By: Benjamin Jacob
As a founder, you have a million decisions to make and scarce precious resources to deploy as wisely as possible. This blog post focuses on a critical decision many founders unfortunately get wrong from the start often with negative outcomes.
The decision? How to approach legal in the early stages of your new startup venture.
To start, it’s useful to understand what usually leads to bad outcomes.
In our experience at Fourscore and historically in the startup ecosystem, there are countless examples of founders who mistakenly view legal in a vacuum as just a necessary expense at best and at worst, an unfruitful and draining cost center to be minimized…well, at all costs. The former often results in a mindset that defaults to underinvestment and a deep misunderstanding of the incalculable value to be extracted from incorporating a sound legal strategy into the company’s overall business strategy from the Company’s inception. The latter – viewing legal as a cost center and unworthy use of scarce resources – carries tremendous risk that can sink even the most promising startup. Neglecting legal early on can lead to compromised IP, poorly drafted commercial agreements, or service provider or founder disputes with potential for costly litigation.
So what are you supposed to do? Devote a significant portion of your limited capital to legal at the expense of developing a minimum viable product or finding product market fit or juicing recurring revenue? Not quite – though over budgeting for projected legal expenses from the beginning is a good idea.
What’s needed is to start with the right mindset. A sound legal strategy is an essential component to your overall business strategy.
Done correctly with the right legal partner, your legal strategy can be a growth lever, not a cost center. Part of the challenge is that there are an increasing number of decent platforms and service providers that can cost efficiently help you form your business entity and even put into place your initial corporate governance documents. In our experience at Fourscore, certain platforms can generate acceptable documents for entity formation and governance documents so long as the founders understand what inputs should be provided. In countless situations, our first project for a new client at Fourscore is helping founders clean up platform-generated, initial corporate documents because there was a misunderstanding on what inputs were needed resulting in inadvertent error or improperly drafted documents. Most things can be cleaned up (even though it would have been less expensive to do it right for the first time) such as missing an 83(b) election (sometimes) but some things can essentially doom the company or founders if they are done right the first time.
Ultimately though, the biggest danger with even high caliber self-service legal websites or platforms is lulling founders into neglecting or postponing the need to develop a solid relationship with experienced legal counsel capable of architecting a strong legal strategy for the business and providing critical advice along the way as myriad issues inevitably arise. The value of a strong relationship with trusted counsel cannot be overstated.
To recap – the right mindset about legal involves recognizing that tending to your Company’s legal needs is an investment. Building a rocket ship venture from formation through a venture financing requires, at minimum, having your ducks in a row with tidy corporate governance. Even better, though, is operating with the mindset that investing in your legal documents is actually a way to fuel solid growth. By ensuring key legal documents such as customer contracts, vendor agreements, NDAs, employment agreements are well-drafted and tailored to your business’s needs – you can protect your business’s IP, manage risk appropriately, promote your company culture, and reduce friction from your sales cycle. Working from a solid legal foundation promotes sustainable business growth that can position the company attractively for further capitalization via venture financing or possibly an exit by way of acquisition. An upfront investment in legal ultimately also saves money by avoiding costly clean-ups on the eve of a venture financing or acquisition.
But back to the most important question – how do you afford investing in legal as an early stage startup with limited cash and projected revenue? Doing this well requires a couple things: (1) finding the right corporate law firm with the requisite experience and ideally flexible payment options (e.g., flat fee model-oriented or flexible payment options when conducting a venture financing) and (2) building legal fees into your model especially when preparing for fundraising. The right mindset also requires the right objective – your objective as an early-stage founder is to develop a relationship with trusted corporate counsel who can examine your business and identify risks and needs. From there, your law firm can work with your leadership team to develop a scalable strategy to build a solid legal foundation for the business at the right pace calibrated to manage cost, benefit, and risk as optimally as possible.
In summary – your legal strategy should be incorporated as a core component of your overall business strategy and an investment into the business itself. Whether with Fourscore or other trusted counsel – it is crucial to find the right legal partner as early on as possible to help your business develop a sensible strategy to put core business documents in place, manage risk, protect IP, and ensure compliance as applicable. When you get one or two amazing term sheets for your first preferred stock financing, you don’t want to find yourself scrambling to engage legal counsel.
Additional note: For a more granular look at important business agreements and how to protect your startup, check out Fourscore attorney Maks Ewendt’s blog series on Core Business Documents.
Picture on the top is by Volodymyr Hryshchenko and is in the public domain.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.
