6 Myths That Lawyers Tell Start-Ups (and 1 that others tell start-ups about lawyers)

I am on a mission.  Not a mission from God but a mission to persuade anybody starting a business that getting a lawyer involved early can prove really useful. I know that it sounds counter-intuitive. Bear with me…

If you follow the advice of Jon Bradford, you’ll blag whatever free advice you can from whichever lawyer might be prepared to spare you a few minutes. If you listen to Seth Godin, you will muddle through without lawyers at all until you have had a chance to build a convincing business model.

Who, then, am I to argue with these start-up heroes? I am a lawyer, dammit.

You see, conventionally, lawyers ARE bad for start-ups. Go and see a lawyer and you will expect to walk away with a long list of jobs you will need that lawyer to do for you and an hourly rate upon which those jobs will be done. The sufficiently risk averse amongst you will want to make sure everything is absolutely tickety-boo and you will waste thousands on unnecessary legal fees, money your business probably can’t afford and can be better spent elsewhere. The more naturally entrepreneurial will either NOT see a lawyer at all, or decide that everything that your lawyer says is surplus to requirements.

But if we can dispose of some common myths that lawyers that are NOT accustomed to dealing with start-ups will try to reinforce, you will see that there are very real benefits to speaking with somebody that knows what they are talking about because they have demonstrable experience in working with start-ups. Because what you need right now is ADVICE, not a shopping list.

In what follows, I have included some links to some of our content.  Other providers are available.  You may not like the cut of our jib, but please do try to seek out another service that is backed by real live lawyers (we don’t much care for the business model, but Rocket Lawyer is an alternative, for example), not a machine that churns out obscure documentation.

Myth 1 – You Need to Create a Company Right Now

Whooah, hold on there soldier. It is part of the human condition to desire a nice job title, and “Managing Director” is right up there, but remember that this is just vanity talking. Absolutely, it’s always a good idea to trade through a company. You will never hear us say anything else. But are you ready for that yet?

The first thing to bear in mind is that incorporating right away costs money. Not a lot of money, but some. Then you need to bear in mind the legal responsibilities you will have. Running a company is a lot like raising a child. Except that a company is much less likely to throw up its breakfast over your freshly-pressed shirt. Have you agreed between yourselves exactly how the company should be owned? What about where somebody is working full time with somebody else to join later? And what about if somebody leaves? These are considerations for your Shareholders’ Agreement.

Myth 2 – You Need a Shareholders’ Agreement Right Now

So you are ready to incorporate or maybe you have already. How do we regulate the relationships between those that own the company? We do it by using a shareholders’ agreement, which you might sometimes see referred to (especially by me) as an SHA. Getting that apostrophe in the right place is always a nuisance.

In any start-up involving 3 or more people, I always expect that within 2 years, no matter how successful the business, one of the founders will be wanting to leave their full-time role to go do something else. This is particularly true amongst businesses run by 20-somethings, who get offered great jobs, want to go travelling, want to move out of the region, pay a mortgage, etc. So having an SHA is a good idea if only for that purpose, and there are stacks more besides. But do you need one now?

If you have started a business that will need equity finance in order to scale effectively, your early doors SHA ain’t likely to be worth so much as a hill of beans once the investor’s lawyers get involved. It’s nice to demonstrate that you take these things seriously, but from that point forward, the investment agreement will be where the action is at.

If you are a husband and wife team or a team of siblings, then, to be honest, your expensive SHA is likely to be much less relevant should you fall out. You will probably have much bigger problems to overcome. And in the husband and wife example, the divorce settlement would override the SHA terms anyway.

If you do have to have an SHA, can you make do with something simple. If you give your conventional corporate lawyer a chance, s/he will want to throw everything in there from deadlock provisions that you may not need to the choice of furnishings for a company boardroom you will never have. Oh OK, so I exaggerate, but the point is that a basic SHA can be done for hundreds. Let your lawyer off the leash and it is going to cost you thousands. Think about when it will be that you will have something of worth going into the company (whether that is resources or revenue) that requires this most expensive of corporate safeguards.  Then think about what you need to agree with your co-founders.  You’ll thank me.

