Most startups begin as a simple idea, and what follows is a whirlwind hard to predict. Strong founders hit the ground running and start making things happen immediately, which means it’s quite common to ignore some legal components when first starting a brand new business.
There are unicorns like Uber and Bird whose actions have led to heated battles against local regulators to even retain legal standing in some local markets. But startup legal concerns are not always centered on fights against government regulators – enterprising entrepreneurs can use legal mechanisms to create powerful competitive advantages, even helping to carve out entirely new markets. But the stories of countless failed companies include critical legal mistakes made somewhere along the journey.
Whether your startup needs to file for incorporation, prepare to enter a new regulatory environment, or draft legal agreements or contracts, there are many reasons why integrating the right lawyer into the early days of your company can prove to be a smart investment.
Entrepreneurs are the kings and queens of DIY. You may decide on self-service legal options for things like staffing agreements or equity partnerships. Ultimately, this is a risk-based decision that the founding team has to make, typically weighing the costs of immediate legal support, versus time investment or knowledge and capability to do some portion of the initial research for legal work on your own.
For the DIYers, we’ve collected some templates and resources that will be of use at the end of this article. For founders considering how best to work with directly a lawyer, this article will help you to find a legal representative that can best serves your startup’s needs.
Before you do anything else, determine what kind of legal support you need. If only filing your initial paperwork, you can always start with a Google search - but reaching out to your local startup community is always a better option. Referrals and recommendations can help you cut through a lot of the initial legwork in finding a suitable lawyer. Regardless of the source, there are several key things to consider when selecting a startup lawyer or law firm.
1. Consider the Relationship
When beginning your search for legal support, a first step should be to identify how an ideal law firm would support your businesses needs, and if you will need them in the future (hint: you probably will).
Most entrepreneurs need some sort of legal support through each stage of company development. Law firms that have specialty experience working with startups know that relationships are the key to future business. Though you may be small today, tomorrow your startup could worth continuous business for the firm. Much like an investor will accept equity, the occasionally law firms will too—but this always comes down to the core relationship, and must include a mutual understanding of where the startup is headed and what legal hazards lie ahead. Whether you have a law firm on retainer, or just need a lawyer to help you get started, be prepared to mark your line in the sand when working with law firms, while also always remaining open and receptive to their offered advice.
2. Finding the Right Lawyer
Just like finding a co-founder or onboarding a new employee, a law firm hiring relationship starts with some form of an interview. When looking for a law firm, this interview should go both ways, and each party should ensure that there is a strong fit and an ability to accomplish the needed legal work.
As a founder, you should make sure that the firm specializes in what you need, whether a successful track record of working with startups, or knowledge within your specific industry. However, there is a large difference between a corporate lawyer and a startup lawyer, so you should make sure the firm can offer the basics like incorporation, staffing agreements, or equity and fundraising legal documents.
3. Create a List of Initial Legal Needs
Filing paperwork for legal incorporation just to get your business started is often not too complicated in many jurisdictions. There are several online services that help make the process even easier for US companies and others. Sometimes building a startup will legally be as simple as incorporation alone, while other businesses will face much more complicated regulatory concerns before ever onboarding a single customer.
The right law firm for yoru business should assist you in identifying all sorts of specific legal challenges that your business will need to tackle on the road ahead; but prior to ever building that relationship with your lawyers, it’s best to already have a strong sense of your own needs. This will factor into the types of law firms you approach and ultimately select.
Example common areas of startup legal support:
- Regulatory and Industry Concerns
- Co-founders & early-stage employees (Equity vesting & departures)
- Intellectual Property (Patents, Copyright, Trademark)
- Leasing agreements
- Merger & acquisition
4. Consider Location
Whether you start your business where you live, or move to a new area to participate in an incubator or accelerator program or to pursue a larger geographic market, none of this means you necessarily need a law firm in your backyard. A local lawyer may offer you easy access to visit the law office, but this does not necessarily mean the local firm will provide the best legal support.
When identifying a lawyer, find one that specializes in both your industry and working with your stage company, but consider other factors as well, like where your future largest markets will be located. If in another country, this could be a serious consideration, especially if startup immigration may be in your imminent future.
On the other side of the equation are the relationships law firms can provide. If you are located within the same region as your intended law firm, the firm will likely be better able to make introductions to mentors, investors, and other supportive parties.
