INITIAL ETHICAL AND LEGAL ISSUES

FACING A NEW FIRM

As the opening case about XploSafe suggests, new ventures must deal with
important ethical and legal issues at the time of their launching. Ethical and
legal errors made early on can be extremely costly for a new venture down the
road. And there is a tendency for entrepreneurs to overestimate their knowledge
of the law. In fact, in one study 254 small retailers and service company
owners were asked to judge the legality of several business practices.2 A sample
of the practices included in the survey is shown next. Which practices do
you think are legal and which ones do you think aren’t legal?
_ Avoiding Social Security payments for independent contractors
_ Hiring only experienced help
_ Preempting potential competition with prices below costs
_ Agreeing to divide a market with rivals
The first two practices are legal, while the second two are illegal. How did
you do? For comparison purposes, you might want to know that the participants
in the survey were wrong 35 percent of the time about these four practices.
The study doesn’t imply that entrepreneurs break the law intentionally or
that they do not have ethical intentions. What the study does suggest is that
entrepreneurs tend to overestimate their knowledge of the legal complexities
involved with launching and running a business.
As a company grows, the legal environment becomes even more complex. A
reevaluation of a company’s ownership structure usually takes place when
investors become involved. In addition, companies that go public are required to
comply with a host of Securities and Exchange Commission (SEC) regulations,