When do you need a lawyer?

lawyers

The following article is reprinted with permission from Darmesh Shah, founder of hubspot.com – a leading website marketing site and author of the onstartups.com blog.


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-solicitation, 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 packaged 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 he/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.

Photo by Bob Jagendorf

About Mark Toohey

Mark Toohey is an experienced commercial lawyer who has worked with both major law firms and as a general counsel in the media, telecommunications, software and IT industries. He has been a lawyer, company director, online marketing executive, company secretary and entrepreneur. Mark's commercial experience extends way beyond the theoretical. He has helped launch a number of start-up businesses and his hands on experience was gained from negotiating and documenting deals for a wide variety of business initiatives.

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