Every creator and business founder reaches a point where they need to lean on the advice of a legal professional. But how do you know when the time is right? At what point in the evolution of your venture do you need to consult a lawyer, and how do you make sure that you’re being as resourceful and pragmatic as possible? We thought the best person to talk to about this was someone that truly cares about entrepreneurs, someone that left a massive law firm to join forces with a legal partner whose mission was aligned with his – to help inspire innovation by working with brilliant founders from inception to help them navigate complicated legal issues.
In our interview with David Postolski of Gearhart Law we dive into many of the same questions that first time entrepreneurs have when starting a business. The first half of the interview focuses on what to consider when thinking about Intellectual Property for your business, detailing what you need to do in the first year of your business and the costs you can expect around patents.
We then cover more common questions, like when you should incorporate, how to avoid personal liability, when to create founder agreements with your partners, and why you should never pay for an initial consultation with a startup lawyer. David speaks with us from the perspective of an entrepreneur to make sure that you limit your costs early on while avoiding major problems in the future.
00:17 Today on the show it’s our pleasure to have David Postolski.
00:56 Why don’t you start us off with a little bit about who you are and how you developed your own expertise when it comes to early-stage intellectual property law.
01:26 I’ve been doing this for about 17 years and I probably have created a little niche for myself. I started my career very early and worked at big firms and large corporations and it really wasn’t soul-satisfying type of work.
02:02 So about 10 years ago, I decided to devote my life to startups and entrepreneurs because I really wanted to do some soul-satisfying work and I wanted to not have to think about the billable hours. I’m an entrepreneurial lawyer as well as a lawyer that services entrepreneurs.
03:51 Tell us about that story of how this firm came together.
04:07 So I met Richard Gerhardt and he is like me. Worked at large firms, worked at large companies, and decided also that he wanted something more.
04:40 At what point do you think someone needs legal counsel… to actually pay for a lawyer, or if they don’t need to pay for a lawyer how can they still get those legal resources to know and have peace of mind that they’re in the right direction?
11:29 I definitely have clients that have done it themselves. I’m not going to lie about that. Those clients I think that can best do it themselves are the ones that can fully inform themselves and understand the legal and technical process around getting intellectual property or starting a corporation.
12:41 If you want something of your own and you want to monetize something of your own, then probably it’s best to at least consult with an attorney that’s hopefully not charging you for consultation because that’s crazy.
13:54 So from my perspective, its concept. Try not to spend any money, try not to monetize, try not to market, try to make prototypes or try to figure out if it already exists out there.
15:18 Let’s say I have a product that’s being tested and there might be some liability now, but I still can’t afford $10,000 for a lawyer. How do you navigate that?
16:14 There’s this concept in patent law and US patent law that says if you ever wanted to protect whatever you want to protect but it’s been publicly known for more than a year, then you can’t file a patent on it ever.
17:18 Just to touch the surface of this, what constitutes public disclosure of your IP? I mean, if you just have people using the product but they don’t know how it actually works, the protectable part of it. Does that count?
17:30 So this is brand new law. It only happened as of March 16 2013 president Obama signs the American Invents Act. There is no exact answer to that question. If it’s not under an NDA, it starts off as public.
20:04 What would that initial first year costs be, vs. let’s say that second-year cost of trying to patent something.
20:13 There’s probably cheaper than us and there’s definitely more expensive than us for sure. But a patent search is $790 which is not such a crazy fee. The first initial application is about $2,500 and then that year later is usually the balance, which is another 2,500 so if you look at a patent application it is about $5,000 average. There are different ways to cut cost.
21:58 You need to prioritize making sure that you get the customer to commit, that you can have more of these validation points to them. Prove to your investors or maybe future customers that you’re actually a real company. So how do you balance that?
22:21 The patent process is not in a vacuum. The entrepreneurial process is not just the patent process, it’s everything, but I think you hit the nail on the head. You must somehow prioritize this because you can continue to get customers and not pursue the patent, but then once you get your customers, you won’t be able to get the patents (unless they’ve signed NDAs).
25:37 Are there any clear distinctions where somebody comes to you and you’re like, you know what, you don’t really have anything protectable here and it’s just not worth for you to pursue it, at least at this stage. Do you have any stories about that? Or at least maybe any general frameworks of thinking about that?
25:51 I’m probably the first attorney to say that not everything’s patentable. Not because there might be not something patentable, but because it might be an industry that really doesn’t require it, that you can have a short runway and exit out pretty quick. So you may not need it. A patent takes about three years to get. So it may be obsolete by the time you get it.
30:31 So because you mentioned sometimes then it’s not worth making a patent if you know you’re gonna be going up against a Google because then it’s public information and they might replicate it anyways and they have more legal resources. Is that correct?
30:44 That’s sometimes how it shakes out. After representing entrepreneurs for the last 10 years, I have been involved in situations where the little guy has gone up against the big guy and when the little guy literally has the patent on file first because it’s all about who can be the first to file their patent, who had the earliest filing date in the situation where the little guy is the one with the earliest filing date going up against a Google, Dell, Oracle, or big company in any other industry. I have seen pretty good success stories come out of that and my opinion has changed over the years. I don’t counsel my clients to be scared of that situation anymore. I counsel them to really embrace that situation because what we see is that company potentially acquiring them.
32:29 When should I incorporate?
34:46 I’ll answer with a little story. Something that really happened. Three founders came into my office and they weren’t even trying to get a patent. They had a really cool idea for a website. So they’d been around for a year, they’ve been doing this for a year and part of the story was also that there was a fourth that was not pulling his weight. It was a really tough situation and it caused them to really kind of look within themselves and realize that they probably weren’t going to be the best partners together. And so the whole thing imploded.
In that situation, they should have had a founders agreement early on. It’s easier to talk about things like that when you’re staring off and things are going great. Even if you’re not incorporated, have something that you signed together.
36:34 Now what if I didn’t incorporate this as a project? I’m working on over the weekend and I’m a hustler. I have software built by Monday. I have three B2B clients using it, but I’m not incorporated yet. What kind of liability am I looking at?
37:02 So let’s say in that situation, at the end of the weekend, you make the software, but the customer who wanted it from you didn’t pay. Then how are you going to try to collect from them? The reason why we have legal documents is that we can go into a court of law.
37:43 Let’s say money wasn’t exchanged, but I have a business that’s using my software but something went wrong. I lost their data and they are upset and are threatening legal action. Is this now going against me personally and my personal assets?
38:04 That’s another reason why we choose to incorporate and we choose to have legal agreements because you want to limit your personal liability.
42:51 Thank you so much for coming on the show and being so open with your information and also just being a champion of entrepreneurs everywhere. We really appreciate you and the work that you do.