As a founder, you need to be scrappy, take care of that bottom-line. We get that, we’re all for a DIY approach when it makes sense (psst we even help you do that through our very free document generator). But, there is a fine line. There comes a time where you need to rope in the legal pros—a lawyer’s experience and knowledge that comes from hours and hours of advising startups, doing deals and even cleaning up DIY-that-went-wrong is your best bet for the long-term. Here are four scenarios where the best advice we can give you is to get some sound legal advice:
1. When you do anything in California. We love the Golden State, the Golden Gate Bridge and Silicon Valley’s golden opportunities. But, as many of you suspect, California sometimes operates in its own world, with laws that aren’t like anyone else’s.
Take non-compete agreements. They’re standard almost everywhere, including New York, Massachusetts and Texas. Yet they’re illegal and therefore unenforceable in California. Well, people sometimes claim that this prohibition contributes to the state’s great climate for innovation—after all, it could allow smart, ambitious engineers, designers and creators to easily hop from one opportunity to the next or launch their own company. Remember that when you quit your job to start a company, just because you can “compete” doesn’t mean you can take your former employer’s ideas with you.
So if you’re doing business in California, you’ll need make sure you understand the state’s laws and that you’re protecting your precious intellectual property. And before you launch a California startup yourself, consult an attorney on how to protect yourself from possible allegations that you pocketed your former employer’s best ideas with your last paycheck.
2. Before you commit to a long-term or big bucks contract. As a startup, you want that contract that will validate your product, get you your initial traction, even increase your valuation. What you don’t want is an onerous contract that will do none of the above. We recently met with the founders of a small startup who wanted out of an onerous 10-year agreement. The other party refused to renegotiate, leaving the startup saddled with this albatross. Now they’re worried that investors may view the situation with concern and balk at funding them.
Lawyers negotiate contracts all the time. They’ve seen hundreds of them, so they know what terms are typical and what terms are deadly. They also can pinpoint missing language, including critical phrases that protect your interests and your business. You can’t depend on the courts to straighten things out. While a judge may feel sorry for your startup’s sad position, the legal system enforces contracts—even really, really bad ones.
3. When you sell a company. You’ve been working on your startup for some time and maybe it’s going really well and you get some great acquisition offers, or maybe it’s not going as well as you dreamed it would but you still have some, albeit small, offers. Pick up the phone and call your lawyer, no matter what that amount is.
Here’s an example to explain why: After a good run, a Boston-area founder was ready to close shop. He’d found a buyer willing to pay $100,000 and was eager to sign off on the deal. No need to pull a lawyer into such a minor transaction, right? Fortunately, he had second thoughts. A careful review of the agreement revealed terms that could have exposed him to massive personal liability. In less than an hour, we retooled the language to eliminate his liability and protect his assets.
If you’re wavering on whether you need legal advice, remember that the dollar amount of a transaction has absolutely no connection to the amount of potential liability or personal obligations in the document.
4. When people want to help you find investments. Startups need cash, and founders often don’t have direct access to investors. When folks who say they have fat bankrolls offer to introduce founders to investors in exchange for a piece of the business, entrepreneurs are eager to talk.
These individuals may describe themselves as consultants or finders and tell you that they know many investors who would love to fund your startup. They may ask founders to sign what they might call a “consulting agreement” that grants them a share of the cash raised as a commission for brokering the deal. These individuals appear really professional, and it all seems on the up and up, but there’s just one small problem: If they’re not registered with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) as brokers or securities dealers, they’re breaking the law, which can mean a lot of trouble for the startup.