Before you hire your first employee, file your first patent or bring on a co-founder, there are a few legal decisions that can determine whether your startup succeeds—or struggles.
In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Philip Crowley, startup advisor, attorney, founder of Crowley Law LLC and author of Avoid Startup Failure. Drawing on decades of experience at Johnson & Johnson and advising technology startups, Philip shares the legal pitfalls entrepreneurs commonly overlook—and how avoiding them can protect both their innovations and their equity.
In this episode, you will learn:
- Why founders should establish the right legal entity early—and how the choice between an LLC and a corporation can impact both liability protection and future tax benefits.
- The costly mistakes entrepreneurs make when negotiating term sheets, protecting intellectual property and waiting too long to seek legal guidance.
- Why written agreements with employees, contractors and co-founders are essential for protecting your company’s intellectual property and attracting investors.
- How vesting schedules, founder agreements and thoughtful planning can prevent disputes and preserve long-term value as your business grows.
- And more!
Tune in for practical legal strategies every entrepreneur should know before launching, hiring, raising capital or bringing a new product to market.
Resources:
Avoid Startup Failure: Learn the Top 10 Causes of Failure for Technology Startups and How to Turn Them to Your Advantage by Philip Crowley | https://crowleylawllc.com | Email: [email protected] | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been edited for clarity and content. It is not a direct transcription of the full episode, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today, I’m joined by a special guest, Philip Crowley.
Philip is a startup advisor, attorney, and founder of Crowley Law LLC. With a background spanning physics research, Wall Street law, and decades at Johnson & Johnson, Philip has spent his career helping founders navigate the challenges of building and scaling companies.
He’s also the author of Avoid Startup Failure, where he shares lessons learned from working with entrepreneurs and companies on the challenges that can make or break a startup.
Today, we’re going to discuss two critical topics for founders and innovators: the biggest legal mistakes entrepreneurs make before launching a company and the mistakes innovators make when protecting their ideas through patents.
Philip, welcome to the show.
Thank you, Marc. I’m passionate about these topics, and I’m glad to discuss them with you and your listeners.
To start, can you tell us a little about your background and your journey from physics research and Wall Street law to working with startups and founders today?
Sure, I’d be happy to.
I started at Stevens Institute of Technology intending to become a research physicist, and I did well enough there to get into Harvard’s Ph.D. program in experimental physics. But as I pursued my graduate degree, I realized I was becoming seven miles deep but only about half an inch wide. It would be a long time before the work I was doing in quantum mechanics and superconductivity would actually help people—and helping people was what I really wanted to do.
I thought back to my time at Stevens, where I’d taken some psychological assessments in a psychology course that I mostly ignored at the time. The results suggested my interests weren’t especially aligned with physicists. Instead, they were more aligned with chemists, lawyers and computer programmers.
That realization ultimately led me in a different direction. For most of the past 40 years, I’ve been a lawyer working in the life sciences and technology, and that’s been incredibly rewarding.
After leaving Harvard with my master’s degree, I decided to try industry because I didn’t want to look back 30 years later and wonder what it would have been like to work as a research physicist. I accepted a position as a senior research scientist at Corning Glass Works, but I quickly realized it was more of the same. So I applied to law school, was accepted to Columbia, and after graduating, joined Wall Street law firms where I learned mergers and acquisitions, securities law and bank financings.
Even then, though, I still had the technology bug. I wanted to find a way to combine law with innovation.
Johnson & Johnson was looking for a corporate commercial lawyer, and I thought I’d give it a try for a couple of years. Once I got there, I found I could learn the business while also developing expertise in what was then a relatively new area: medical device law and FDA regulation.
Eventually, I became Chief FDA Regulatory Counsel for Johnson & Johnson’s biotechnology companies. It was fascinating because I was deeply interested in both the science and the business. Our philosophy in the Johnson & Johnson law department was practical: our job was to help business leaders achieve their goals in ways that were legal, ethical and consistent with the Johnson & Johnson Credo.
That’s one of the reasons I stayed for 32 years instead of the two I’d originally planned.
Over the course of my career, I watched large companies gradually scale back their internal research efforts because bureaucracy made innovation difficult. Meanwhile, small startup companies were forming around great ideas. They could pivot quickly, build valuable intellectual property, and eventually license their technology or be acquired for significant sums.
As I approached retirement from Johnson & Johnson, I realized those were the companies that could really benefit from my experience.
At the same time, I saw something troubling. In many cases, the innovators who created these breakthrough ideas weren’t protecting themselves. A few years later, they would often find themselves pushed aside or heavily diluted, missing out on much of the wealth they had helped create.
I felt those people needed help, and it would be a privilege to provide it.
So I retired from Johnson & Johnson on a Friday, had my retirement party on Saturday, recovered on Sunday and opened Crowley Law on Monday.
I genuinely love helping founders take great ideas from the laboratory bench to the patient’s bedside—or from the garage to the marketplace. Since then, I’ve brought on three other experienced attorneys to help serve these innovators.
