What Startups Should Know About Litigation


No startup ever wants to be involved in a lawsuit.  Unfortunately, however, lawsuits are commonplace in the United States and especially so in today’s fast-paced and ever-expanding startup industry.  While startups can engage in forward-thinking and strategic planning to try and shield themselves from potential lawsuits, it is next to impossible for a company to avoid all lawsuits forever.  Inevitably, someone will sue a startup.  When this happens, the ideal option is to try and reach a settlement with the suing party.  If settlement negotiations fail, however, a startup will be forced to defend the lawsuit and engage in litigation.

Litigation is the official process by which two or more parties seek to resolve a dispute or disputes. The plaintiff initiates the lawsuit by filing it in the appropriate court, and the defendant defends against the lawsuit. Litigation is typically lengthy, time-consuming, and expensive.  Throughout litigation, the parties and their attorneys will exchange relevant information through “discovery”,  discuss and narrow the legal issues, and engage in constant settlement negotiations.  This process can take months—even years—and can cost your startup valuable time, money, and headaches.  Lawsuits are also bad publicity.

Startups can Take Precautions to Litigation

A startup can protect itself from the negative effects of litigation by seeking legal counsel, restructuring to ensure separation from owners, and obtaining liability insurance.

Seek Counsel from a Reputable Litigation Attorney

Attorneys play a vital role in protecting startups faced with lawsuits.  From the outset, attorneys will work with you and your company to evaluate the lawsuit and its merits, and advise on the potential legal exposure the startup may face.  Depending on the specific situation, the best option going forward may be to fight in court or negotiate an immediate settlement.   When the lawsuit is all said and done, an attorney will also advise on how to protect the company in the future.  Some options include restructuring the startup to avoid liability and drafting clear and enforceable business contracts.

Thus, if and when a startup finds itself exposed to a lawsuit, it is highly advisable that the startup seek legal counsel. Though many lawsuits may seem straightforward and simple, such that a startup believes it can be handled without legal advice, an experienced attorney may be able to identify potential issues that others may not notice.

Remain Separate from Owners

Some startups can unintentionally expose its owners and investors to liability.  This can be the case, for instance, due to the type of business entity originally chosen at formation, because some entity types don’t entirely separate or distinguish the startup from the owners.  When this is the case, a lawsuit may expose the assets of both the startup and its owners.

Exposure is especially common with sole proprietorships, one type of business entity, but also with corporations and limited liability companies.  With these latter entities, in which owner liability is reduced, courts may still allow plaintiffs to “pierce the corporate veil” and hold owners liable.  In these instances, plaintiffs can go after both the company and its owners, just like with the sole proprietorship.  Startup owners can avoid this by working with legal counsel to properly structure the company and reduce situations where a court may pierce the veil and hold owners personally liable.

Obtain Liability Insurance

Ideally, a startup will have obtained insurance from the get-go, long before trouble arises.  Liability insurance can protect the startup and its owners from the liabilities imposed from lawsuits.  Furthermore, as mentioned earlier, litigation can be lengthy and expensive, and without insurance, litigation can drain a startup’s finances and even force it into bankruptcy.  Thus, startups should evaluate the type of insurance best-suited for its needs, and do this from the start to avoid any headaches down the road.

Contact Startup Company Counsel Today to Schedule Your Consultation

Startups should plan accordingly to reduce the risk of litigation and safeguard against the costs and liabilities associated with litigation.  The skilled and knowledgeable attorneys at Startup Company Counsel will work diligently for your startup in order to protect your company.  You can schedule a consultation with one of our experienced attorneys by calling our office at 408-441-7500.

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