A CEO is never happy to have to call a litigator: it usually means that his company has been wronged, or worse, that the company has been accused of wronging someone else. And, of course, a lawsuit always means time, money, and a public relations hassle.
Obviously, not all litigation is avoidable, but a huge percentage of it can be. Unfortunately, the greatest opportunity to build a protective wall against future lawsuits is the time when young companies are more worried about paying their rent than for a lawyer.
However, cutting that corner can result in big expenses later. Bottom line: start-ups should really seek counsel early.
Admittedly, this advice comes from an attorney -- but as a former litigator, I saw what could happen when contract language or protections for intellectual property were not put in order preemptively.
Recently, I came across a Texas law firm's offer of a legal "start-up organization package" for young companies. For a flat fee of $5,000, a start-up company can get help in drafting and filing organizational documents and employment agreements, as well as four hours of consultation on these areas and on venture capital term sheets.
Alan Bickerstaff, a partner at Andrews Kurth (the firm offering the plan) said the firm's goal is to represent start-ups from "inception to the exit-event," be it an IPO or acquisition. But, he said, attorneys in his field often see start-ups that try to perform the early legal tasks themselves, only to find out that they had made mistakes which cost them a lot to untangle later.
One mistake start-ups seem to make, Bickerstaff said, is forming the organization in a state that is not suitable for their long-term goals. For example, those who want to eventually seek venture capital funding may want to incorporate in Delaware, rather than their home state. And certain corporations (such as a C-corp.) could better suit some needs than others.
Another step young companies tend to miss is creating an opt-out plan, should a founder eventually want to resign from the company. "It creates issues if [the departing partner] owns a big chunk of the company," Bickerstaff said. "Even if you are only starting with two or three people, if one leaves, you need to have a mechanism to get their stock back."
Also, as start-ups move from their planning phase to actually soliciting venture capital funding, potential investors will be more comfortable if they can be given some sort of guarantee that paperwork is in order and contingency plans are in place in preparation for company growth and change.
Of course, not just any lawyer will do. It's important to seek out an attorney or firm who has experience working with young companies who have products or long-term financial plans similar to yours, as well as an attorney who has represented the type of company you wish to become.
"I can't overemphasize how important it is for new companies and start-ups to get advisers that actually operate in their space," Bickerstaff said. There are nuances in every jurisdiction and business area, and you want someone who has experience with the details.
In other words, he stressed, "You want someone who has been around the block."
This is especially true if your company is the new kid. While a natural inclination might be to avoid paying lawyers, they can sometimes make your trip around that block a lot less bumpy in the long run.
Disclosure: The author worked at Andrews Kurth as a young associate, but, as mentioned, as a litigator and not in the corporate section. She first met Mr. Bickerstaff when she consulted him over the phone for this article.