If your business is going to be successful, you have to find a strategic way of managing your risk. In this lesson, we're going to talk about legal risks that you should consider in connection with running your business. I'll give you some idea of how to think about managing risk and then we'll give a few best practices on risk management and then wrap up. First, let's talk about the legal and regulatory risk that your business will face, because there are many. First is torts. Torts are wrongful acts that lead to injury to another person's property or body or reputation. This is a big area of the law that encompasses all kinds of conduct. Injuries that result from defective products, injuries that result from defaming another person, injuries that result from interfering with contractual relations, so torts negligence, intentional torts. Tort is a very broad area of the law which creates a huge amount of legal exposure for your company. Similarly crimes are a very broad area of the law and similar to torts as an employer, you can be held liable for the torts or the crimes of your employees in certain situations, particularly when your employees acting within the scope of their employment. Because of that, your employees' conduct creates a huge amount of potential exposure for your company. You have to find a way to try to regulate and mitigate that risk. Also, there are many statutes and regulations that have requirements that may be relevant to the area in which your business is practicing. As a business owner, you're required to ensure that your business is complying with those laws and those regulations. Now, while they may not necessarily be torts or crimes, they may be certain regulations that the company could be held responsible for if you're not complying with them. Then finally, another area, a big area of legal risk for your company is in the area of contract. The successful operation of your business will require you to have contracts and agreements with third parties, whether it's a landlord, whether it's a supplier or vendor or somewhere else in the distribution chain for your product, whether it's an employee agreement. These contracts and agreements that are associated with running your business can create legal exposure if your company breached the contract. What if the third party you're contracting with breaches their end in the contract. How do you put all of this legal and regulatory compliance risk into a framework that allows you to focus on growing your business? Here's how I like to think about it. Whenever you're thinking about risk, you want to put it into a framework that allows you to decide what end of the spectrum a particular risk factor lands. First is exposure. I know that's a legal term, but it essentially means the consequences. What are the consequences of this particular risk that you're assessing? Also, what's the likelihood of this type of risk coming to fruition for your business. For example, if you're in the business of Uber, for example, was in the business of car-sharing. The exposure and the consequences of an Uber employee getting hurt while in transit or while carrying a passenger. That is a huge risk that can result in death, that can result in serious bodily injury, that can result in some type of bodily infliction. The exposure is huge and the fact that Uber's in the space of rideshare. This is what they do day in and day out. The likelihood of this type of thing occurring is quite high. Because it's a huge exposure, huge consequences for the risk and a high likelihood of occurrence, this would be very high risk factor for the company. On the other end of that spectrum, imagine your key engineer for your software company gets sick two days before your product is to launch. This can happen. But consequences for a company. Maybe you have other engineers that are in place. So you have some redundancy built-in. This is not a type of thing that will taint the company particularly if you have those measures in place. The likelihood of occurrence, the fact that your key engineer will get sick every time you have a product launch, it's not that likely. That I would put on the other end of the spectrum if you're using this exposure and likelihood of occurrence type framework. Once you have your head around that framework for thinking about risk, then you want to think about ways to manage those risks. There are three ways that I like to point out that you can manage risk. You can either accept or ignore the risk. For example, in the case of your key engineer who got sick shortly before your product launch, one way to deal with that risk is to accept it. It may happen. Another way of dealing with it is ignore it. We're just going to keep trucking along for our product launch and not worry about those types of things happening. Another way of approaching risk is to transfer the risk. Let's use the Uber example for this. This is such a high risk factor for the company. There is huge consequences, huge exposure, and the likelihood of this occurring is quite high because this is what we're in the business up doing. With risk that are met of the spectrum to the extent you can, you want to transfer those risks. One of the ways to transfer risk is to get insurance. What insurance does is it takes all the risk factors and put that risk on a third party. In that's scenario, Uber would get insurance for it's drivers in order to mitigate and transfer the risk of those problems happening to the insurance company. The other way of managing risks is to just mitigate the risk. Let's jump in and expound on this a bit. For acceptable and normal risk like the key Engineer getting sick, these are risks that have minor impact and a low likelihood of occurrence. These are risks that may be okay accepting or ignoring. One of the things that you may want to do here is have some redundancy in place although you are accepting the risk because of the minor impact or the low likelihood of occurrence, you're also putting mechanisms in place to mitigate the risk from happening in the first place. Transferable risk. These are risk, like the Uber situation, that can have a major impact on the company. These are the risks that can take your company. You want to transfer some or all of these risk to an insurance provider. This is typically an agreement between you and insurance company whereby whether it's annually, monthly, you pay a premium and the insurance company bears all the risk for the occurrence of this particular action happening up to certain limits. The risk that you want to try to mitigate, these are risks that have a major impact on the company, they may have a high likelihood of occurrence but you're able to put mechanisms in place to reduce the risk. For example, let's use an employment discrimination situation as an example. Unemployment discrimination carriers can have huge impact on the company. It can be a major lawsuit, it can be a lawsuit that takes away the time and energy of your officers and your employees through protracted litigation, it can tarnish the brand of your company while this litigation is pending and your company is being subjected to media increase and media scrutiny, it can have a real drain on your company, huge impact. The likelihood of this little occurring can be quite high unless you put certain mechanisms in place, including regularly educating your employees about discrimination laws, regularly educating your employees about best practices on interacting with other employees in the workplace. This is a good example of how an area of risk that could have a major impact on a company, how you can mitigate those risks by putting a protective measures and procedures in place. As summary, you want to choose a business form first that shields you as a founder and you as the owner of the company from personal liability for actions against the company. Business forms that achieve that are the corporation, the limited liability company. Also, even if you're a limited partner in a limited partnership, these business forms allow the business to operate and allows a plaintiff that has a claim against the business to only pursue their claim against the business and not against you as an individual. That's your first order of business choosing a business form that shield you from personal liability. The next is to get adequate insurance for risk that you are able to transfer. You want to work with an attorney to make sure you understand what your rights and obligations may be under some of the risk that your company face, but also attorney can help you think through what insurance mechanisms may be available for you to help either transfer or mitigate risk that you may be facing.
