From structuring to contracts: The essential legalese of starting a small business

There is considerable legal paperwork that goes into getting a startup off the ground. From drawing up commercial and employee contracts to protecting intellectual property, bringing investors on board, ensuring legal compliance, drafting terms of service and making negotiations, there is a lot that the skills of an experienced startup lawyer may be invaluable for. 

lawyerEntrepreneurs tend to be reluctant when it comes to getting a lawyer on board. Often, they would sooner turn to online services like Clerky or Cooley Go to automate some legal paperwork and get their show on the road.

Why the reluctance to go with a lawyer?

The costs involved are the primary reason why startups shy away from quality legal assistance; drafting a terms-of-service or privacy policy document alone can cost $500. Other services tend to run at a few hundred dollars an hour. Unpleasant anecdotes about legal firms putting startups on their least experienced lawyers, and a simple fear of complicating matters, all add to the disinclination felt.

Automated legal paperwork services can work with many generic businesses, for sure. Some startups, however, do have specialized needs; it’s easy to go wrong with an automated paperwork service when your business has such needs. For this reason, experienced entrepreneurs always hire lawyers starting out with a venture, even if they do plan to go with an automated service later on. The lawyer can tell them if their business idea is simple enough to be handled by automation or if there are any complications foreseen. It always pays to get advice from experienced firms like Brown Smith Wallace, it can help to understand what these complications might be.

The law

Startups often issue equity to early members of the team. It’s great for motivation. Unfortunately, it also makes timely IRS filings important for those lucky recipients. Not infrequently, startups with no professional legal assistance forget all about their new tax obligations and find themselves dealing with IRS summons.

Raising funds from outside sources is another minefield that frequently makes victims of startups. There can be serious legal questions to answer if complicated securities laws are violated.

Lawyers can help with negotiations in unexpected ways

Entrepreneurs with startups to promote learn how lawyers can help with negotiations, and imagine that they would only need such assistance when they planned to do tough price negotiations with suppliers. It’s important to understand, however, that negotiations can crop up everywhere.

When a startup partners with a well-established company to gain access to new markets, for instance, there may be ideas to contemplate that a legally inexperienced entrepreneur might ignore.

A professional lawyer will always ensure that every co-founder understands the term of their contract. Being careless at this point can easily lead to serious disagreements down the line.

A startup may even become the target of a takeover bid if the right clauses aren’t mentioned in distribution contracts. Lawyers understand areas of confusion that usually crop up in these deals, and offer clarification before it is even sought.

Unfortunate things happen when no one’s willing to read the fine print

Lawyers thrive on the fine print. This can be a valuable skill to startups that need to sign deals and contracts. Getting good contracts isn’t simply about negotiating well enough to engineer favorable terms. It’s also about ensuring that the terms negotiated actually appear in the contract. If there is no one on board to go over these details, there’s simply no way to know.

Most startup websites are in violation

Startups tend to be incredulous of claims that uncounseled entrepreneurs make serious mistakes. There is at least one piece of evidence that is easily available, however: most startup websites and blogs are in violation of all kinds of rules, policies, and laws. At the very least, they tend to be in violation of Google’s privacy policies. Many are in violation of state or federal privacy laws, in addition.

Such violations usually do not attract lawsuits because the companies in question are small ones. If they were large and profitable, however, those lapses would turn into huge liabilities. Such legal mistakes are not made when startups seek proper legal counsel.

Often, startups need more than occasional legal consultation; they need a full-time counsel onboard. For businesses building on promising new ideas, lawyers are known to come on board in exchange for equity deals. These lawyers help steer their company through difficult early days and use their business contacts to further the company’s cause. For startups, a lawyer retained in some capacity is the default choice.

Harvey Page works as a business consultant, mostly helping start-ups in the IT industry. He shares his knowledge online through his articles.