Make An Investment In Legal
February 19, 2018 | By Kevin Vela
A question I often hear from startups when discussing initial legal work is, “How much will this cost?”
This is the wrong question – most startups are looking at their legal expense the wrong way. They should be asking, “How much will this save me?”
You see, bad legal records can end up taking significant time and expense to correct down the road. The easiest way to derail venture financing is to have poor corporate legal records. I hear VCs say this over and over again. It’s a real pain point during due diligence. They never say, “Poorly commented code base will kill a deal,” or, “We pulled out of our last deal because their marketing plan was on Post-it® notes instead of PPT slides.” But VCs all have anecdotes of a good deal unraveling because the startup’s legal docs were a mess.
When you first start your company, it is critical that you do the following:
- Incorporate correctly (including entity type, jurisdiction, # of authorized shares, and par value).
- Document your initial stock issuances (Delaware is a real stickler for this).
- Vest everyone’s equity.
- Make sure the company, not any one individual, owns the IP, including the domain name. (I see so many startups go sideways because a departing founder has the domain name in her or his name.)
- Make sure you have proper “service provider relationship” paperwork for founders/employees/advisors/independent contractors. And then, as you go through financing rounds, the volume of paperwork increases alongside the importance of it.
Anyone in the venture space will tell you that investing in legal early on will save you tens of thousands of dollars down the road. These days it costs a fraction of what it did 10-15 years ago to organize a new business or go through a financing round.
For those small businesses out there who do not plan to raise venture financing, the counsel here is the same: devote some resources early on to avoid landmines down the road. Some areas for small businesses to watch out for include proper formation, real estate leases, contracts with suppliers, and hiring employees.
In closing, please think of your legal expense as an investment in your business. It is a way to build equity in your company that you can cash out at exit; it may be hard to quantify, but it will definitely be there as you go through the due diligence process.