As a startup founder, you have a to-do list fourteen miles long, so, if you hire an attorney for advice, "Legal Best Practices" can seem daunting. As a result, a lot of founders either don't do anything, or do too little. As a result, you end up with exposure or risky behavior. You don't want to be that founder. So here are five specific things you can do to avoid the worst mistakes my founder clients have made.
Hire Counsel
I can't tell you how many people I've met and clients I've talked to who think that they'd make great attorneys and/or that they have people they talk to for advice other than attorneys. I have a single and uniform response to a comment or statement like this:
Even when I am speaking to a client who is or was an attorney or has a J.D., they are almost never correct. The reality is that the law is a constantly changing field and that compliance is a moving target. What best practices, avoided negligence claims, and/or compliant last year, last month, or even last week may not be what does so today. Good counsel assists with that.
Good Counsel will also prevent you from saying something stupid, assist you in negotiations, give you a second set of eyes on contracts and agreements, and do myriad other things that provide value. Additionally, good counsel needn't cost you an arm and a leg. Lots of founders connect to large firms like Wilson Sonsini and/or Fenwick & West either due to reputation or their connections to accelerators. There are lots of good attorneys at those firms, and they do everything. But they charge you between three and six times what you can be paying at any given smaller firm. Even if you can't get all your services at another firm, do you want to pay a premium that high for one-stop shopping?
If you want to do a one-stop shopping option, we can assist you with an outside counsel service where we can help find other service providers, supervise and connect with those providers and be the primary point of counsel helping organize the connections, and even with the additional attorney's involvement, we will still save you money.
If we talk and you find you don't think we'll work together well. We're not the only firm that could do that.
Protect Your IP
Every startup has IP of some value. I don't care if you're inventing a solar alternative to the internal combustion engine or selling pork cutlet out of the back of a 76 Pontiac, you probably have IP. The former needs a patent attorney, both will want trademark protection and for their names and branding, and the latter may want copyright protection for photographs of its products, car, and blog posts. The former may want this last thing as well, but it will be even more necessary in the latter instance. After all, you need to protect yourself from anyone else who decides to get into the discount delivery pork cutlet game.
If your company is in tech, your IP is all you have. It is what you sell. IP is your stock and trade. Without protection for it, you have nothing. There is some common-law protection based on usage for things like trademarks and copyrights, but neither of those are as strong or effective as registering, and while the cost of each may seem prohibitive (trademarks can be on the order of $1200-1500 including filing fees), the protection of a registered trademark is profound compared to the protection of common law protection.
Get Everything in Writing
I ran a workshop for law students recently and I asked what was the first thing you should do when a you get a new client. I got a lot of answers. The closest to the right one was, "Check for conflicts." This was wrong because you do it before you take on a client. If you're doing it when you have the client, you're making a mistake. The first thing you do is get them to sign a retainer agreement and get your retainer payment.
I don't care if they're your brother, sister, cousin, wife, uncle, or spouse. If you expect to get anything from the deal, get it in writing and get the cash when its due. This is applicable to every business whether you run a law firm, executive search agency, work as a gardener, or write video games on a contract.
There are three key reasons to get things in writing: It reduces the likelihood of future litigation, it protects you in litigation if it happens, and it protects your relationship with clients. Even if the first two reasons weren't good enough, that third one should be why you do it.
Let's start with why it reduces litigation: A good contract will clarify everyone's responsibilities: Clear expectations prevent people from fighting over who was supposed to do what. You might still have issues if someone doesn't do what they were supposed to, but the biggest cause of lawsuits between business partners isn't failure to do what you promised, it's lack of clarity about who was supposed to do what. This is also why you want a good attorney. A good attorney will ask you all the questions you need answered about what happens if the company goes under and who assumes what debts and who gets the company cars.
