**     **     **     **     **     **     

First off, let me begin with a disclaimer:  I AM NOT A LAWYER, I don’t play one on TV and I don’t play golf with lawyers on Sundays (I don’t play golf at all). 

None of the content from this article  should be taken as legal advice.  If you have a situation that does require professional legal advice, please seek legal counsel. 

The following are some tips from my own personal experience working in and around startups.  Clearly, your situation is different, but I have found that there are often “patterns” in early-stage startups.  These tips are written from the basis of an early-stage startup with just one or two founders.  It’s based on startups in the U.S. (I’ve never started a company anywhere else).  It’s not meant to be exhaustive or detailed, but to just provide some of the core elements that startups usually consider when contemplating whether or not they need to hire a lawyer.

When You Need A Startup Lawyer (and When You Don’t)

1.  Company Formation:  Usually, the early process of formalizing your company (creating an Inc. or LLC) does not require a lawyer to get the paperwork done.  There is plenty of information on the web to help make this decision yourself, in most cases.

2.  Operating Agreement:  This one’s a bit more complicated.  If you need to have an operating agreement (that defines the rules by which the company will be run), you’ll probably need some legal help.  Operating agreements can be complicated (though a fair amount is boiler-plate).  Usually, single-person entities don’t need a sophisticated operating agreement, but as the team grows and you need to structure control and governance better, this will likely become necessary.  Even if it’s not a full operating agreement, you’ll likely need something that defines how big decisions get made, the terms for anyone that holds stock in the company, vesting periods, termination clauses, etc.  Once the company consists of more than just one person, it becomes increasingly important to define these things.

3.  Employee Agreements:  It may be advisable that you have each of the employees of the company (including yourself) sign some basic agreements such as non-competition, non-soliciation, etc.  These are usually pretty straight-forward and samples can be found online.  Common things to see here are what an employee can’t do after she leaves the company for some period of time (often a year or two).  Examples include:  Not working for a competitor.  Not soliciting other employees to leave.  Not taking client lists.  Not revealing company secrets.  The documents can range from reasonably simple and boiler-plate to pretty complicated (based on what your needs are). [Editor's Note: While basic agreements are a calculated risk, if your project has any inventive element or valuable intellectual property is being created then you are well advised to ensure your ownership is watertight.] 

4.  Trademarks:  If you intend not to hire a lawyer in the early days, you should probably at least do a basic search for your company name to see if the trademark is available.  This can be done at the U.S. Patent and Trademark Office website.  I generally don’t worry about registering trademarks in the early, early days of a company as it’s rarely the case that trademarks have been an issue.  At some point, you’ll likely want to trademark your company name, product name, etc.  On a related note, I’d adviseagainst trying to find an available trademark — registering it, and then trying to use it to get a domain name from someone that owns it.  This is painful.  When picking a name, just find a domain that’s already freely available (or available for sale).

5.  Patents:  Patents in the software industry are still hotly debated but can be an important asset for you in certain situations.  I’m not going to tell you when you should or shouldn’t patent.  But, if you do decide to try filing a patent, you’ll likely need a lawyer to help work it through the system.  Also, do some basic reading on the web on what not to do should you intend to file a patent (like talk about the basics of the patent publicly too early).  You may also want to consider filing a “provisional patent” which is much easier and helps lay some groundwork should you decide to file a full patent someday.

6.  Financing/Investors:  If you’re going to raise money from outside individuals (particularly VCs), you’re going to need a lawyer.  Probably a really good one that has experience executing financing transactions for startups.  In most cases, you (the company) pays for all legal fees — including theirs.  Prepared to be annoyed/irritated/offended at the high costs for executing what you would think would be a “standard” transaction with lots of boiler-plate terms.  I don’t know why it costs so much, I just know that it does [Editor's note: We hear the need for reasonable rates and pakaged service fees are available].

What I would do (though this may seem out of order to some):  Have the idea.  Find suitable domain name and company name.  Create the entity (either S-corp or LLC).  Work like heck to build something.  Attract team members and/or co-founders.  Then, engage a lawyer that has tons of experience dealing with startups and have her work on the basic corporate docs we need.  If done right, this same lawyer should be able to help with the legal side of the first round of financing (if there is one).

A couple of things in closing.  When you’re hiring a lawyer for your startup, it’s important to remember that the she represents the company — not you.  In most (but not all) cases, the company’s interests and your interests are aligned.  But, as the company evolves and grows, interests can diverge.

Regardless of how exciting your Web 2.0 project is and how ‘cutting edge’ your technology may be, it’s still important to pay attention to the most fundamental principle of business – making sure you get paid.

The risk of being ‘dudded’ is reduced by following a few simple rules.

Despite their simplicity, it is surprising how often these basic business principles are bypassed or forgotten. Structure your business processess and secure your right to payment.

Rule 1: Identify Your Client

It sounds simple, but the complexity can be hidden under the surface of a business name or blurred by our failure to correctly identify the entity that is to pay. Often, this is due to the haste of agreeing to a job that’s “just for a couple of days”.

Time for some basic legal theory: Businesses are generally structured as sole traders, partnerships or companies. The type of structure makes a big difference to who has to pay.

A sole trader may operate under their own name or under a business name (registered with the Department of Fair Trading in the respective state). Sally Smith, as an individual, is liable for her debts. Don’t be puzzled if she operates under a business name such as ‘Amazing Skills’. The contract is still between you and Sally. Any agreement or invoice should make it clear that Sally Smith is required to pay you. Refer to her as “Sally Smith trading as Amazing Skills”.

