Why Attorneys Are Not Top of Mind for Entrepreneurial Businesses (but should be)
There are a number of books that focus on the tremendous amount of difficulty involved in starting a company. There are thousands of ways to fail. There may be insufficient financing. The entrepreneur may be a visionary but weak at execution. The market may not embrace the product as much as the entrepreneur thought. The team may not be right. The pricing model may be off. There may be supply chain issues. The “key person” may disappear or may tire of the enterprise. The operating margins may not be right. The customer experience may be subpar. The demand is less than the supply. The demand is greater than the supply. A competitor underprices you. A competitor hires away your talent. The list goes on and on. You get the gist.
Most entrepreneurs would agree that there are fewer hours in the day than there are business issues to address. So, it makes sense that as the company grows, it becomes necessary to assemble a team of professionals, known as the C-suite, to assist with growth. Roles typically include Chief Operating Officer, Chief Marketing Officer, Chief Financial Officer, and Chief Sales Officer.
These traditional staffing models rarely include legal considerations. Legal considerations exist in a separate bucket from things that govern day-to-day business operations. But it’s the implementation of key legal considerations that provide a framework for a business’s overall success.
While experienced business and IP attorneys are trained to work within this dichotomy, entrepreneurs are not. Based upon just the very partial list of potential business issues noted above, it is hard enough for entrepreneurial organizations to handle day-to-day operations and continue to build strong internal systems, let alone find and then work with legal counsel to start and build an effective legal strategy. Plus, attorneys generally have a number of clients and are not always the best at reaching out to build proactive legal strategies.
Why does legal strategy matter?
A business’ legal strategy matters as much or even more than a business’ business strategy.
A) Unclear Co-Founder/Management Agreement: Facebook’s Mark Zuckerberg paid out $65 million (and several million dollars of legal fees) for not adequately addressing the terms and conditions of equity for source code provided by some college friends.
B) LLC Mistakes: LLC formations are cheap; however, they are a creature of contract and if you plan on selling or providing equity to key employees, the contract has to be 100% clear (sometimes up to 100 pages clear) on the all too common “what-happens-ifs”. As opposed to corporate law, many times, the only fallback is litigation. My most lucrative cases are those where there was some sort of operating agreement, but that agreement didn’t adequately address what happens if a co-founder or partner slacks off or even stops working. We generally have worked those issues out after the threat of litigation and several tens of thousands of legal bills on each side.
C) Branding without Clearance: Branding is generally the number one way to increase business because it defines how customers relate to your business. If you do not clear the name (and sometimes image) with counsel, you have a significant likelihood of a need to rebrand (a big deal) or face a federal lawsuit. I can say that it is far more lucrative for me to handle trademark litigation than to conduct brand clearance.
Along these same lines, contracts, taxes, employment, privacy, terms of use, and funding/equity all need to be crafted specific to each individual business. Undoing poor, non-strategic work or engaging an attorney after the legal issue has stung the business is both expensive and uncertain.
I generally ask my clients to answer two questions: Do they want to grow the business? And what would any investor/buyer think if there were seminal legal issues in the business? Generally, whoever conducts the due diligence will either say a) not interested anymore or b) as we need to assume the risk, we will discount the value of the business.