A contract also acts as a shield (or sword) in litigation if it does happen. A clear contract lets you know who was supposed to do what, so if litigation does need to happen because someone failed to do what they were supposed to, you have a clear indication that the parties knew what was going to happen and knew that there would be consequences. Contracts can even shortcut some of the aspects of the litigation: have a matter where you know proving damages will be a nightmare? You can have a liquidated damages clause for just such an occasion. Concerned that the amount of money may not be sufficient to sue over? You can provide contractual attorney fees.
But the ability to protect your relationships with your clients is really key. I know this seems odd, that a contract with X company may help you keep Y client, but let me explain. Sometimes you may have clients who need to know that your supply chain is secure, need to know about how you are sourcing raw materials, or just need to understand your relationship to the staff working on their project due to data security issues. Having a clear set of paperwork will help with that. I am currently working for a client to save a relationship with his client because the client never set up operating agreements and now, he has a client concerned about data security, and that client is ready to find a new provider of services due to an inability to document relationships between himself and his staffing company.
This need develops before your first business deal. Every partnership, multi-person enterprise, or co-founder situation requires documents in writing, You can call them founder agreements, partnership agreements, division of labor agreements, or Wilma Flintstone; but you should have one.
Incorporate Before Developing Serious Exposure
Incorporation exists to protect you from exposure due to debt, contract, and/or risk. Any risk you take on before incorporation remains risk you have unless and until you can get the person or organization to whom you have the exposure to agree to give up their connection to you in order to get their hooks into the corporation instead. Smart people will never do that. A plaintiff can get at the corporation through an owner. They can't usually do the opposite.
A lot of startups don't necessarily incorporate right away, and/or don't incorporate in their final form, and either of those might be okay. Especially the latter. Forming as an LLC or California C-Corp to reincorporate as a Delaware C-Corp later might be just fine (Being a Delaware C-Corp headquartered in California can be expensive tax-wise for a startup with minimal profits early on. Though, reincorporation becomes more difficult, onerous, and expensive the later on you do it and more assets you have. Reincorporating a company with a massive Cap Table is a nightmare, Reincorporating a company with three investors is not usually a huge deal.
Waiting for any kind of incorporation may also be okay when you're just four people coding a landing page out of your apartments to develop an MVP. But, before you start taking substantial liability by taking on on big clients, renting office space, or getting substantial credit, you will want to incorporate.
Follow Employment Best Practices
Mistakes in employment practices can be expensive fast. Settling employment cases can be pricey, just ask some of my clients who didn't retain me until after they got a letter from the California Department of Labor. I've gotten former employees fifty thousand or more on demand letters alone with no litigation based on someone saying something stupid, all because employers didn't follow employment best practices. If your company is in California, compliance issues start being a consideration at five employees. Most small businesses and lots of early stage startups need to be doing sexual harassment prevention trainings, providing paid leave, and complying with heightened minimum wages at far earlier points than they might believe.
Further, local minimum wages, leave standards, and work from home policies have resulted in employees who are underpaid without employers even being aware of the issues, so if you have employees telecommuting, it is critical you know where they are and you have policies protecting your company from exposure should they not be sufficiently compensated in the location where they are working even if they are sufficiently compensated for where your company operates.
Confused? Don't feel alone. I had been working in employment law for seven years when this issue first appeared on my desk. I spent hours of research, consulting colleagues, and speaking to members of the California Labor Board before I determined what the best practice, compliant, and non-compliant solutions were in order to advise my client what the best course of action was.
But that's what I'm paid to do. I got the client an answer. That's why it's so critical to have good counsel, because we can assist you with these sorts of complicated questions. That's it. None of this is rocket science or brain surgery, but they are the most important steps a founder can take to protect their time and money and their investors time and money. None of these steps guarantee success, but failing to take them can guarantee failure. Theranos met its end for failure to follow act in a manner that counsel would have advised. Myriad Silicon Valley startups have failed due to lack of protection of IP, or failure to have any IP worth protecting in the first place. EA just paid millions for it's failure to follow employment best practices. Need I continue? I understand that the price of all these things can be daunting, but fortunately, help is available for a price you can afford. Call us. Let's talk.