Last week I wrote an article on IP protection for startups. It gave some pointers to startups on when they might want to consider protecting their IP.
It captured quite a lot of interest, so I thought I’d expand a bit on the topic of when a startup should really use a lawyer, and how to save money where possible. These tips are aimed at tech startups with very little cash to spare, not at SMEs.
The issue founders face when deciding on whether to spend on legal services or not is that these services generally reduce risk and costs in the medium to long term. Hiring a lawyer is a short-term cost that does little (usually nothing) to increase revenues. Founders are generally risk takers, or they wouldn’t be doing what they’re doing, so their natural tendency is to spend startup capital on product, marketing and sales, things that will generate an immediate return.
There are, however, a couple of instances where you really should consider using a lawyer. The short term cost in these situations is outweighed by the significant risks to your business if you get things wrong. I’ve set out these instances below.
Shareholders agreement and company incorporation
If you’ve just started brainstorming ideas with potential co-founders there’s really no need to incorporate. Only do this once you’ve settled on the business idea you’re going to be focusing on. If you incorporate, and you’ve got more than one shareholder, it’s worth entering into a shareholders agreement as quickly as possible. Things move quickly in startups (i.e. founders quit!) and you should get a basic framework set up early. If you work with a lawyer who understands startups you should be able to get your shareholders agreement drafted for around $1500. If you’re planning on raising capital make sure you tell your lawyer so the document can be drafted with this in mind.
Business terms and conditions
You’ve got to be careful with these. At the end of the day you need to make a risk/cost decision based on where your startup is at. If you’ve got a little bit of traction then the cost of getting your terms drafted is probably worth it. A thousand dollars or so isn’t going to be the difference between your company surviving or not, but being sued early on in your startups life because you’ve not adequately protected yourself could be. If there’s one thing you should get a lawyer to assist you with it’s your business terms and conditions.
If you’re cash poor there are a few options out there to get a cheap employment contract. A few Australian websites sell them for $50-$100. At LegalVision we provide them for free. If you’re just getting started you can probably get away with either a free or a cheap online customised employment contract. When you do raise your first round you should make sure you get an employment lawyer to redraft your contracts; it’s likely that your investors will want to see a well drafted non-compete clause in your contract at the very least.
As a startup you might need ad hoc legal help and advice along the way. When legal issues come up you need to make a judgement call on whether getting a lawyer’s help is worth it. A good example is non-paying customers. If a debtor owes you a couple of thousand dollars it’s usually not going to be worth speaking to a lawyer; you’ll end up sending at least a few hundred dollars on legal fees. If the amount owed is in the tens of thousands, then clearly seeking a lawyer’s assistance makes sense.
You can spend tens of thousands of dollars on legal services for hugely complex documents that are just not necessary for your startup. At the other extreme you can draft all your own legal documentation and end up being sued because you’ve not adequately protected yourself. Try and keep a bit of cash aside to get your basic legals sorted. When you raise your first round you can tighten things up even more.
Lachlan McKnight is the CEO of LegalVision, an online law firm which provides legal advice and documentation to Australian businesses.