Startups, Law, and Lawyers

by Giff on September 13, 2009

contractsChris Dixon just wrote a post “Entrepreneurs needs to learn some law“, which spawned from a discussion on first round term sheets.  Startups are a massive learning curve no matter how many times you have done one (just different curves), but I agree that it is absolutely worth taking the time to become savvy on contracts and business law. I thought I would jot down a few practical notes:

  1. Learn basic HR law: you can get into hot water if you ask the wrong questions during an interview, or if you fire someone without taking the right steps beforehand like building a documentation trail and providing documented feedback to the employee.  If you are new or rusty on this issues, ask your attorney to give you a 30 minute review of the key points of hiring and firing.
  2. Plan for the worst case: while you never want to think about this when co-founding a business, signing the big customer, and landing the big partner, you really need to think about worst case scenarios.  With co-founders, work out vesting schedules and plan for disagreements or breakups.  With big customers, have protections in place in case they pull the plug on the project or have their own cash crunch.  With partners, build in performance metrics so that you can kill the deal if you are not happy with the results.
  3. Draft contracts within the realm of reason: if you have started a contract process, I’m going to assume that you hope to actually not just sign it, but do so in a reasonable amount of time and with only a reasonable amount of effort.  While you never want to excessively negotiate against yourself before even getting to the table, it is worth editing your own document while putting yourself in your customer / counterparty’s shoes.  If you start from a reasonable position, your deal should close faster. However, preserve any important protection, and even any reasonable term that you want but are willing to give up.  Every contract gets redlined, and often the other side only feels like they have done their job if they’ve had something to cross out or add (not unlike the common strategy of leaving negotiation room in pricing).

On saving money:

  1. LOI first: When it comes to contracts for business deals, start with a non-binding letter of intent that allows you and the other side to get all the key business terms down and agreed upon before the lawyers get involved and the billing clock starts ticking.  Not only can it speed the process, but it can keep a deal from being derailed by an overzealous attorney who has, in trying to do their job the best they can, lost sight of the business motivations and priorities behind the deal in the first place.
  2. Have your lawyer edit, not write: you can waste a lot of money on legal fees if you have a lawyer draft something basic up from scratch like a software license, TOS, or privacy policy.  Ideally, you are working with a lawyer not unfamiliar with tech ventures, so this won’t be an issue (if not, start asking around for one). Ask your attorney for some sample contracts they already like on the topic you need, and mash up your own version. Only then ask your attorney to edit it for flaws and holes.
  3. Review NDAs yourself: if you are not comfortable with NDA language, ask your attorney for a primer training session, but in general save your money and only ask for assistance when you are really worried about a clause and the other party refuses to strike it.
  4. Plagiarism is fine: when you have to use another company’s contract, keep your eye open for language and clauses that is better than your own version.

Finally, on lawyers themselves:

I am a big believer in working with an attorney who understands your world (i.e. biotech, or music IP, or Internet software).  Even if their hourly rate might be higher, their efficiency should more than make up for it.  You don’t want someone doing their legal research on your dime, and if you do get into trouble, you’ll be glad to have a top dog already on your side.

You do need to keep an eye on your bills.  Legal fees can be a huge drag on a startup’s cash flow, so you want to pick your attorney carefully and do not be afraid to make a change or to work with more than one.  You want someone who really respects the clock, i.e. you wallet (not respecting the clock includes piling multiple attorneys on a conference call and billing everybody’s time, or pulling in partners, rather than skilled associates whenever they need to tap a different department).  This can differ by the individual, rather than the firm, but it is a general truth that the bigger the firm, the more this can be a problem.

Do not be afraid to ask your attorney for estimates on work, updates on costs billed so far in a process, and even for a cap on costs.  Do not be afraid to work with experienced associates, rather than a partner, or even a cheaper attorney from a different firm for bread-and-butter work.

There’s only one way I believe in to find a good attorney, and that is through a referral.