Because It Can't Be Said Enough: Choose Your Founders Wisely

I ran into another situation this week where a business completely fell apart and is heading for dissolution solely because of a growing war between the two founders.  I will have more on the details of this in a future post because it is enlightening for startups, but in the mean time, you can find more info on the right way to choose your founders and how to structure your initial equity here in my Founders Series Parts I, II, and III. Remember that you should always set up an agreement between the founders at the beginning of the business, but structure it for the end of the business.

Just Do It: Entrepreneurs Show Why Now is a Great Time to Start a Business

I saw today another example of people using entrepreneurship to overcome the struggling economy.  In addition to the 9.6% of Americans that are officially unemployed, there are many, many more who are underemployed or stuck in a job they don't want just for the security of a paycheck.  But in reality, they don't feel very secure. This article highlights people who are taking control of their situations by starting their own businesses.  Whether it is buying an existing business, purchasing a franchise, or bootstrapping a new small business, I hear similar stories from my clients all the time, and I am constantly surprised by their resourcefulness.  There is a real buzz from the entrepreneurs out there that are creating business for themselves, many of them without quitting their day jobs. Perhaps it is your turn to give it a try.

To learn more about starting a business, franchising, or entrepreneurship in general, take a look through the categories on the right for some additional posts on these topics.

Have you already started a new business?  What has been your biggest challenge?

Are Noncompetes Enforceable in Massachusetts?

I am often asked about noncompetition agreements and I have been thinking quite a bit about them recently, partly because of the continuing on-again-off-again talk in Massachusetts about changing the law regarding noncompetes, but also because of a recent issue that arose when one of my clients was threatened with a lawsuit over her new company by a competitor. Noncompetes are used by businesses in a variety of situations in order to protect a company's intellectual property or business interests and are entered into with employees, contractors, investors, vendors, and any other person or group who may have access to business secrets.  For example, as I described in a previous post:

In many states, parties can agree to restrict a former employee from working for certain competitors in a limited geographic area (for example, a baker who can’t work for any other bakeries within 20 miles for one year after termination).  Such non-compete agreements are generally enforceable if the duration and geographic limitation are reasonable.  The court aims to strike a balance between protecting legitimate business interests of the company with the ability of the employee to earn a living.

Regardless of the intent of the company, noncompetes face varying enforceability standards around the country.  California, for example, makes it simple:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Among the very limited exceptions is in the context of a sale of a business.  But otherwise, California allows any employee to leave employment to work for any other company or start a competing business of their own, provided they do not steal company trade secrets. Massachusetts on the other hand currently follows the reasonableness standard described above for determining enforceability, and is it ultimately in the hands of the court to determine what is reasonable based on the circumstances.  When used properly, noncompetes can be a very powerful and effective tool for businesses in protecting their competitive position.

Enter my client.  She did some limited freelance work for a company but was never hired as an employee.  She never signed an employment agreement, nor did she sign a noncompete, a non-disclosure, a non-solicitation, or any other type of agreement.  Therefore, she is not restricted from working for a competitor or establishing a competing business (despite the protestations of the company) because there was never an agreement to prevent her from doing so and Massachusetts will not infer an agreement where one did not exist.  Plus, even if there were an agreement, the non-compete must protect a legitimate business interest in order to be enforceable.  Ordinary competition is not considered a legitimate business interest in Massachusetts. While her competing business (and the numerous other similar businesses) may ultimately take away business from the company, she did not use any of the company's intellectual property or nonpublic information to establish the competitor, so the noncompete laws protect her right to start her own business.

I am curious to hear if you have run into a situation like this.  Is a noncompete currently holding you back from taking a new job?

Quick Hits: October 1, 2010

Here are a few non-legal thoughts for the end of the week:

• The entire national narrative during this election season is about the epic clash of the parties heading into November, and yet not ONE political sign in my area lists the candidate's political party affiliation.  The color choices don't help either.  Why the disconnect? And is this the new normal?

• Big Ten play starts this weekend for the 4-0 Michigan Wolverines football team.  Denard Robinson, the nation's leading rusher (even though he is a quarterback and missed more than three quarters of the game this past weekend) is ready to play despite bruising his knee last week.  Have you ever seen a more electrifying player?  He is as good as the defense is bad.  At least we get to play Indiana, Purdue, and Illinois (sorry, B0b) still this year.

• It's October 1st and the high temperature for the day here in Massachusetts is in the upper 70s.  Fall just does not work if it is hot.  Looking forward to cooler days ahead.

• Massachusetts implemented a texting-while-driving ban this week.  With so many smartphones out there now, how in the world will this be enforced - were you texting or typing in your passcode to make a phone call?

So what is on your mind this week?

New Law Provides Needed Help to Small Businesses Now and For a Limited Time

After the last couple years of bailouts for financial firms and large manufacturing companies, small business is finally getting some much needed direct relief.  President Obama signed into law this week the Small Business Jobs & Credit Act of 2010, which aims to loosen up credit for small businesses and provide immediate tax breaks to help these companies.  But many of the law's provisions are short-term measures that businesses need to understand now if they are to enjoy the benefits. Here are five provisions that may be immediately useful for your business:

1. Money to Lenders:  The law authorizes $30 billion of funds to be directed to small businesses through community banks and additional funds to state lending institutions.  This is intended to get more capital flowing and allow small businesses to borrow needed capital at reduced rates.  Check with your local bank to find out more.
2. Start Up Expense Deduction:  For startup expenses of new companies, the maximum allowable business tax deduction of $5,000 is doubled to $10,000.  But this increase is only applicable in tax year 2010.
3. Qualified Small Business Stock Deduction:  If your small business has investors looking for liquidity, now is a good time to act.  A holder of qualified small business stock can exclude 100% of the gain on the sale of stock through the end of 2010.  This was increased from the 75% exclusion that was enacted as part of the stimulus in 2009 (the normal exclusion prior to 2009 was 50%).  This provisions is also only available to Subchapter C corporations (S corporations and LLCs do not qualify).
4. Capital Expenditure Limits.  Businesses that acquire capital equipment any time through 2011 can write off up to $500,000, which is double the $250,000 available under the 2009 stimulus.
5. Health Premium Deduction.  Anyone who is self-employed can deduct as a business expense the amount of health care premiums paid in 2010 from the amount of income that is subject to self-employment tax.  Again, this provision is limited to one year.

These are just a few of the provisions intended to help small businesses.  If you own a small business, which do you think will be most beneficial to you?