Early last month, Snapchat founders Evan Spiegel and Bobby Murphy successfully made their third, alleged co-founder Reggie Brown disappear- with an undisclosed settlement after a prolonged legal battle. News of the decision rippled through the valley, recalling past disputes between Mark Zuckerberg and the Winklevoss twins, and Zuckerberg ( again ) with cut-out co-founder Eduardo Saverin. Tech lawsuits seem to have reached starpower status, but there’s surprisingly little guidance out there on how startups should work with their lawyers on a regular basis, before crisis strikes.
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This is Ken Callander’s wheelhouse. As the managing principal at Value Strategies, and a marketing veteran from leading business law firm Davis Wright Tremaine (and Agilent and HP before that), he now works closely with startups to help them not only find the right lawyers, but get the most value from those associations at every stage. In this unique interview, he shares some of the tips and tricks he’s discovered over the years to help founders get wise about managing their legal spend.
It goes without saying that there will be legal considerations with starting a company, but many entrepreneurs vastly underestimate how much help they’ll need from a lawyer. It starts at the very beginning and only escalates as their startup grows and moves towards an exit.
When should a startup start thinking about obtaining a lawyer? I say yesterday.
As soon as you have an idea, you may have intellectual property to protect. It could be software or a product design, but you should have a lawyer help identify and protect right upfront what makes your company special, either with patents or trademarks or copyrights. You’ll want protections in place before you start sharing the details with anyone, and that includes potential hires and investors.
Once you have your development protected, you want to physique out the ownership entity: Should it be a sole proprietorship? A limited partnership? A general partnership? A corporation? An LLC? “That determination is really important. The answer depends on what the business is, what tax issues are involved, how many partners or investors are involved, and the potential liability issues, ” says Callander.
If you choose wrong, there can be major financial repercussions – the initial decision is high stakes, but surprisingly few people treat it that way. “A lot of people don’t need to arranged up an LLC or a corporation because it seems like a bigger hassle and there are more costs involved, but if you’re an only manager and you infringe on someone’s trademark, patent or whatever and someone comes after you, they can come after your personal property. ”
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If more than one founder is involved, you’ll want a lawyer’s help painting up a founder’s agreement to avoid situations like the Zuckerberg and Snapchat fits. You need to be totally obvious upfront with the people you’re operating with where items stand, how much of the organization they personal, and who can take credit for what.
Actually picking a name and logo can be fraught with legal issues. “You should have your attorneys do a search to make totally sure you’re not violating anyone’s trademark and that you truly personal all the properties you need like your web website. ” Progressively, startup creators are needing to buy their website ( sometimes from squatters) and may need help solving this and additional issues.
“If you’re going to have employees, you’ll need employment paperwork like contracts, stock option gives, etc ., ” he says. “There are going to become issues with IP and confidentiality all along the way. What if your older engineer comes up with a fresh design? Does it belong to him or the organization? It may belong to him unless you have the right paperwork and IP projects in place. ”
Non-disclosure agreements become critical when your startup starts operating with additional companies or partners. “NDAs are important to protect your interests, ” says Callander. Every organization will need its personal clauses specific to its interests and technology. “ Eventually, you will have more vendors, consultants, and additional third-parties involved so operational agreements become a requirement, along with distribution, licensing, and franchising agreements. ”
And, once you’ve grown to a particular size, the likelihood of a sale or combination might end up being in the desk – either you’re thinking about buying another business or somebody desires to purchase you away. Having the best legal group is definitely essential to obtaining the offer you desire. “All of these basic factors, increasing financing, capturing for an IPO – you don’testosterone levels want a attorney , but the right attorney who understands your company and your interests really. ” you will desire to function with a person Preferably, a group or a company throughout the complete lifestyle of your startup that has learned your tale and your goals. But producing this happen comes with its talk about of problems.
Where are founders’ blind spots?
When it comes to finding a good legal team and mapping the best strategy, early-stage firms face three major hurdles:
“Startups tend to end up being pretty naïve about what’s involved, what the stumbling blocks are, and what the procedures are. The legal component of their business turns into kind of an afterthought because they’re therefore concentrated on their item, getting hiring and financing, ” says Callander. “Legal is certainly an specific area where you possess to take severe treatment. ” Too many business owners do not understand what to perform and they finish up using lawyers that are a poor suit, or finish up having to pay even more than they should.