Myth 3 – You Need Director’s Service Contracts and Employment Contracts Right Now

Let’s address this one bit at a time. If you are employing someone who is just going to be an employee and not, for example, a co-founder, they are entitled to have some written terms of employment. But they don’t need to have a full scale 19 page employment contract. Basic employment terms are readily available on the web for just a few pennies. We have a template on www.particular.pro in fact.

Co-founders don’t have to have a written contract of employment. If you are going to have a shareholders’ agreement then it would make sense to have director’s service contracts as well since there is considerable overlap between the roles you play. Also, if you are looking for equity investment or you think you may be required to defend your IP, you should have contracts that confirm that the company is the owner of any IP generated by the directors.

Even if you do need director’s service contracts at the outset, don’t be fooled into thinking that you need something bespoke. To begin with, all the co-founders should have the same template, so that will save you a bit. Second, you need a draft that covers the core issues. You don’t need something that runs on for dozens of pages. If you want to know a bit more about this, have a look at Deb’s videos “Why You Need to Know About Employment Law” and “Guide to Employment Contracts“.

Myth 4 – You Need Commercial Terms Right Now

Are you already selling? If so, how does that selling take place? If you are running a clothes shop and all your sales are to folk coming in buying t-shirts or whatever, then you’re probably not going to need terms of sale at all.

If you are building something and working towards a launch in 3 or 4 months maybe, then that’s when you need some terms. Not now. And if you are building something new and you really don’t know whether it’s going to work at the outset or whether the business model might not be right initially – and especially if you are bootstrapping – do you really need bespoke terms straightaway? Your first customers will be the innovators and early adopters on the product acceptance curve. These guys like something new. They’re usually not so bothered about the terms of registration/sale. As long as you’ve covered the basics (which you could do by adopting something like our standard service terms as Bloo.ie did, for example) you should be fine for the time being.

When your revenue graph starts bending upwards, you do need to think about investing in some decent terms, preferably something written in plain English or at least what we call “softened legalese”. But the problem with writing your terms too early is that terms of sale or registration or whatever are heavily dependent on your business model. Every time you pivot, you need to review or even replace your terms and that will cost more money.

Oh, and one last thing. I have had a couple of occasions recently when, a client with funding has been asked by a start-up contractor to produce a supply agreement. You can usually translate such a request as “can you have some terms written for us as you’ve got funding and we don’t.” To which, of course, the answer is a firm “no”. The sub-contractor should have their own terms (it would worry me that they don’t). You review them and suggest alterations that will be drafted up by their lawyer as special conditions for your consideration. Job’s a good ‘un.

Myth 5 – You Need Me to Write You a Privacy Policy Right Now

The exception at the early stage is a privacy policy, especially if you are in the tech sector. Your innovators and early adopters are likely to be MORE likely, not less, to want to check on how you are dealing with their personal data. So if your business model relies upon the use of the data provided or generated by your customers and clients, you need to describe this carefully in your privacy policy. This is, after all, a notice, not a legal document. You should describe how you use the personal data of those with whom you engage. If you do that, you won’t go too far wrong.

For everybody else with any kind of web presence, a basic privacy policy (such as our core template) should be fine. And if you are doing anything with data relating to children or you a handling what’s called “sensitive personal data” – which is about things like ethnicity, health-related issues, etc – you do really need to investigate what’s involved. If you want to speak to a lawyer, make sure you find one with provable experience in data protection (there are a few of us around) because, without exception, EVERY commercial or corporate lawyer will tell you they can help with this.

However, if you can’t find a specialist to speak to for half an hour who can give you a nudge in the right direction (for example, at our #CafeClinic) try the Information Commissioner’s Office website. They have a helpline and they’re super helpful.

Myth 6 – You Need to Protect Your Intellectual Property Portfolio Right Now

So this is probably the most controversial of the myths, but here it is. You don’t need to PROTECT your intellectual property at the start-up stage. What you DO have to do is to ESTABLISH whether what you are doing will infringe anybody else’s rights and IDENTIFY your intellectual property and what it will take to protect it. Then, you have to make a decision on whether the cost of that protection is warranted at this stage.