The same approach works if Sally is in a partnership with Sam. Contract with Sally Smith and Sam Chung “a partnership trading as Amazing Skills”. The beauty of dealing with a partnership is that they are both bound to pay any debt the partnership owes. So, if one partner can’t or is unwilling to pay, then the full debt can be recovered from the other partner.

There are two main company types. The common-garden-variety will have a name like Amazing Skills Pty Limited. If simply named Amazing Skills Limited, it is a public company and is probably listed on the ASX. Corporations can also hold business names or operate through a subsidiary.

Clarify which entity in the corporate structure is engaging you and verify that the person giving the undertaking to pay is authorised to bind the company. Usually senior executives have this power. If a substantial amount of money is involved, it’d be prudent to get a director (or better still two directors) to put pen to paper.

Rule 2: Record the Deal

That reference to paper highlights a crucial point – make sure you get the deal set down in writing!

Memories fade (not always wilfully) and a written record can clear things up. It also provides excellent evidence of the debt if things turn sour.

Rule 3: Use the Correct Address

Cite the other party’s registered office address on your agreement and any invoice. Send all correspondence there. This removes any question about whether proper notice of the debt was given.

Taking Action

If things turn ugly, there are cost-effective ways to boost the heat. A solicitor’s letter often gets the desired result. Or you could make use of a Small Claims Tribunal or local Magistrates Court. Sadly, the structures vary in each State as do the monetary limits (around $5,000 -$10,000). If it’s enough money to buy a new car, the correct jurisdiction will probably be a District Court. More serious cash means your matter is destined for the Supreme Court – and all that involves.

The above rules aren’t fail-safe, but they are sound defensive measures. Adherence will help ensure you are fairly rewarded.

In case of emergency: the following link will be a good place to start digging to determine your State’s specific process: www.accc.gov.au/content/index.phtml/itemId/260090

Teamwork is key to any major deal.

The task of buying or selling a business can be daunting if you lack experienced assistance.

It can be hard work managing each aspect of the transaction: the accounting, legal, commercial and operational factors – particularly if you don’t have all the assistance you need .

It can be equally demanding if you are trying to launch a new subsidiary or venture and you don’t have all the firepower you need to get the job done.

The load of trying to achieve so much without enough help is gruelling and it can result in a deal slowing or even being lost if the other party’s enthusiasm wanes.

We’ve developed a range of service options to meet those needs. We can work with you as an advisor, on a project basis or as a vitual lawyer.  It really comes down to your requirements.

We’re keen to help you take your business to the next level and we’re convinced that experienced advice will lighten the load and make success more achievable.

Of course, choosing the team that will assist you is an important decision and it is wise to understand how our services could help in your particular circumstances.

The best evidence of results we’ve delivered are the recommendations others have kindly given.

Selling a business you’ve spent years building is an intense emotional experience.

You want the best price and you care about what happens to the employees who helped you get there.

We understand the process from valuation though to completion and we’ll back your efforts – each step of the way.

Equally, if you’re acquiring a new subsidiary or merging with another business you‘ll need someone familiar with the gamut of commercial contracts.

We can help ensure you get what you are paying for and that you don’t end up ‘inheriting’ the seller’s problems. 

Good due diligence not only considers the available documentation, but it searches for what is missing so hidden pitfalls and risks can be avoided.

In most deals the correct structuring of the commercial terms can have an enormous impact on the financial outcome.

Precision is required to clarify each aspect of the deal and the ensure the documentation matches your intentions and the commercial terms are comprehensively captured. 

It can be a long road from those first steps through to execution of the deal.  Agile negotiation strategies are required to keep adjusting the terms each time a new path is opened. It is common for a deal to be fairly fluid (at least in some of the less critical terms) and one must be ready to adjust to those rapidly changing factors.

It helps if someone who knows the territory is sharing your load.

We can advise you on the numerous legal aspects of the transaction and help you achieve a soild deal and a good commercial outcome.

The urge to discount should be continually resisted.

Don’t destroy your business in the mistaken belief that higher turnover equals more profits. That slash and burn approach to pricing has led many businesses to a sad ending.

Before you ever lower a price, get out your calculator and do the sums. You may be stunned to find out how much extra work will be required to make the same profit.

A simplistic example may help illustrate the point.

1. Assume I do ten $10,000 jobs where I make a 30% margin and it results in $30,000 net profit from all ten jobs.

2. If the practice of giving a 10% discount on each job became entrenched (or my discounts over the next ten jobs averaged $1,000), the result would be:

* a net profit of $20,000 for the next ten jobs; or
* doing 15 jobs to again have a net profit of $30,000.

What a stark truth! If I regularly give a 10% discount, I have to do 50% more work to make the same amount of money.

Of course, this is all based on a margin of 30%. Discounts pose an even greater threat if you are trading on slimmer margins.

Not only will you have to work harder to maintain profits, but your costs may significantly increase due to the extra work. Not only will staff and equipment costs rise, but numerous less obvious costs may also have an impact. Take the time to work through those hidden costs to see just how much the extra work is really costing and examine just how thin your margins really are.

No company can sustain extended periods of discounting. Well established companies may give the appearance of heavily discounting, but don’t be fooled by their marketing. If the discounts are genuine they can only offer them because of large buying power, switch selling or they have the rare good fortune to be selling high margin products.

You can be sure that any successful trader long ago learned how to make money and is not in the business of giving it away through uncontrolled discounts.

If a discount is to be offered, use it for a special purpose like clearing old stock. Or, if you are a service provider, link the discount to the job’s margin and not the overall fee revenue. Just imagine how magnified a “little” discount can be if it applies to the whole revenue.

In summary, uncontrolled discounts are commercial poison. Don’t routinely discount unless you ready to enjoy early retirement.