“Legal costs can be every more than the map and can be very hard to track, ” Callander says. “Legal providers can end up being extremely costly. A great deal of startups move in with an entire checklist of factors they want to perform before they can obtain financed, however they do not possess the cash that’s required to actually perform it best. Therefore they lower corners, or they don’t perform it at all. They neglect essential legal guidelines due to the price and that can arrive back again to chew them. ” ( Even more about how to reduce these costs afterwards. )
The Best Fit
You want to find the right lawyer at the right firm to carry out specifically what you want to carry out. “That’s actually about acquiring somebody who provides great understanding of the sector you’re functioning in, and who appreciates that you’ve got to maintain costs in check. The right lawyer should understand you’re a fledgling business just, and preferably end up being thrilled about the chance to function with you at that stage. ”
You don’t want an lawyer who’s simply heading to fill out forms and make filings on time. If somebody understands your business and your sector actually , they can help instruction you through some of the main road blocks you could end up being facing, because they’ve been there and they’ve performed it before, Callander says.
There are fairly few resources to help inexperienced founders navigate the legal services process. The normal choices consist of the retention of a sizable company with multiple practice groupings, attorneys from boutique solo or companies practitioners. Many people remedy on recommendations by heading to an attorney they understand and merely requesting: “Who should I make use of? ”
“This is not the best idea often, ” says Callander. A attorney who proved helpful well for somebody in one sector is certainly not really always the greatest suit for your business.
Rather, Callander advises that business owners request for recommendations from various other people in their very own sector. “ Request them who they’re using or possess proved helpful with in the previous, who is normally great and why. He also recommends ignoring almost all lawyer lists and rankings that are publicly published. “Many of these lists are structured on peer rank – which translates into, ‘I’ll suggest you for a list if you suggest me for this various other list. ’”
Chambers, this individual says, is normally the most reliable rank provider to seek advice from because it basics rankings on selection interviews with actual customers. Chambers may end up being present online and rates lawyers across various areas of sector and regulation .
Selecting the Correct Lawyer
When it comes to deciding who to work with among a host of candidates, you want to be sure you find someone with solid understanding of corporate law, contracts, IP, work and taxes regulation to begin . But there are many various other requirements Callander suggests prioritizing.
First, he says, an lawyer is wanted by you who will be responsive, in a pinch especially.
Before joining Worth Strategies, Ken Callander served as CMO for Davis Wright Tremaine. To that Prior, he spent 26 years at Hewlett Packard/Agilent Technologies as an executive in marketing and operations, where he was accountable for the prices of professional providers globally.
If you send out a be aware to an lawyer stating you’re thinking about functioning with them and you do hear back again the same time, I would wait employing them.
“That’s a bellwether for the potential – you want someone who will be best there when you want them. It’t that type or kind of function. ”
Second, consider what kind of assets the lawyer or the solid have got in their discretion. What essential connections might they possess? If they’re functioning in your sector, they could and should understand a great deal of individuals who can help you in various areas as you develop the firm. “This could consist of everything from style to specialized talking to. Good attorneys know a complete lot of individuals and can open doors for you. ”
Character suit is important seeing that good. “You’lso are going to work with whomever you choose very closely , so it’s important to feel comfortable with them on a personal level. ”
Startups should also think about their approach to risk and find someone with a similar world view. “A shared risk profile is really important, ” Callander says. “What’s your risk tolerance and does your attorney have the same idea? If you tend to push the limits (of course within legal bounds ), you want a lawyer who can spell out all the risks so that you can make an informed business decision. If you have a high risk tolerance and you have an attorney who’s too cautious, that may not be a good fit. ”
When you’re looking for a lawyer who will understand you and your business, you may choose to take recommendations from the VCs who backed you. This can be great becaue you can benefit from the experience of others, but you should be sure that the recommended attorney is definitely not only an experienced lawyer, but also a good match for you and your company .
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“VCs and law firms are pretty connected, and a lot of VC firms will say, ‘This is the firm we work with, so we want you to work with them also. ’ But it might not be the best firm for you. You may or may not have some say in the initial decision, but you should have the option to switch in the future. ”
Set Good Ground Rules
Once you’ve selected a firm or attorney to work with, part of establishing a good working relationship is in setting clear operating guidelines.
“These guidelines should help set pricing and billing expectations between the company and the firm , ” says Callander. “Many clients are beginning to appreciate that the incentives and objectives of the standard hourly billing model may be contrary to their own objectives. That model compensates attorneys based upon the amount of time they bill, while the client’h objective generally is usually to minimize the amount of time required and have legal cost predictability. Instead of the hourly fee-for-service approach , attorneys and clients should look for ways to align their incentives and objectives . One way to do this is usually through alternative fee models in place of hourly billing. ”