July 3rd, 2013 NYC Legal Hackers: ADR for Startups
On Wednesday, July 3, 2013, OLC attended NYC Legal Hacker’s event: ADR for Startups, The Future of Dispute Resolution Mechanisms. The event was held at Projective Space and featured four speakers: Giulio Zanolla, Associate Mediator at Weinstein Melnick LLC, acting as the moderator; Vivek Boray, Partner at De Franceschi & Shefayee LLP; Jesse Sandoval, Co-founder & CEO of MindSwell; and Yoran Vilosny, Founder & CEO of JusticeBox.net.
“Companies frequently experience disputes in their initial stage of development. Especially at that early stage, conflict involving the founding team can have destructive consequences for the venture, the personal and professional relationships and the investments made. If we compare conflict with a disease, litigation would represent an invasive, costly treatment of last resort. And yet, companies rarely consider options beyond a lawsuit when relationships go awry.
“This event will discuss the merits and deficiencies of existing alternative dispute resolution (ADR) mechanisms, specifically for disputes involving startup companies. The panel will engage the audience in an interactive discussion regarding possible alternative approaches to conflict, and how different choices of process can lead to dramatically divergent outcomes from the same initial situation. After fleshing out some of the stakes and considerations in tailoring these processes, we will discuss the possibilities of new ADR mechanisms that could save effort, time, and money for young companies.” (NY Legal Hackers Meetup Page)
The event started off with Giulio Zanolla asking the speakers to describe themselves and their work.
Jesse Sandoval: I’m originally from California. I did work in management consulting, but I moved here to New York to start a new business. I just wrote a blog post on legal considerations for the Stanford Alumni Angels.
Yoran Vilosny: I’m from Israel and founded a platform using new technology—we just launched in Israel and about to do another launch in Australia.
Vivek Boray: I’m part of a boutique law firm and I focus on startups from corporate to exit.
Giulio Zanolla: Tonight, we’ll be talking about ADR. What is ADR, some of you might be thinking. Some of you are familiar—it’s Alternate Dispute Resolutions to solve disputes. It’s what people can choose to use to retain their control. ADR is presented as a spectrum to binding arbitration. There’s all series of processes that goes from the spectrum. The one main difference between core procedure and ADR techniques is that parties can retain their control with ADR. The processes offers various levels of control. ADR processes are flexible. They’re flexible in many ways. This makes for efficient solutions.
ADR alows for faster, cost-effective solutions. The fact that ADR is spread in many areas doesn’t mean it’s popular. We think that there might be—there can be benefits to using ADRs in the startup world.
Every organizations face disputes. Scientists believe that conflict is beneficial to human interactions. It presents an opportunity to progress and evolve. So why ADR for startups? Startups at the early-stage are vulnerable to disputes. There’s no structure. It’s based on relationships and we’re here to talk about optimizing that.
ADR is like a toolbox that offers tools for people to create solutions to be better informed and get closer to what their interests are, but a lot of people associate it with the litigation process. It should be brought to attention that ADR can be used in a relative way.
In a startup world, people are committed to investing and creating something new. At the moment when founders bring separate counsel, it brings a detrimental effect to the group. Now, what's the panels perception on this? What did you observe?
JS: I feel that in business, there are agreements that are structured, and for those agreements, there will be disagreements, meeting to arbitration or court proceedings. I feel that there are a number of disputes that come at the managerial level, at the supplier level and the sales level. In New York City now—when I started, there were few startups—now, there's a ton of startups.
It's interesting because when you look at the evolution of startups, they don't last. They last for usually 24 to 36 months. That's the initial hurdle. A third of them failed because of co-founder disputes.
If you think about it, there's a lot of educational tools that help you create better products, services, but very few tools that help you out with how to deal with managerial issues. I think in general, the first question to consider is: Do you think alike? Do you view the world in a similar manner? You want your initial team to have similar backgrounds, training and perspectives because it reduces dispute. After 10 employees, focus on diversity.
Another thing is the idea of ownership—most people feel they have ownership over certain things be worked on. It's important to establish a sphere of influence from the start. Define it so that co-founders don't feel they are breaching or feel like their roles have been breached. There should be some sort of the executive branch in the organization. So ownership is very important, it's also tied into your ownership of equity. Generally speaking, anyone that wants to start an organization, they need to be mindful of distribution of equity.
YV: I've talked to a lot of people that don't read their contracts. People made bad decisions because they've downloaded them. Its such a big mess later on. Its crazy. People sign it because it's cheap. On the ADL issue, lawyers are doing a bad service. Lawyers don't give the option for ADL because of financial reasons. ADL doesn't have a bad reputation, its just under used. You can use ADL in a lot of places, but lawyers don't tell you that. I wish it could change.
VB: Its very important for startups to define their roles. Communication is very important. A lot of times when I see startups fall out is because of the lack of communication. It's very important to have open communication and had the initial understanding of roles and the objectives that need to be achieved. I think sometimes when we get to ADR, the relationship is so frayed that someone has to leave. I think just focusing on the business side is important and giving another option to solving that is key.
GZ: When there is a lot of money involved, ADR is fairly, if not, frequently used. But at the startup level, what is the impact?
VB: Obviously, you’re looking at the interests of the company. It’s very useful to have an objective person to oversee the procedures to separate the ethical and the unethical between the two parties. To be the arbitrator, though, is a very difficult thing to be.
GZ: Conflict can be either faced or escalate. Interestingly, through ADR mechanisms, a shift happens. Situations where relationships are so spread out, ADR helps rebuild it. I mean, earlier the better to solve disputes. It’s interesting to see the different number of outcomes.
JS: Most startups are created with people that don’t have complementary skillsets. But at some point, people’s visions on the product will conflict at some point. An executive authority—someone needs to have it.
GZ: How can technology serve an integration function on the startup community? What is the key element?
YV: So, our platform is based on the idea that conflict is everywhere. Well, what are the possible ways to mediate those needs? How can we create a better way to solve these disputes? We developed our platform to answer that. We came up with the legal aspect of what we do, so we do different case management. If startups themselves do ADR, it puts them ahead of the game.