As a tech founder, youcan and will be sued for anything, whether the plaintiff has a real grievanceor not. Below are the times I’ve seencompanies most vulnerable to a suit, and what you can or can’t do.
You’reabout to sell the business. This is arguably the point atwhich you’re most vulnerable because even if you have insurance, it doesn’tmatter. A potential acquirer is going tosay “make this go away, tomorrow,” and many acquirers will pass all together,even if it’s an asset sale. Filing aclaim with your insurer is going to take many months (sometimes 10+) so you’realmost always going to be forced to settle. If you’re selling the business, tell as few people as possible and doeverything you can to make sure past employees or former business associates donot find out.
Youjust fired someone. If you don’t already have EPLinsurance, get it. Nobody is good athiring and inevitably you’re going to hire someone that you need to fire. No matter how amicable the firing was, thereis risk that the person will come back and sue you: all it takes is themfalling on hard times and a lawyer taking their case on contingency.
Acompetitor claims you’re infringing. Even if you’re not infringing on someone’spatent, copyright, or trademark, if a competitor thinks you are or if thecompetitor just wants to slow you down, you could get sued. The good news about suits like this arethey’re less common because they are very expensive to litigate: we’ve seenplaintiffs spend upwards of $150k and spend 10 months in court trying to establishinfringement. Nonetheless, if you’ve gotthe budget to patent some of your most important IP, it may be worth it not soyou can go sue competitors, but so that you can easily play defense when theytry and sue you.
You’resideways with your banker. Boutique investment banks suetheir former clients all the time. Thiswill happen when you’ve hired a small investment bank to run a process for you,they fail, you raise money on your own or sell the business on your own at somepoint, and now the banker believes they’re due a fee because you’re within the‘tail period’. Make sure the bankercontract says they only get paid on intros they make directly and have a 6month tail. Terminate any bankeragreement as soon as they’re no longer working and the process is over; do notlet these agreements linger.
Shareholders areangry about the next round. This was a newer one for us. We closed a round whereby a strategicshareholder was upset the business did not end up in a difficult cash position sothey could buy the company at a distressed price. The company was promptly sued based on very frivolousand meritless claims. The company knewgoing in the risk of a suit was high, so they consulted with counsel ahead oftime to figure out whether the suit was meritless and how much it would cost todefend. They planned accordingly.
I’ve come tobelieve that it’s not about avoiding getting sued so much as it is beingprepared for any suit. Do what you canto minimize the risk at all times and always be conscious of it.
Thankyou for your readership. Please visitblossomstreetventures.com to see more SaaS articles and data. Email the author your pitch directly at sammy@blossomstreetventures.com.