Life is sometimes like HBO’s Silicon Valley (unfortunately)

Hard truth: Even the most promising startups are one calamity away from completely shutting down.

Self-inflicted wounds are hard to escape from. But there are increasingly a number of options when a competitor, customer or would-be investor puts a company on the brink.

 Lee Ducker, one of the founders of Lake Whillans, sees  the horror stories. His firm offers litigation finance and  distressed venture capital services to companies in  distressed situations. He’s also one of four speakers at t  this year’s MedCity CONVERGE panel “The Modern  Entrepreneur’s Dilemma: Protecting What’s Yours.”

This panel is one of a series of conversations at MedCity CONVERGE – taking place Sept. 1-2 in Philadelphia – that provide fresh insights to the new challenges and opportunities in healthcare entrepreneurship.

Drucker talked about the issues around bad relationships, how they come about and how they’re solved. Excerpts of that conversation are below.

How often do things go so sour that a startup winds up needing to take someone to court?

People only come to us once something goes wrong. My guess is the vast majority of actors are solid individuals; they’re not robbing and stealing every chance they get. But it does happen and we see it. We see a lot of it.

When it does come to fruition it is devastating. It’s devastating for investors and entrepreneurs.

How does it happen?

It’s similar to the show Silicon Valley on HBO. You have this groundbreaking new technology and share it with a big company. They say: “We have to have it. We’ve got to partner with these guys.”

I would speculate that in some situations, the relationship turns into a numbers game. They plug in a number: “What happens if we build out this technology on our own, and what happens if we partner with the entrepreneurial company and own 30 percent?” If they determine it’s more profitable to build the technology on their own, then they disregard the contract and the law.

The carnage and wreckage is accounted for only nominally. It leaves the entrepreneur asking what happens next.

What are the real-life problems?

There’s no common scenario. But some of the situations that we’ve seen include strategic partners investing in a technology company only to garner trade secrets, and then abandoning the company before fulfilling their obligations and using the trade secrets to develop a competing business. We’ve seen instances where the equity investor and the debt facilitator are the same company; the money from the equity investor is delayed and the banks foreclose and the company loses its assets.

We’ve seen organizations that were working with a company then tell that company they decided they want to go in a different direction. That’s fine. But then, later on, they come out with a product that’s basically the same, and it turns out they misappropriated a number of the underlying innovations.

It can also be a customer, who licenses the technology, but never pays pursuant to the contract. Or a competitor, who acquires a product with incentives for the startup but then shelves the product in favor of its own.

How can you prevent someone set on taking advantage of you?

When you start to see things going wrong, start documenting them. When you have conversations, have them in e-mail so they are readable and documented.

If it’s a disagreement over certain tests, spend the money and get an independent tester. Verify your perspective. Corroborate one of your stories. It’s a chance to protect yourself.

Most entrepreneurs think, “We have to work this out.” But it isn’t always that way. So you need to document what is going on. Bottom line, you’re better off documenting every thing, at every step, from the very beginning.