Without informing their board, a certain startup had amassed $150,000 legal fees in just three months.
The investor team I was part of grilled the founder to explain why. He told us the fees were for documents involving business formation, funding, various agreements, and intellectual property registrations.
Because fees like this can sink an early-stage startup, it’s critical that founders of emerging companies know cost-effective ways to use lawyers.
As a founder, you can get the most out of legal help by deploying a few smart strategies that won’t break the bank or blow your budget. Not everything you do requires a lawyer: You simply need to know when to engage your attorney, how much to spend, and when to do it yourself.
When you absolutely need a lawyer
Your startup needs the right legal structure. Structure depends on various factors: the nature of the business, its growth potential, funding requirements, liability considerations, and tax implications. Most startups are formed either as an LLC (limited liability company) or a C-Corp. Your business lawyer will help determine which structure best fits your company.
All startups enter into agreements and contracts with employees, suppliers, strategic partners, distributors and partners. It’s wise to have a lawyer help draft contracts to ensure your startup’s interests are protected. These three key areas require legal coverage:
Not everything you do requires a lawyer: You simply need to know when to engage your attorney, how much to spend, and when to do it yourself.
IP (intellectual property) protection: Identify and protect your IP, including patents, trademarks, copyrights and trade secrets.
Fundraising and securities law compliance: Your capital raises from investors require securities laws compliance. These laws were established to ensure transparency in investing. As an entrepreneur, you provide accurate information to your investors about their potential investment. This includes all associated risks. A lawyer will advise and help your startup navigate the process to ensure your company is compliant.
Employment law: When a startup hires employees, the business must comply with state, federal and different country laws that include operating and promoting a fair and inclusive workplace. To lay out the company’s policies, you’ll need an employee manual that an attorney can review or help create. It’s equally important to have relevant agreements completed, such as employee “IP assignments.” This means an employee who creates intellectual property for the company, such as patents, trademarks, trade secrets or copyrights assigns all rights of ownership to the company.
My six smart ways for your startup to use lawyers effectively follow.
Ask your network for referrals and research before hiring
Before hiring a lawyer, ask other entrepreneurs, your board and advisers for referrals to prospective attorneys. Find out what they’re paying for legal services in your area. This will give you a good sense of how much you’ll pay and what to budget for. Ask about education, experiences and how satisfied they are with their lawyer.
You’re better off with an attorney who specializes in the entrepreneurial ecosystem and has many years of experience with entrepreneurs. Angel investor groups often have alliances with sponsoring law firms that specialize in the startup space. Because these law firms understand the inherent risks for emerging companies, they often have experience on all sides of the complex business and intellectual property issues that startups are likely to encounter.