Startups tend to have “DIY” in their DNA. Founders are likely to find themselves changing the copier toner or fixing a leaky faucet in the moments between updating the business plan and meeting with a prospective investor. Most entrepreneurs are clever and dedicated, but when it comes to legal matters, DIY doesn’t cut it.
Smart startups hire themselves a lawyer.
There’s nothing simple about business law. Even the seemingly basic stuff can be deceptively complex. Should you form an LLC or a C-Corp? What liabilities do you have? What in the world is “indemnity”? Hiring a lawyer might seem expensive, but it’s a bargain compared to the costs of being on the wrong side of a lawsuit.
Why your startup needs a lawyer
You’re going to need legal help from the moment you commit to launching a new business. Bringing an attorney into the process early can save you loads of time and money.
What can a lawyer help you with? Here are some instances in which an experienced lawyer can make all the difference.
Setting up the business
How you set up your business entity will have implications for taxes, investments, and financial arrangements. While the essentials may not be hard to grasp with a little research, the details get complicated fast. Is forming an LLC a better idea than becoming a corporation? Should you become an S-Corp or a C-Corp? And once you’ve decided, it’s essential to codify the founders’ roles, expectations, and equity stakes in a legally binding agreement.
Staying in compliance
Expert guidance can help you comply with IRS rules, state laws, and corporate formalities that pertain to whichever type of entity you’ve formed. Tax laws are tricky and frequently change. Seemingly minor factors in business operations can create huge differences in tax liability.
While a good accountant can help you with the basics, it’s always smart to have a lawyer take a look at any complex tax situation. Depending on the nature of your business, there may also be factors like licensing requirements, environmental regulations, and other thorny legal issues to consider.
Preventing lawsuits and managing risk
While even the best lawyer can’t prevent you from being sued by upset customers or disgruntled employees, your attorney can make sure you have the right protections in place so a potential lawsuit doesn’t pose an existential threat to your company.
Additionally, if your business involves any kind of intellectual property, such as patents, copyright, trademarks, or product or industrial designs, your lawyer can help you protect those valuable assets.
Negotiating ownership stakes
When you are negotiating the ownership of your company during equity deals and exits, you’re going to want your own lawyer in the room. No matter how helpful a venture capital firm’s legal team seems, they don’t work for you. Make sure you have someone there to represent your interests.
Managing negotiations, contracts, and everything in between
Anytime your company enters into an agreement with another party, it’s not a bad idea to have legal counsel around to double-check the details.
From negotiating lease terms to interpreting the fine print in distribution contracts, you’re going to want your lawyer to look things over before you sign on the dotted line.
How to find the right lawyer
How do you find the right lawyer for your startup? Your best bet is still the good, old-fashioned referral — nothing beats a solid recommendation from another entrepreneur or trusted professional. If you can’t get a referral, try the American Bar Association’s Lawyer Referral Directory.
It’s important to vet all referrals to find someone who will fit your specific needs. Like professionals in every other field, lawyers tend to specialize. An attorney who has a deep understanding of the manufacturing industry, for instance, might not have as firm of a grasp on the needs of an e-commerce startup.
How do you know if a lawyer’s experience and skill set is right for you? Just ask. Lawyers are used to being asked tough questions. While you’re at it, make sure to ask about their fees, their billing arrangements (such as retainers), and their billing increments (as in “how much will a five-minute phone call cost me?”).
When to use legal software and online services
No discussion of modern legal assistance would be complete without addressing the lawyer-like services of LegalZoom, Rocket Lawyer, and similar companies. After all, many common legal documents such as wills, copyright registrations, and even business formation paperwork can be filed without the assistance of a lawyer. Combined with subscription services that promise on-demand access to experienced business lawyers, these companies seem like a great option for entrepreneurs on a budget.
Do these disruptive legal services live up to the hype? Opinions are mixed, but the current consensus seems to be that they can offer a viable option for relatively simple legal matters. If all you need is help with a basic contract or the paperwork to start an LLC, using an online legal service (or software, such as Nolo) may make financial sense, even if you already have an attorney.
However, sometimes lawyers are essential. LegalZoom can’t negotiate a new lease agreement for you, amend your freelance contracts, or send a menacing letter to a non-paying customer. They certainly won’t be able to represent you at the negotiating table when an investor wants to talk details on an equity deal. And if you find yourself unlucky enough to be slapped with a lawsuit, you’re going to need a flesh-and-blood attorney in your corner.
Every startup will eventually need legal counsel; it’s part of doing business. If you’re hoping to raise capital, bring on new partners, or move towards an exit, your incentive to lawyer up is even stronger, since a company with its legal affairs in order is very attractive to investors. Retaining good legal counsel is an investment in your company’s future.