Managing Your Startup’s Legal Spend: Focus on What’s Most Important

By Andrew Comer

Most companies will need to hire a lawyer at some point as their business grows, but the price tag often prompts entrepreneurs to risk doing without legal counsel when they need it. Regardless of the size of your business, watching the bottom line is always a priority, and figuring out how to budget your legal spend is a common dilemma. There are times when hiring a lawyer is a make-or-break decision for the survival of the company, and others when you can afford to be more self-sufficient.

Below we’ll take a look at the most common legal priorities for startups, including some you can tackle yourself and others where it’s risky (and potentially catastrophic) to go it alone. We’ll also discuss factors you should consider in hiring an attorney or firm that’s right for your business, and how to optimize your spend through a fee arrangement that makes the most sense for your company’s needs.

Getting Started

Entrepreneurs can often get the legal ball rolling on their own by forming a single member LLC with a simple online Secretary of State business filing and application for an employer identification number (EIN) number (also known as a Federal Tax Identification Number). Both of these are important first steps for legally straightforward businesses and require zero legal spend or expertise.

If you’re looking to form a multi-owner entity, however, you should consider governing documents that contemplate the complexities of your relationship with your co-founders or other stakeholders, including what ownership percentage each party has, who has the power to make certain decisions, and exit strategies. Legal counsel can play an important role in formalizing these decisions.  Moreover, if you’re entering a highly-regulated industry that’s fraught with red tape and risk, such as food manufacturing, pharmaceuticals, or anything involving the production or sale of alcohol or cannabis, retaining qualified legal counsel may be one of the first things you need to do. The complex compliance requirements and changing laws in these spaces should be taken seriously.

As your business grows, there are three key areas where you’ll want to invest in legal cover: 

  1. Intellectual Property (IP) This critically important area includes registration and protection of patents, trademarks, and copyrights.  It also encompasses the development of strong nondisclosure (NDA) agreements which should be used with employees and contractors as well as some suppliers, vendors, and investors—basically, anyone who has access to your confidential information.  If your business makes use of trade secrets (and more do than you might think), protecting them through proper agreements and procedures can be fundamental. Legal safeguards that help prevent the possibility of someone taking, using, or devaluing your inventions, brands, trade secrets, proprietary methods, or technology should be considered an essential spend.

  2. Employment Matters As your business grows and you begin hiring employees, you’ll want an attorney to draft an employee handbook,  employment agreements for key employees, and agreements for any equity incentives (such as stock options), confidentiality restrictions, non-competes or other post-employment provisions. Development of company policies related to nondiscrimination, sexual harassment and compliance with federal employment laws will also become increasingly important as more employees come on board. Employment litigation can be costly, distracting, and embarrassing; these backstops can help prevent it.

  3. Vendor and/or Service Provider Contracts Even early-stage startups can benefit from having a legal professional develop a few specific form contracts for use in frequently occurring situations. For example, if your company is providing a service, you’ll want to have a solid and binding service agreement, describing the services you will provide to your customers, payment terms, termination, dispute resolution and so on. You may also need similar form contracts for use with outside suppliers or vendors.

Always put things in writing—avoid relying on handshake deals—and always have an attorney review contract provisions you don’t understand. Two of the most common issues I see are misunderstandings caused by not having an agreement in writing or a bad contract that’s been signed and cannot be improved or terminated. Contracts often have buried language or legal implications that are easy to misunderstand or miss completely. Having an attorney prepare and/or review them is the best way to avoid big headaches in the future.

How to Find the Right Attorney 

Requesting recommendations from friends, family or business associates is a great starting point for finding a good attorney.. If you work in a highly regulated or niche area, it’ll be important to hire a firm or attorney that’s experienced in your specific industry. Bigger isn’t necessarily better, especially for those on a budget who want personal attention. You can get what you need from a specialized one-person shop or a small, boutique firm (5-30 employees) that has attorneys who can help with a variety of general legal issues.

When you meet with someone, I recommend asking the following questions:

  • What type and volume of cases do you generally handle?

  • Do you understand my business/industry?

  • Are you familiar with the kind of risks I’m likely to encounter?

  • Do we have the same appetite for risk as me?

How to Budget Your Legal Spend

Setting aside some money for legal assistance in the areas outlined above is important, and I advise startups to budget for it like anything else. Additionally, if you build a relationship with an attorney you trust and who knows your industry, they can provide not only the legal nuts and bolts, but also a gut check when you need it. I often encourage entrepreneurs to touch base quarterly with their attorney to talk through the state of the business and address any areas of potential risk that may arise.

How To Ensure Legal Fees Meet Your Expectations

The cost of legal counsel can be a significant worry for startups and entrepreneurs who need help but are operating on a shoestring budget. Most people are familiar with attorneys billing at hourly rates, but flexible attorneys will agree to flat-fee, project-based, or other fee structures where they can. Ask if your attorney or firm can work on a specific project or provide a set number of hours of counsel for a flat fee. If a flat fee is not an option, request written estimates in advance of the work being done. That way, if it looks like a project might go over hours or budget, your attorney should alert you and provide an explanation. You should also expect to see an engagement letter outlining each of the firm’s attorneys’ hourly rates so that you know what to expect.

Don’t let your startup be distracted or face financial challenges because of one bad contract, a trade secret in the wrong hands, or an unexpected foray into expensive litigation. Making strategic investments in legal counsel can very often save money in the long run and provide vital protection.

Andrew Comer is a partner at Fortis Law Partners. He advises companies on mergers and acquisitions, commercial transactions, and a host of other corporate matters that can affect their formation, financing, and operation. He has assisted clients of various sizes as they’ve grown, negotiated with vendors and customers, and prepared for acquisition. His clients include those in the legal cannabis industry, software and application developers, cloud-services companies, creative and advertising agencies, manufacturers, and various service providers and retailers. His work with debt and equity financings have included angel investments, venture capital, private equity and public offerings. He also leads the firm’s trademark practice group, advising companies on registrations and brand protection.

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