Seeing ideas grow into businesses that improve the lives of thousands—or even millions—of people is incredibly rewarding.
When a founder is in the earliest stages of building a company—or even just developing the idea—what are some of the legal mistakes you see them make before they officially launch?
One of the biggest mistakes is not having a limited liability entity in place soon enough.
At a minimum, entrepreneurs should consider forming a limited liability company (LLC), or possibly a corporation, to help ensure their personal assets aren’t at risk because of the business.
The second mistake is assuming they can’t afford to speak with a lawyer. Many people think engaging an attorney automatically means spending tens of thousands of dollars, but that’s simply not true.
If you find a firm that’s interested in helping startups, you can often get guidance much earlier than you think. There are also many startup accelerators that provide mentorship, resources and access to experienced professionals. You don’t have to do everything on your own.
There are lawyers and other advisors who dedicate their time—either at no cost or at a relatively low cost—to helping startups get off the ground. Too many founders wait too long before having even an informal conversation with a lawyer, and they end up creating problems for themselves.
For example, they may receive a letter of intent that says it’s “non-binding.” At first glance, that doesn’t seem risky because it doesn’t obligate either party to complete the deal.
The problem is that if an important protective provision for you as the entrepreneur isn’t included in that initial term sheet, it’s often very difficult to add it later. Likewise, if there are terms you don’t like, you need to negotiate them up front. Once everyone begins drafting the definitive agreements, changing those terms can become extraordinarily difficult without jeopardizing the deal.
That’s why having relationships with knowledgeable mentors, startup accelerators or attorneys early in the process can be invaluable.
Particularly here in New Jersey, Marc, there are a number of excellent accelerators for technology companies. They provide mentorship and opportunities to connect with entrepreneurs who have already built businesses similar to yours. Learning who they rely on, who they work with and becoming part of the innovation community can help you avoid making costly mistakes.
It’s also valuable to have experienced people ask tough questions about your technology and your business approach. Those conversations often uncover blind spots that you didn’t realize existed.
The other major issue is protecting your intellectual property.
One mistake entrepreneurs frequently make is describing their technology in too much detail before they have a non-disclosure agreement, or NDA, in place. Assuming you’re dealing with a trustworthy person, an NDA helps protect confidential information and prevents it from becoming public.
That’s especially important when you’re discussing your invention with others before filing for patent protection. Once an idea enters the public domain, it can become much harder—or even impossible—to protect.
In the United States, you generally have a one-year grace period after a public disclosure to file a patent application. However, in many other countries there is no grace period at all. Public disclosure before filing can eliminate your ability to obtain international patent protection.
If you want to maximize the value of your innovation, you need to work with a skilled patent attorney who can determine what is—and isn’t—patentable. One common first step is filing a provisional patent application, which establishes an early filing date and effectively puts a stake in the ground for your invention.
I’ve seen advertisements offering to file provisional patent applications for a few hundred dollars. In the intellectual property world, you generally get what you pay for.
If a provisional application is drafted too narrowly, competitors may be able to design around it with relative ease. You may technically have a patent filing, but not one that provides meaningful practical protection.
Making an investment in your technology early—and protecting it properly—is an important part of being a successful technology entrepreneur. At the same time, managing your business risk by operating through a limited liability entity is equally important.
Those are two of the biggest mistakes I see.
In my book, Avoid Startup Failure: Learn the Top 10 Causes of Failure for Technology Startups and How to Turn Them to Your Advantage, I discuss all 10.
For anyone worried it’s one of those law books with a list of 75 rules where missing one means you’re doomed, it’s actually written as a story. I follow a likable young man from the Midwest who comes from humble beginnings, becomes a technology expert and sets out to commercialize university technology. Along the way, he makes almost every one of the top 10 startup mistakes.
Readers get to see how those mistakes play out in real life. Then I analyze each one and explain what could have been done differently.
The final section of the book walks through the kinds of legal documents entrepreneurs encounter once they begin attracting angel investors or venture capital firms. Capital is often the fuel that allows startups to grow, although there are exceptions, particularly with certain software-as-a-service businesses that can scale through recurring revenue.
Those are the areas I’d encourage entrepreneurs to pay close attention to.
Going back to something you mentioned earlier about business structure and protecting personal assets, is there a meaningful difference between forming an LLC versus another entity, such as an S corporation or C corporation, when it comes to liability protection?
An LLC is generally the least expensive and simplest entity to establish and maintain.
A corporation involves more paperwork, additional documentation and ongoing state filings. However, there can be significant tax advantages to using a corporate structure.
That’s one of the reasons entrepreneurs should speak with a knowledgeable business tax advisor early in the process.
For example, there’s a provision in the federal tax code—now mirrored by 46 states, including New Jersey—that can exempt up to $15 million in capital gains from the sale of qualified small business stock. That benefit generally applies only to corporations, not LLCs.
While it’s possible to convert an LLC into a corporation later, it’s worth thinking about these issues at the beginning. If you’re building a company, you want to maximize the value of all the hard work you’re putting into it.
