When should a young company start to think about engaging legal counsel? There is no one-size-fits-all answer to this question – a startup should assess its status as an organization, its goals and future needs and its resources for outside legal spend. Startups do not have excess cash lying around, so it’s important for them to know what is necessary to address now versus what can be postponed versus what is superfluous. However, there are certain events startups frequently encounter where it can be very beneficial to have a lawyer on board who is familiar with the company. Engaging a firm that does a lot of startup work doesn’t necessarily require a lot of upfront up cost and many law firms offer subscription based services or fee deferral arrangements that can help with the cost issue. Thus, you should consider engaging a firm early in your company’s development, but when do you really need to use their services?
What should you get help for?
Below are a few events with which founders should get legal assistance:
- When forming the company. Lawyers can help you pick the appropriate entity type for your situation. Based on factors such as future financing, tax and the desired flexibility in regards to structure, your lawyer can recommend different options and help structure the entity in a manner that best suits the startup’s needs.
- When issuing founder equity. When issuing equity to founders, lawyers can provide an objective perspective and assist in ensuring that the founders’ and company’s interests are aligned, through vehicles such as founders agreements or equity repurchase agreements. Having these types of agreements in place can help solve problems if the founders want to move in different directions. Additionally, investors may want to see that founders’ stock is subject to vesting, providing an incentive to drive growth. Your lawyer can help ensure that interests are aligned and protected from the outset, which is more efficient and cost-effective than having to address problems down the line.
- When you need to protect technology. If it is likely that valuable IP will be created, it is wise to get your lawyer to help you strategize your IP protection approach. Counsel can also help you with making sure the company has the strongest ownership claims against contributors to the IP (which, if started early, can help smooth the path to M&A exit later on).
- When key commercialization events occur. Many companies enter into contracts that are long-term, and can impact the company’s business for a long period of time. Often, the other party provides its standard agreement, which may contain negative terms obscured in unlikely places that could diminish the value of the contract for the startup. When entering into long-term or exclusive contracts, contracts with significant performance obligations or contracts with significant customers, it is worthwhile to have a lawyer involved who has the company’s long-term interests and vision in mind.
- When trying to raise money. Counsel can be very helpful with capital raising, including helping companies comply with securities laws, especially those relating to crowd funding or involving “general solicitation”, a topic of great focus for the SEC since the passage of the JOBS Act. Your lawyer can help make sure you know what you can and cannot do under the securities laws. When selecting legal counsel, a startup can also look to a firm that can help connect it with potential seed, angel or institutional investors, as well as counsel who knows how to drive capital raising deals to maximize company proceeds. Whether it’s a full Series A financing round or a convertible note, startups should have their own legal counsel to look over the agreements and advocate for the company’s best interest. An attorney will know what to look for, and what terms to either add in or keep out when considering the company’s future fundraising goals. Otherwise, the company may be bound to terms that could dissuade future potential investors from investing.
- When hiring employees, consultants, independent contractors or other service providers. There are many employment laws, both state and federal, that your lawyer can help you comply with at the front end of the process. Additionally, your lawyer can help you correctly classify service providers as employees versus independent contractors. Employers have greater obligations to employees versus independent contractors, and misclassification can bring significant exposure. If you are hiring an employee who is under a non-compete with a former employer, your lawyer can help you evaluate the company’s exposure. Your lawyer can also help you establish a compliant equity incentive plan for the company to issue equity awards to employees.
A good law firm will be a part of the startup team, provide insight from a number of different perspectives, especially as to issues that start small (and can be fixed easily) if caught early but which become major issues later on, and can be a great resource of institutional knowledge and history about the company.