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

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 hiring employees
The Washington Post
George O’Leary
Misrepresenting competitors
Amway vs. Proctor and Gamble
Janet Cooke awarded the Pulitzer on April 13, 1981.
When the editors of the Toledo Blade, where Cooke had worked, read biographical notes, noticed discrepancies.
Investigation revealed that Cooke's credentials were false. Pressured by the editors of the Post, Cooke confessed her guilt.
Two days after the prize had been awarded Post held press conference admitted that the story was fraudulent. Next day's paper offered a public apology.
Assistant Managing Editor Bob Woodward said at the time: "I believed it, we published it. Official questions had been raised, but we stood by the story and her. Internal questions had been raised, but none about her other work. The reports were about the story not sounding right, being based on anonymous sources, and primarily about purported lies [about] her personal life -- [told by three reporters], two she had dated and one who felt in close competition with her. I think that the decision to nominate the story for a Pulitzer is of minimal consequence. I also think that it won is of little consequence. It is a brilliant story -- fake and fraud that it is. It would be absurd for me or any other editor to review the authenticity or accuracy of stories that are nominated for prizes."

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 raising capital

12. Summary of Advantages/Disadvantages Associated with Forms of Business Ownership Green = positives; Red = drawbacks
Sole Proprietorship
General Partnership
Limited Partnership
C Corp.
S Corp.
Limited Liability Co.
Cost of setting up & running
Easy and Inexpensive
More expensive and time intensive
Liability Issues
Unlimited liability to owner
Unlimited liability to partners
Limited partners liability limited to investment
General partners liability unlimited
Liability limited to investment
Tax
Issues
Not subject to double taxation
Subject to double taxation
Ease of raising capital
Difficult
Easy
(if business model is strong)
Moderately difficult
Other Issues
Liquidity of investment low
Relies on Skills of a single owner
Skills and abilities of > 1 owner
Stock can be liquid
Ability to share stock via options can motivate employees
Must meet certain standards to qualify
Tax accounting complicated
Governing regulations vary by state