As we like to say in New Jersey, it’s not just how much money you make—it’s how much money you keep.
That’s why good tax advice is every bit as important as good legal advice.
What about the state someone incorporates in? It used to be that the advice was, “No matter where you’re doing business, incorporate in Delaware.” I know there are a few other states that get mentioned now. Is there really a difference? Are some states more advantageous than others?
Delaware is still widely viewed by investors as the preferred state of incorporation because of its long history of corporate law and governance. The law is very well developed, and there are relatively few issues that haven’t already been addressed by Delaware courts.
The majority of large U.S. corporations—including many Fortune 500 companies—are incorporated there. While other states have tried to become more attractive for incorporations, I still believe Delaware offers significant advantages for startup companies.
One reason is the Delaware Court of Chancery, which specializes in business and corporate law. Instead of appearing before a general trial court where a judge may hear family law one day and commercial litigation the next, you’re dealing with judges who focus specifically on corporate matters.
From an investor’s perspective, that’s reassuring. It provides predictability and a well-established body of law.
The cost of incorporating in Delaware also isn’t dramatically different from incorporating elsewhere. In my experience working with agencies in New Jersey, New York and Delaware, I’ve found Delaware to be particularly business-friendly. The Secretary of State’s office is responsive, knowledgeable and efficient. I can’t always say the same about my experiences in New York or New Jersey.
I hear that comment a lot from people doing business in New York and New Jersey.
What are some of the mistakes founders make when bringing on employees, contractors or business partners?
One of the biggest mistakes involves intellectual property ownership.
If your business creates inventions, trademarks, copyrighted materials, marketing content or software, you need written agreements that clearly assign ownership of everything your vendors or contractors create to the company.
Here’s a common horror story.
You’re building a startup with very little money, and a friend volunteers to write code for your software.
He says, “Don’t worry about paying me. I’ll work on it nights and weekends.”
Everything seems fine until you’re raising capital. During due diligence, an investor asks, “Who wrote this software?”
You say, “Mostly me…and my friend Jack.”
“Were they an employee?”
“No.”
“Did you have a written agreement assigning the intellectual property to the company?”
“No, it was just an informal arrangement.”
At that point, one of two things usually happens. Either the investor loses interest, or they require you to track down Jack and obtain a written assignment confirming that everything he created belongs to the company.
If Jack realizes the software has become valuable, he may ask for equity or compensation before signing.
That’s why it’s so important to address these issues upfront.
I often compare intellectual property to lightning in a bottle. If you don’t keep the cap securely on the bottle, the intellectual property can escape—and it’s very difficult to put it back.
Investors want confidence that the company owns all of the intellectual property necessary to succeed.
The same principle applies to employees.
Generally speaking, under New Jersey law—and the laws of many other states—intellectual property created by an employee within the scope of their employment belongs to the employer. Even so, it’s extremely helpful to have that clearly documented in writing.
Employees should understand that work they create for the company belongs to the company. They shouldn’t be using that work for personal projects, and when they leave, they should return all company materials and stop using them.
If a former employee misappropriates confidential information or copyrighted software, having a signed agreement makes it much easier to enforce your rights in court.
Another mistake I frequently see is bringing on co-founders without a vesting schedule.
Someone joins the company, receives a large ownership stake and then leaves a few months later. Meanwhile, the remaining founders do all the work, build the business and create the value—yet the departed founder still owns a significant percentage of the company.
That’s why venture capital investors typically require founder equity to vest over four years, often with a one-year cliff. If someone leaves before completing the first year, they don’t earn any equity. After that first year, the remaining shares usually vest monthly over the next three years.
That structure ensures people earn their ownership by contributing to the company’s success.
It’s also important to think through what happens if a founder or employee leaves.
If someone resigns to work for a competitor, should the company have the right to repurchase their shares at a nominal price? If they leave on good terms, should the company buy those shares back at fair market value?
Those are conversations that are much easier to have while everyone is getting along.
It’s similar to a prenuptial agreement. No one enters a marriage expecting it to end, but it’s much easier to make rational decisions before emotions become involved.
I’ve seen many business relationships deteriorate to the point where people make decisions that actually hurt their own interests simply because they’re angry with the other person.
Working through these scenarios with an experienced startup attorney—or through an accelerator program—can prevent a tremendous amount of conflict later on.
Philip, we’re just about out of time. Thanks so much for joining me on The Agent of Wealth. Before we wrap up, where can listeners learn more about your work or get in touch with you?
Thank you, Marc. We have an extensive website with a great deal of free information for innovators at crowleylawllc.com. If you’d like to schedule a consultation, you can email us at [email protected]. We also host a podcast where we interview innovators about their experiences and what they’ve learned while bringing new products and technologies to market.
We’re passionate about helping entrepreneurs build successful technology companies, and I wish all of your listeners the very best as they work to create innovations that improve society.
We’ll include links to all of those resources in the show notes. Philip, thanks again for joining me, and thank you to everyone who tuned in today.
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Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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