What to Do If Your Startup Gets Sued

Latest posts by Monica Zent (see all)

Lawsuits and business, unfortunately, go hand-in-hand. Every week, there’s something in the news about a major company being sued for a variety of reasons. LL Bean, for example, was sued by a customer for changing its lifetime return policy.

While mega-corporations have teams dedicated to fighting such battles, startups and entrepreneurs might not. That’s what’s happening with a small Missouri restaurant that’s being sued by Broadcast Music Inc. for playing eight songs in their local establishment without a license.

What do you do if you find your startup in a similar position?

Here are the steps you should follow to keep from going under if your startup is sued in a civil court.

1. Have written agreements in place

As an attorney and entrepreneur myself, I know first-hand that your best defense is a good offense. So, you should avoid getting into a lawsuit situation in the first place.

The most common types of disputes for startups I’ve seen are with vendors, customers, employees or occasionally competitors. Have written agreements for every one of those relationships and make sure you’re comfortable holding up your end of the bargain.

2. Be insured

In addition to having contracts with everyone involved in your business, you should also have an insurance policy for your business. I’ve worked with a lot of startups who don’t think to carry insurance, but I recommend it to protect the business in unforeseen circumstances, such as lawsuits.

No insurance is going to be able to cover every kind of claim, but having some will help you in a lawsuit situation. Before you start calling a lawyer, call your insurance company to see how your policy will protect you.

3. Try to resolve the conflict out of the courtroom

Don’t rush into the courthouse the minute you’re threatened with legal action. I always recommend that startups look at other possible remedies. Consider writing a letter, call them or meet with them in person. Try to resolve the issue diplomatically business to business, or person to person.

Many causes of the disputes I’ve seen are misunderstandings and can be remedied outside of a courtroom. Once you go to court, you are always going to lose even if you are the “winner,” given the resources including time, energy and money that you will have to expend. Trying to diplomatically solve something is still the best course of action.

4. Choose a lawyer who specializes in your field

If nothing has worked to prevent the lawsuit from going to court, the next step should be to find an attorney who is familiar with the law that relates to the type of dispute. A lot of entrepreneurs will often call a general attorney, but usually, that person is not an expert in the particular area of concern. You wouldn’t go to a general practitioner if you had a severe skin condition; you’d go to a dermatologist. The same is true for lawyers.

I’ve seen people get into trouble in this regard because they’ve hired a lawyer who wasn’t an expert and they weren’t adequately defended. Even as a startup with limited funds, you can search on websites such as Upwork and LinkedIn, or your local bar association to find solo lawyers for a more reasonable cost.

5. Talk to your accountant

No matter what, a lawsuit is going to cost you money. That’s why it’s important to get your accountant involved early on to ensure you have the funds necessary to handle the litigation process. Find out what changes you need to make, how being sued will affect your bottom line, and how much you can afford to spend to defend yourself, if that’s the only option.

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6. Don’t talk about the lawsuit

You’re going to talk to a lot of people in a lawsuit situation, from lawyers to accountants to insurance companies—but you should never talk about the legal matter publicly and avoid discussing it with your friends and family. That also includes any social media or press. Whatever you say could be held against you later. You might think it’s helping your image by getting ahead of what will be said in court, but it could only hurt you if comments were taken out of context or said in a moment of passion.

Lawsuits are the last things any entrepreneur wants to deal with when they’re just getting started. Unfortunately, it can still happen. Being prepared and following some simple steps can prevent permanent damage to you company or entrepreneurial spirit.

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