5 Risk Management Practices Innovators Should Follow

Opinion

High-tech and investment company startups plan for big successes – and this planning should include putting in place features that startup leaders may think are only necessary for established companies. However, whether business is boom or bust, new business leaders should seriously consider tried-and-true best practices.

Before you launch your business with customers or take money from your angel investor, even if the investor is your family member or best friend, spend a few hours and dollars on five basic business considerations:

1. Corporate formation. When you start your business, open and operate the type of legal entity that is right for you. Many small businesses choose to operate as limited liability companies or partnerships. Engage a lawyer to advise you about the type of corporate structure that makes sense for you, taking into account issues such as taxes and protection from personal liability. Once you decide on a structure, your lawyer should prepare the corporate formation documents, subscription agreements, and operating agreements that are the right fit for your business and your investors. In sum, these documents provide clear guidelines of what the parties understand and expect at the outset of their relationship and should prove useful if a dispute arises down the road.

2. Cash controls. Once you decide upon a basic corporate structure, use it. Observe corporate formalities, including installing formal accounting and cash control systems. Keep minutes of management meetings. Report on your business’s progress on a regular basis. Local non-profits commonly follow such basic practices, and therefore, it should not be overly burdensome for a startup business to do the same. Plus, you may find that balancing the checkbook and reporting on monthly or quarterly results helps you make more informed decisions about expenditures and brings to light disagreements with partners before disputes get out of control.

3. Business partners. We have all heard the old expression – don’t mix business and pleasure. In the context of a startup, it may be tempting to bring in your friends and family as officers and directors to share in the fun and quickly build out your “team.” Resist such temptations. The only people who should be on your board of directors are those who you expect to contribute in a significant way to the operation of the business. If you don’t want your brother-in-law’s input, don’t give him a platform from which he can insist on having his say. If you don’t expect your mother to participate in business judgments, don’t expose her to liability by giving her an honorary title that could saddle her with liability for decisions that you – and you alone – made. In sum, do business with your business partners, and stick with inviting your friends and family to the holiday party.

4. Insurance. The cliché of the insurance salesman may make you smile, but you wouldn’t drive your car without insurance, so you shouldn’t consider operating your business without basic insurance policies either. Consult a business insurance broker to determine what coverage would be ideal, and what type of policies you can afford. To start, you should consider basic general liability insurance and director and officer’s insurance. Once you have identified the policies you need, be sure to keep your policies up to date. Many policies need to be renewed on an annual basis.

5. Legal advice. Finally, even the simplest of businesses are subject to laws and regulations. When you start out, retain a lawyer who can provide you with basic employment law advice, or other advice relevant to the nature of your business. If you have employees, you should seek advice on compliance with wage and hour and workplace safety obligations. Depending on the nature of your business, you may need specialized advice regarding compliance with state or federal regulations that govern your sphere of business, for example, privacy laws regarding disclosure of personal identifying information. If you have a proprietary invention, you will want advice regarding the protection of your company’s intellectual property.

Startup leaders and investors alike will be well-served by following tried and true corporate formalities, whether they “hit the big time” or find themselves enmeshed in a lawsuit.

Sara Jane Shanahan is a partner at the Boston law firm of Sherin and Lodgen LLP. Her practice focuses on complex business disputes and litigation. Follow @Sherin_Lodgen

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