreneurs • Criteria to consider: • Contact local bar and ask for a list of start-up specialized attorneys • Interview several attorneys • Select an attorney who can assist in raising money for the firm • Double-check the attorney’s track record

5. Issue 3: Drafting a Founders’ Agreement (AKA shareholders’ agreement) • What is a founders’ agreement? • Written document dealing with issues like: • Relative split of equity among founders of the firm • How individual founders compensated for cash or “sweat equity” put into the firm • How long founders have to remain with firm for shares to fully vest • Items to include in a founders’ agreement: • Nature of prospective business • Brief business plan • Identity and proposed titles of founders • Legal form of business • Division of stock or ownership share for each founder • ID of any IP signed over to business by any founder(s) • Description of initial operating capital • Buyback clause

6. Issue 4: Avoiding Legal Disputes • Most disputes result from misunderstandings, sloppiness, or lack of legal knowledge • Steps an entrepreneur can take to avoid legal disputes: • Meet all contractual obligations • Avoid undercapitalization • Get everything in writing • Promote business ethics via codes of ethics and ethics training

7. A Note on Promoting Business Ethics • Promoting Business Ethics in a New Venture • Code of Ethics: describes firm’s general value system, moral principles, and specific ethical rules • Ethics Training Programs: formal programs teaching employees to respond to ethical dilemmas that might arise • Most common ethical problems • Human resource ethical problems • Example: job interviews; applications; resume “padding” • Conflicts of interest • Example: hiring/contracting with family members not qualified • Customer confidence • Example: Labor practices; handling recalls; resume verification; misrepresenting competitors • Inappropriate use of corporate resources • Example: taking paper and pens home from work

8. A Note on Customer Confidence • Issues dealing with appropriate labor practices • Nike and Kathie Lee and sweatshops • Handling issues requiring recalls • Tylenol • Lead in children’s toys • Tainted food • Employer responsibilities to customers in hiringemployees • The Washington Post • George O’Leary • Misrepresenting competitors • Amway vs. Proctor and Gamble

9. A Note on the Inappropriate use of Corporate Resources • $40 billion is stolen annually from US businesses via employee theft. • Around 75% of all employees steal from their employers. • Employee theft has been cited as the reason why between 30-75% of businesses fail. • Employee theft includes: • Embezzling cash, taking office supplies/equipment, photocopies, phone calls, taking extended lunch breaks/personal time, etc. • Preventing Employee Theft • Pre-screen people • Use interviews, trust tests, psychological tests, as appropriate and legal • Effective prescreening has been found to reduce firm losses by as much as 70% • Utilize prevention and detection methods to combat existing employee theft • Surveillance cameras, financial controls, anonymous 800 numbers, informer drop boxes, etc. • Handle all employees consistently • Engage in ethics training • 80% of employees admitting to stealing regularly, do not believe they are doing anything wrong • Suggests misunderstandings of what constitutes ethical behavior • Monitor ethics programs on a regular basis

10. Issue 5: Choosing the Legal Form of Business • Sole Proprietorship: involves one person; the person and business are the same; not a separate legal entity • Partnerships: when two or more people start a business • General Partnership: two or more (general partners) pool their skills, abilities, and resources to run a business • Limited Partnership: same as general but includes two classes of owners—general partners and limited partners • Corporations: separate legal entity organized under the authority of a state • C-Corporation: separate legal entity that, in the eyes of the law, is separate from its owners • S-Corporation: subchapter S corporation combines the advantages of a partnership and a C corporation. Must meet certain standards to become S-Corp. • Limited Liability Company: LLC combines the limited liability advantage of the corporation with the tax advantages of the partnership

11. 4 Issues to Consider When Choosing Legal Form of Business Ownership • The cost of setting up and maintaining the legal form of ownership. • The extent to which an entrepreneur can shield his or her personal assets from the liabilities of the business. • Tax considerations • The ease of raisingcapital

12. Summary of Advantages/Disadvantages Associated with Forms of Business Ownership Green = positives; Red = drawbacks