So, for example, you may have come up with a distinctive brand for your product that is still 6 months from launch. You think your main markets will be Europe and North America and perhaps the Pacific Rim, if things go really well. Do you need to start filing trade mark applications now? Well, even if you do it yourself, a Community Trade Mark application is going to cost you a €900 filing fee. That’s like buying a spare MacBook Air. Not many bootstrapped start-ups have that much cash lying around uncommitted.

So what are your options? Wait until closer to your launch and file your application then. After all, you may come up with an even better identity by then. And if you don’t, what’s the worst that can happen? Somebody else gets in there first and registers the same name or something similar and you have to rethink. If you are really committed to the identity in question, this might not be a risk you feel you can afford to run. If you are not, but you still feel a registration is important, then it might be.

Let’s look at the other major IP right that has start-ups jumping: patents. There are two risks to delaying the filing of your patent application. First, there may just be another team working in some part of the world on solving the same problem as you and they may have come up with the same solution. The first to file their application wins and it really is winner takes all. If you are second, you get nothing, nil, zero, zilch, diddly-squat.

The second problem is that if you run the risk that your invention becomes public knowledge (it is “anticipated”) or that something happens that means your invention is no longer sufficiently inventive (it has become “obvious”). If either of these things happen, your invention will no longer be patentable, or if you still manage to get a patent, it could be revoked.

There is not much we can do about the second limb of this second risk other than to say that you should, in any event, have checked that what you are building won’t infringe the rights of anybody else. In doing that, you should get a pretty good view as to how fast things are moving in your field. But as far as the first limb is concerned, whether your concept becomes public knowledge is very much down to you. You can keep it confidential until you are ready to file by using non-disclosure agreements with suppliers and partners. You might be able to test market by disclosing WHAT your product does without disclosing HOW it does it.

Now look at it the other way around. Is there any danger associated with filing your patent application too early? Yes there is. If you file a patent application and then find that some tweaks to your invention make it much more effective and much more valuable, you may find that you are unable to protect those improvements because once your own application is published, those tweaks have become obvious. Your eagerness to obtain protection will have been your own undoing.

Myth 7 – Speaking to a Lawyer Will Cost You a Lot of Money

And so, to conclude, the biggest myth of them all, but one that, unlike the first 6, is not perpetrated by lawyers but by those consultants and advisers that will love to share their opinion with you: Lawyers cost you money.

Well, of course, lawyers DO cost you money. But legal fees need not be a waste of your resources provided you use your lawyer effectively. If you need help from a lawyer, it is because you are doing stuff and it’s doing stuff that causes you to rub up against the sort of things you need a lawyer’s help with.

Any lawyer that is experienced in dealing with start-ups, especially start-ups in the tech sector, is likely to be able to give you a pretty clear plan of how you need to proceed within the time it takes to drink a big mug of the frothy stuff at a leisurely pace, especially if you are prepared to pay for his or her coffee yourself (always a good sign for potential clients that, I find). Make sure that the lawyer you are going to talk to DOES have that experience though. Ask around, check his or her LinkedIn profile for recommendations and examples. Don’t be suckered into thinking that for a lawyer, working with a start-up is like working with any other kind of commercial client because it isn’t.  But if all you do is ask them, they’ll SAY they do, whether they do or not.

You do need guidance and, yes, a plan at this stage. But your plan should not be written in stone. Your business will evolve over the coming months and you and your plans need to adapt to account for its evolution. Ultimately what you need most of all from your lawyer is a relationship, not a shopping list.

4 thoughts on “6 Myths That Lawyers Tell Start-Ups (and 1 that others tell start-ups about lawyers)

  1. Pingback: Betanuggets: The Revenge of the Margaritas ‹ Betarocket

  2. Pingback: The #CafeClinic | Matthew Rippon

  3. Pingback: The Copyright Registration Fallacy | Matthew Rippon

  4. Pingback: The Copyright Registration FallacyParticular.pro

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