Other than the idea, one of the first issues founders face is whether to retain legal counsel. There are a few instances where a startup definitely needs a lawyer. Mergers and acquisitions, long-term contractual issues, SEC compliance, and criminal issues come to mind. However, as a general rule, startups need lawyers less frequently than they think.
Unquestionably, startups need legal support. From formation, to raising capital, executive compensation and employment contracts, intellectual property, regulation, and exits, there are a myriad of legal issues for founders to tackle. Regardless, a startup may not have to turn to lawyers to resolve each of these issues. Startups bootstrapping their businesses have other priorities. So, discretion needs to be used in determining when lawyers are necessary.
Founders learn pretty quickly that if they do not do the work, the work is not likely to get done. So, the most obvious solution to this problem is self-help. For certain industries, there is no doubt that standard forms predominate. If your startup is in one of these industries, you’re less likely to need the help of a lawyer. The following websites provide some of the better legal forms on the internet for startups:
At the end of the day, startups need lawyers when they provide the best, value-add related to a specific problem. A list of issues to consider follows:
There are two issues to separate as it relates to forming a company: (1) giving advice regarding what business entity is most appropriate; and (2) the actual filings. As an independent task, the filing can likely be completed cheaper by someone else.
Again, your startup might be in an industry where most, if not all, startups in the space use the same structure. Self-help can be best answer when this is the case. If not, there might be some value in retaining legal counsel as it relates to the business entity choice. Your goals will also have a significant impact on this issue. As a general rule, the less you wish to seek outside funding, the less like you are to need a lawyer. Bottom line: a lawyer might be overkill, except in specific circumstances.
Issues related to employment law have been in the news recently as it relates to the gig economy. Think Uber, Lyft, etc. Depending on your startup’s goals, employment issuse can be unique and novel. On the other hand, these issues can often be resolved with common sense. So, this will likely come down to a value judgment. Increasingly, the popularity of this issue creates a value-add proposition for lawyers. One reason is that employment agreements are contractual in nature, so they are difficult to change and can have a outsized impact on a company’s future growth.
The movie ‘The Social Network’ about Facebook shed light on the alleged behavior of founders. It seems more common these days to be told stories of partnerships that have gone wrong. It is certainly not always necessary to draft a document that outlines founders’ responsibilities. However, not having written expectations can create issues as your startup matures.
If one of the founders has the majority of the shares or voting control, the other founders might benefit from legal advice. If the founders hold shares equally, then this may all come down to trust. Either way, it is certain that time will inevitable change expectations. Therefore, it may help to put them in writing.
This issue is likely one of the most important issues related to startups. If your product is not unique, your company will compete in the marketplace based on a certain set of considerations. If your startup has a unique idea, your company will likely have to deal with Intellectual Property. Whether a startup needs to engage a lawyer depends on two key questions: (1) Is IP at the core of the business; and (2) Is that IP unique to the business? If the answer is yes to both, your startup needs a lawyer. If the answer is yes to one, then think very seriously about engaging a lawyer. Otherwise, it is likely unnecessary.
There is little doubt startups need lawyers for issues related to funding. Investors have a simple agenda: How are we going to make as much money as possible? Investment documents are often technical and founders are stuck with them. In this instance it is valuable to have a lawyer who can provide clarity about arcane or technical language. If a Term Sheet provides for a 2x liquidation preference, with uncapped participation, would you know what this really means? Would you know this deal point can likely be negotiated down? Your lawyer certainly should.