Do startups need lawyers? Absolutely, but not as much as many first-time entrepreneurs think.
Lawyers play two important roles for startups. Rules and Risks.
1- Rules. Incorporating your company, taking money from investors, and hiring employees all require compliance with a complex set of laws, codes, and regulations. The key responsibility of a business’ lawyer is to ensure the company complies with all the rules: Local, State, and Federal. These rules are often arcane, contradictory, and changing. Most importantly, if the rules are followed correctly, the risks to the business are low. If the rules are broken, the company can face fines in the minor cases, and lawsuits in the worst cases. Thus it is worth the money to hire a lawyer for incorporating, when dealing with investors, and when hiring employees.
2- Risks. Lawyers are trained to think about and weigh risks. As such, good lawyers come across as pessimists, as their advice for any situation is a list of associated risks. As you build your startup, start entering into partnerships and sign other contracts with other organizations, it is often useful to get an opinion from a lawyer, to ensure you are not overlooking any important potential risks.
Do note that this short list does not include two other roles that I usually see startups using their lawyers. Contracts and Negotiations.
Outside of the laws involving incorporation, securities and employment, most business contracts do not have to comply to any specific laws, and thus do not have to be written by lawyers. You can run your business on handshakes and verbal contracts. You can do business deals on self-written term sheets and memoranda of understanding. All of these forms of agreements are legal contracts.
Hire a lawyer to write your contract when the risks of the deal going wrong are high. For example, when you are licensing a product or service to a large company or to dozens of customers. But when you do go down this path, you should write the first draft of the contract, to ensure that it includes what you want within the agreement, rather than your lawyer adding in clause after clause which cover unlikely and unimportant risks.
Far too many times I’ve seen contracts that go on for multiple pages, where 90% of the text covers unlikely events and “boilerplate”, with only a few paragraphs stretching across only half of a page covering the key terms of the agreement. All those extraneous words costs you more money in legal fees to be created, costs your partner more legal fees to have reviewed, and costs both sides yet-more time and legal fees to negotiate.
And speaking of negotiation, the one role that startups should not use their lawyers for is in negotiations. Ask your lawyer for advice during negotiations, but unless you are negotiating with the SEC or IRS or other regulatory body, do not ask your lawyer to negotiate on your behalf. You need to run your startup as a business, making the best business decisions, not necessarily the least risky decisions.
When negotiating partnerships, you need to create trust with your partner. When negotiating terms on a sale, you need your customer happy and satisfied. When negotiating a lease, you need your landlord to want to rent to you. To complete a negotiation with both sides satisfied, and both sides still respecting each other, you need to compromise, trade off unimportant terms, and in most cases, aim for deals that provide benefits to both sides of the negotiation.
Your lawyers, on the other hand, are ethically obligated to only do what is best for your company. Ruthlessly following that guideline is likely why lawyers are so despised. I have far too often seen a lawyer egregiously delete whole paragraphs in an agreement, creating issues within the negotiation, putting the two sides further apart, aiming for the best short-term solution, rather than questioning whether it is the in best long-term interest of his client to live with that term. In such cases, lawyers should point out the issue, suggest far less onerous changes to the clauses, and leave it to the business person decide whether any change is worth the effort in the specific negotiation.
In short, as a startup entrepreneur, delegate to your lawyer only those tasks that must be done they way they must be done. Elsewhere in running your business, ask advice from your lawyer, listen to the list of risks, but use your own judgment and make your own decisions as to what is best for your company.
