Cash is king with startups. Many startups don’t yet need an attorney, or at least their money could be better spent elsewhere. I’m not suggesting you can just ignore legal issues at the beginning, but with all the resources available on the internet and the strong startup communities out there, I believe smart founders, if motivated, can find the information they need either online or by talking with other founders.
Big caveat…Never delay forming your entity. For tax reasons and to reduce your personal exposure you need to take this step immediately. You don’t even need to use a commercial service for this. Most Secretary of State’s websites provide online forms for Articles of Organization you can fill out and file yourself in order to form a limited liability company (LLC). In Ohio the fee is $125 and the form is available here. At this stage an LLC should meet your needs and the steps to keep you legal are much easier for this entity than for a corporation. And the Articles of Organization are all you need. Get it done and move on. Unless you’re already taking any of the steps I’ve listed below, you can’t mess up too badly with your initial choice of entity.
Listed below, however, are five situations in which you need to consult an attorney. The list is certainly not exhaustive and it’s best to keep a friendly lawyer close to your belt to help spot issues. Here are my general principles, though, when I’m helping founders determine when it’s time to take the plunge.
Get a lawyer…
1. Before you partner up. Before you agree to split the equity in your company with anybody, consider getting an attorney involved. Once there’s more than one owner, it becomes difficult to change entities and your initial LLC may not be the best choice to prepare you for growth. In addition, your founding team that seems so perfect now may not work out the way you planned. If it doesn’t and you haven’t properly set up vesting arrangements or a buy/sell agreement, you could be stuck with one or more free-riders going forward.
2. Before you raise capital. Never play fast and loose with securities rules. Even borrowing money is usually considered to be the “sale" of a security and can get you into trouble if you’re not doing it properly. Besides being against the law, improperly selling an interest in your company (or borrowing money from investors) negates the limited liability of the founders. If things go wrong, the founders are likely to find themselves obligated to repay the entire investment. I sometimes hear successful and vocal founders offer contrary advice, but remember, things went well for them. The founders whose ideas went south probably aren’t talking about it on Twitter.
3. Before you hire. Hiring employees raises all sorts of legal issues. Unless you’re experienced at it, it’s a good idea to consult an attorney to make sure you’ve got tight employment agreements in place and aren’t running afoul of employment regulations. More importantly, though, before you hire anybody, employee or independent contractor, to build or create any part of your product or brand, get a lawyer involved to make sure you properly protect your intellectual property. Remember, the general principle is that the designer/developer owns their work. Unless agreements are in place that change that principle, you’ll have significant issues if you become wildly successful or want to raise money from a sophisticated investor.
4. Before you spend your nest egg. Before you shell out a large sum of money or sign anything committing your company to a significant obligation, have an attorney look over your agreements. I hope this is obvious, but if it’s a bet-the-company type of deal, get a lawyer.
5. Before you launch. If you’ve somehow managed to get this far without partnering, raising money, hiring a developer or spending a ton of money, my hat’s off to you. Before you release anything to the public, though, make sure you’ve discussed your product and business model with an attorney. If you haven’t already, you’ll certainly want to take steps at this time to protect your intellectual property. In addition, privacy and consumer protection regulations can be nuanced; a good attorney can help issue spot areas that may cause trouble for you once your product’s released.
In general, you may have some time before you need to hire a lawyer if your startup is trying to conserve cash. As I mentioned above, though, don’t let a list like this substitute for keeping a friendly lawyer close to your belt. Most lawyers that represent startups will enjoy hearing your story and will be open with you about when it’s time to get them more involved.