Going into any new legal agreement is scary. On the one hand, you’ve seen enough movies to know that legal documents can have all sorts of loopholes and/or subtleties that feed your paranoia about walking into a trap at some point in the future, but on the other hand, you know you need to get them done in order to move on with any deal.
Legal docs are just part of business life.
The thing is, though, that it doesn’t have to be something that is so scary that you need to be extremely paranoid about. This is particularly the case when you’ve been able to bring on a good legal firm on board. Good legal counsel can basically help you understand all the tools in the legal toolbox. What the tools are for, how they are used, when they are appropriate, and what they are protecting against, etc.
Now, when I mean good legal counsel, I don’t mean your cousin’s best friend who is a lawyer and can do it on the cheap or a favor. That is probably the single worst thing you can do in terms of starting off on the right foot with your investors, you’ll waste their time and yours. If you can’t find good legal counsel where you live or nearby, then go outside of your area or move your business (and the good thing is you may not have to do it physically either). One sure sign of a startup ecosystem being mature is the availability of top tier legal firms in the area. If you need to move the legal state of your company to get access to these… do so, you won’t regret it. If you don’t know where to start, cold-call a startup you admire and ask around.
A good anecdote always helps in illustrating the point…
A few years ago, I was working with company that had reached out to a local lawyer, but not one that specialized in venture law. After having provided the company with standard industry docs, a long, almost two week period followed where I didn’t hear back from either the company or their counsel. Then, once I did receive the documentation, it was red-lined so much that it took another week just to come up with the response. As you can imagine, every single conversation we had was tough and grueling, and the entrepreneurs, grew increasingly paranoid that we were trying to get the better of them, but it was mostly due to the lawyers providing poor advice on items that we standard across the industry. This carried on for a few weeks with volleys going back and forth and various stalemates being reached at different points. In the end, we did reach an agreement, but it was after much work and much education. The situation was salvaged in the end, but it didn’t have to start off like it had. And, as you can imagine, the legal fees were over budget.
In summary, good Legal Counsel does the following:
1) Validates your company. The best Firms will be selective of whom they work with. Their time is valuable as is their reputation. Working with a top tier firm definitively says something about your company.
2) Saves you money. Yes, it sounds counter intuitive, but whilst you may pay higher in terms of fees, you’ll spend less on legal fees in the long run with the reduced issues that you’ll have during a negotiation as well as with any future issues that are the result of poor legal advice.
3) Saves you time. As mentioned in #2 above, the time an experienced lawyer takes going through documents they’ve seen time and time again is a huge savings over a lawyer who is getting acquainted with the docs on your time and money. Additionally, that time could be better spent on helping you think of what realistic scenarios you are trying to protect yourself against rather than making mountains out of molehill standard terms.
4) Helps you consider the future. As your company will go through many permutations throughout its life, a good and experienced lawyer will not only be able to help you with your current situation, but also in preparing you for situations to come, be they setting up your company in a specific way, to how you should try and negotiate with potential investors.
5) Good counsel knows the industry players. By the very nature of being a top tier legal firm, they will have worked and will know the top tier investors first hand. The firm will know what the investors tend to offer in their deals, what to expect as being standard in their terms, and what might be out of the norm.
After considering the above, however, you do have to manage your counsel. In the end, you are responsible for every item on your documents, and only you care as much about your document as well.. you do. So as much as great legal counsel can help you on not making mistakes, don’t slack off during the process. Stay engaged, you’ll learn a lot.