As the list of sureties go, add ‘getting sued’ alongside death and taxes. Unfortunately you can and will be sued for anything, whether the plaintiff has a real grievance or not. It’s not a matter of if, it’s a matter of when. Below are the times I’ve seen companies most vulnerable to a suit:
You’re about to sell the business. This is arguably the point at which you’re most vulnerable because even if you have insurance, it doesn’t matter. A potential acquirer is going to say “make this go away, tomorrow,” and many acquirers will pass all together, even if it’s an asset sale. Filing a claim with your insurer is going to take many months (sometimes 10+) so you’re almost always going to be forced to settle. If you’re selling the business, tell as few people as possible and do everything you can to make sure past employees or former business associates do not find out.
You just fired someone. If you don’t already have EPL insurance, get it. Nobody is good at hiring and inevitably you’re going to hire someone that you need to fire (you should adopt a hire slow, first fast mantra, but that’s another article). No matter how amicable the firing was, there is risk that the person will come back and sue you: all it takes is them falling on hard times and a lawyer taking their case on contingency.
A competitor claims you’re infringing. Even if you’re not infringing on someone’s patent, copyright, or trademark, if a competitor thinks you are or if the competitor just wants to slow you down, you could get sued. The good news about suits like this are they’re less common because they are very expensive to litigate: we’ve seen plaintiffs spend upwards of $150k and spend 10 months in court trying to establish infringement. Nonetheless, if you’ve got the budget to patent some of your most important IP, it may be worth it not so you can go sue competitors, but so that you can easily play defense when they try and sue you.
You’re sideways with your banker. Boutique investment banks sue their former clients all the time. This will happen when you’ve hired a small investment bank to run a process for you, they fail, your raise money on your own or sell the business on your own at some point, and now the banker believes they’re due a fee because you’re within the ‘tail period’. Make sure the banker contract says they only get paid on intros they make directly and have a 6 month tail.
I’ve come to believe that it’s not about avoiding getting sued, it’s about avoiding getting sued multiple times and handling each suit quickly and cost effectively. Do what you can to minimize the risk at all times and always be conscious of it. Of course, this article is not nor is it to be construed as legal advice, I’m not your attorney, and you should seek the advice of counsel for all matters.
Visit us at blossomstreetventures.com and email us directly with Series A or B opportunities at email@example.com. Connect on LI as well. We invest $1mm to $1.5mm in growth rounds, inside rounds, small rounds, cap table restructurings, note clean outs, and other ‘special situations’ all over the US & Canada.