Lawyers are a necessary evil for business ventures.
Not that lawyers are evil. It’s just an expression.
They’re actually integral to a successful start-up. You need them for a host of reasons, but they are often one of the most costly aspects of start-up ventures. The key is understanding how lawyers play into your business, so that you can manage their role and the legal costs.
The type of lawyer and the level of expense will vary depending on the nature of the business. A biotech venture may need to use an expensive big name firm while web businesses may be able to use boutique specialty firms with lower cost structures. Biotech start-ups are often backed with significant venture capital, and they are expected to be primarily in the business of exploiting their patents.
For web-based businesses, the story is quite different. Few web businesses actually create significant patents. The IP of a web business is focused on the brands and the content, not a pharmaceutical patent. Even if a patent is filed for a web business, it is not the lynch-pin of the whole business like it is for a drug development company. Web and software start-ups can get away with using a small firm or a solo attorney for most of their work, and their investors may appreciate the cost savings, even if it means not using a name brand law firm.
Here’s an overview of what a start-up might do with lawyers over the first year of business:
You legally form your entity, draft bylaws or an operating agreement and any other agreements between shareholders. You can do some of this without lawyers. For example, you can file your own articles, since the state-approved forms rarely deviate. You can file your own IRS tax identification number.
When relying on a corporate attorney, you should find out if he or she has experience with small mergers and acquisition deals, contracts between companies and fundraising. Can your attorney deal with a term sheet from an angel investor? Can he or she deal with selling stock to your rich uncle? Can he or she draft an agreement to share revenue with another web business in a revenue-sharing deal? If you use a big firm for these things, you will probably get really good results. You may also pay for three or four lawyers to work on it. If you can find an experienced attorney in a small firm, you’ll probably get quality work and the same results.
In terms of cost, the first year start-up may only spend $2-4K on corporate work the first year, depending on the level of activity and the amount of fundraising that is conducted. If you want a private placement to do seed financing, that may cost another $4-10K. If you take an angel group’s fixed term sheet, you may only spend $2K, because there is only so much advice and negotiate that your attorney will be able to do.
If you aren’t a pharma or biotech venture, be cautious about filing for patents. The cost up front is about $10K and the fees keep going for 3 years. It takes three years in some cases just to get to the first office action on a patent (they are working to shorten that now). If your web business or software or technology is so novel and unique that the patent will give you a major market advantage, then spend $1K on patent counsel to evaluate it and then only consider filing the patent if it is a clear and broad base of rights that you will gain.
If you can keep your patentable idea secret for a while, you can put off filing a patent application. Once you disclose it, you have one year to file. Often the smart path is to keep the idea under wraps as long as possible and wait to prove your business case, or at least wait to ensure that you have sufficient funding for normal operations and to file a patent application.
For web and technology businesses, the trademark may be one of your more valuable assets. As intellectual property (IP) goes, it’s up there with your content and your code in terms of value. Luckily, trademarks are cheap in comparison to patents. You can file yourself for under $300, and an attorney can file for about $800 including the underlying USPTO fee. A typical start-up may file for a couple of different trademarks for their web brand, as well as for the name of any service or product that is offered under the main trademark. If there is only one brand, then sometimes a company will file one trademark for the word(s) and one for the combination of words and design to protect the logo.
Other Legal Issues
During the first year of a start-up, your corporate attorney may have the skills to cover the hodgepodge of other things that arise. For example, if you hire contractors you need a contractor agreement. If you have artwork created you will need to ensure that you own the artwork, which requires a “work for hire” agreement. If you hire an employee, you may need a little bit of employment law. You are going to need confidentiality agreements drafted and reviewed.
Overall, a start-up’s first year of legal services can be well managed so that the venture reduces its risk, implements its company and plan with its “legal butt covered” in a way that doesn’t break the bank.
I’ll end by deferring to my friend Dana Robinson, an entrepreneur, investor and attorney who publishes FreeLegalAid.com. Dana’s motto for start-ups is simple: Don’t over-lawyer.
“Lawyers can over-analyze things; they aren’t usually businesspeople,” said Dana, who also blogs at GetinBusiness.com. “They are trained to see every obscure possible liability and contingency. They have a role, and you need them. But, as the business owner or manager, you need to control them, manage them and ensure that you get just what you need for a price that is within budget. It’s your job to do this, and good lawyers will flow with your needs and understand if you place some limits on what you use them for and how you use them.”