5. Aligned Goals
If you only need legal support to file the basic incorporation paperwork to get up and running, you may not need to get too crazy on the relationship building. However, for startups looking for a more long-term legal integration, aligning goals with your law firm is incredibly important.
Startups can choose very different paths when it comes to the founders’ particular end-goals, be it an acquisition, IPO, or a profitable continued private ownership model. Finding a lawyer that can support your vision for the future needs your company is important during the early stages. Can you find another lawyer later? Sure. Is it possible that an acquiring company will offer full legal support? They absolutely will, but you still need your own representation. The same goes for investors, who will often suggest using their recommended and trusted lawyers, who may in fact have the investor’s own best interests in mind. Make sure your law firm has your best interests top of mind, and that they understand your vision for short, medium, and long-term future of your business.
6. The Right Connections
So you’ve selected a lawyer or law firm that specializes in early-stage or industry-specific businesses, great! That means this well-qualified legal partner should likely possess some kind of proverbial rolodex or offer any number of contacts and connections that will promise to help further support your startup’s future needs.
Prior to signing a law firm on any kind of ongoing or semi-permanent basis, it’s a very good idea to make sure the firm is acting as a true partner to your business. Whether network connections to investors, other founders, regulatory or industry connections, or other contacts for specialty legal support - a lawyer that fully represents your company should show qualified leads or demonstrate how they will continue add value beyond what they have already delivered in previous legal work.
7. Determining Cost
Some law firms that specialize in working with startups offer lower rates or equity deals, in hopes that the businesses eventually flourish and there is a stronger return on investment. To that end, you can expect to find everything on the table, from fixed fees, to hourly billing, to full or part-time legal partners, to equity-based, and even exploring DIY legal solutions.
- Fixed Fees: If you’re only looking to get your initial incorporation filings completed and/or review of some initial legal documents, many law firms may be opened to a fixed fee. In these situations, you can expect things to be far more transactional instead of relationship-based.
- DIY: Like fixed fee options, there are plenty of sites that offer basic legal support to complete your initial legal filings, or even offer customizable templates for certain kinds of contracts for some localities and jurisdictions.
- Hourly or Retainer: Unless hiring someone to act as general counsel, one of the more common approaches is to retain a law firm. This typically means that an initial amount is set to retain the services of the firm, and they will support your business needs at hourly rates.
- Hiring: Most startups shuold not consider a lawyer or legal team to be part of their founding team or early-stage employees; but if you are looking to disrupt the next taxi ecosystem or another highly regulated industry, general counsel may be a worthy investment. Your general counsel can be a part or full-time employee, and you can consider offering mixed-equity as compensation for bringing the right strong or specific legal expertise in-house.
- Mixed-Equity: If you thought hiring an early employee with only equity was a steep price to pay, assume the equity rate will be double for law firms. You may be able to reduce a firm’s rate with a mixed-equity deal.
Important Questions to Ask Regarding Cost:
- Can you describe the team, the roles, and the billable rate of the resources that will be working on my account from your firm, and how do you anticipate that an average legal matter, such as a partnership agreement, will be completed?
- What is the best way for me to work with you and your team to get the highest quality work for the least amount fees, and do you offer any discounts or fee deferrals for companies in our position?
8. Get a Client Referral
Before signing any kind of agreements it’s important to speak with an existing or former startup client that has worked with your law firm. In most cases, you will not find Yelp or Google reviews from any abundance of startups raving about how a law firm helped with their employee agreements, so go in with the assumption that the law firm expects to make this introduction. Be prepared to ask the referral about how the legal process worked, if they remained within their budget, if they assisted the team as they grew, and of course about the quality of the personal relationship with the lawyer or legal team.
9. Formalize the Relationship
Unless you are working with equity as a component to your relationship, a law firm should not ask you to sign any long-term contracts. There should be some basic paperwork that needs to be completed, and they will be considered your law firm of record. A good law firm will be able to support your business as it grows, help to introduce you to investors, and provide support that will overall reduce risk along the way.
The following templates may provide a helpful starting point, but should not be used as-is. Like all legal documents, it is highly recommended to have a lawyer review it to ensure the document aligns both with your unique business and your own local jurisdiction’s laws and regulations.
Software Development Agreement (Downloadable word doc from American Bar)
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