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.

The Lawyer Vs. The Law Firm – a response

I read a post published recently by Canadian legal sector consultant Jordan Furlong.  To say that it resonated was something of an understatement.  But I didn’t agree with all of his conclusions.  You can read his post here and this was my response.

Jordan, your article is a clarion call that strategists in commercial law firms around the world should heed or face extinction.  And of course, for that reason I expect little change in 2013, meaning by 2014, the traditional law firm is no more than a plump turkey waiting to be pulled apart by more astute commercial players.

Why is this?  Because traditionally law firms reward big billers and rain makers with promotion to management status, whereas those actually skilled in longer term business development and strategy are overlooked.  Lawyers are inherently self-interested and are forced to work together out of need and those at the top of the trees all to often are arrogant and unwilling to consider that there may be any other path.

But here’s the thing.  Whilst it may be that big enterprise likes to align itself with one firm or another, ultimately law is a relationship business.  When you look across the UK legal scene (which is where I work), you see a vast array of firms and to the business owner or manager, almost every single one of them is seen as a substitute for another.  Which firms could be excepted from that analysis. Pannone perhaps, or maybe Slaughter & May.  I can’t think of any others that have their own distinct personality.

In my father’s day, the lawyer was at the heart of the client relationship.  Networks were personal.  Not because they were jealously guarded, but because professionals in market towns naturally grouped themselves into non-competitive alignments with fellows who thought like they did.  But this changed in the 80s when English firms were allowed to start marketing themselves.  As a result, the idea of a central law firm identity, a brand, started to take priority over the individual lawyers.  But of course lawyers didn’t know what a brand was – and many, most perhaps, still don’t.

The attitude of the individual lawyer towards cross-selling is guarded not merely because of his or her doubts over the quality of service that might be provided by a colleague of which s/he knows little.  The lawyer protects his or her contacts because of the very pressure s/he faces to cross-sell.  I can’t count the number of times at the larger provincial practices for whom I worked when, faced with a client need out of the ordinary, I would approach a dept head or team leader for permission to refer said client out to a specialist I had found at another firm only to be told “Jenkins does that sort of thing, or something similar or he’ll work it out”.  Why? Because equity partners are not motivated by long term gain through first class customer service.  They are motivated by the scale of their drawings, which themselves depend upon the revenue generated within the tax year.

When I decided to set my firm up in 2011, I decided to do everything, EVERYTHING, different.  Why fight our client’s desire to bond with their adviser?  Why not to sell ourselves through our support of that relationship?  For our consultants, why try to restrict what they do with their contacts and clients? Why impose covenants on them? Why force them to cross-sell.  Instead, new would-be consultants are told that should they wish to leave, not only will they not be restricted, they are positively encouraged and will leave us with our blessing.  If they wish to refer their clients to advisers outside the firm, that is absolutely their decision.

We do this because when we set the firm up, we decided first to build a brand (not an identity, an actual brand) and then see where we went from there.  So we created a values document that all of our advisers must not only sign up to, but must make sing out through their work.  And that values document is provided to all of our clients so that they can hold us to account.  So we can be confident in the absence of controls over our people, because they wouldn’t be with us in the first place if they weren’t the RIGHT KIND of people.  And so we don’t push our brand on the clients of our lawyers.  And it’s by operating this way that our clients love us so much.

Which brings us back to where you started, and the idea of the growth-by-merger fallacy.  When two large firms combine, what analysis is made as to the qualities of the lawyers at the coalface?  Practically none.  Or if there is, it’s merely about their ability to bill as opposed to their ability to build a long term relationship with their clients through which those clients might place total trust in the fidelity of their lawyer.  Because a merger between two firms is not about the building of economies of scale, it’s about the building of megaliths that massage the egos and satisfy the avarice of their equity partners.

Thus far, the focus in England post-Legal Services Act has been on the destruction that is to be reaped upon the High Street sector by the likes of the supermarkets and other large consumer brands.  But there is a tsunami that is going to overwhelm the commercial side also before long.  Insurers, business consultants, accountants, unions even, are all bigger than us and better resourced and much more astute in a commercial sense.

The future for quality legal resource is, as you mention, niche.

Sometimes, it really *is* the fault of the lawyers…

Justice secretary Ken Clarke has announced that there are to be changes to the rules on ‘no win no fee’ arrangements between lawyers and their clients. In case you’re not aware, these are the arrangements that allow “lawyers” (for which, by and large, read the call centres of companies whose revenue comes from the referral of potential claimants to solicitors) to advertise their services as offered at no cost to the prospective client. These arrangements, properly known as “conditional fee agreements”, mean that should a claimant be unsuccessful in his or her claim, they are not required to pay anything to their lawyers for the services rendered. In return, lawyers receive a nice bonus should the case be won.

Shamelessly, Clarke appeared on the Today Programme (@r4today) this week, decrying the fleecing of the NHS and poor innocent insurance companies who have had to pay multi-millions on an annual basis to crafty lawyers. ‘This is not how it was supposed to work’, he shouts, ‘and we’re all paying’. But let’s be clear, it’s not just the lawyers that benefit from these arrangements. There are the Mercedes dealers, the country clubs, the Rolex retailers. And those corporate palaces in the centre of England’s fair cities don’t just build themselves, you know. Honestly, Clarke is supposed to be a business specialist. Isn’t he aware of the multiplier effect? We’re keeping these people in business. And if it wasn’t for no win no fee, daytime TV would be deprived of the majority of its revenue. And what would Trisha do then?

You’d think, given the explosion in litigation over the last decade, that the no win no fee agreements were invented by a Conservative government. Actually they were, but they only really took off in the late 90s when the Labour government decided to do away with Legal Aid for most forms of litigation. By way of compromise for those complaining that access to justice would be denied for those most in the need, who are usually those who are least able to afford a lawyer to advise and represent them, the administration decided that “success fees” earned by lawyers would be recoverable from the losing party. In addition, because of the principle in English Courts that the loser pays the winners legal costs, it was also proposed that insurance premiums charged for covering the risk that a case might be lost should also be recoverable.

Quite possibly, back when these reforms were first contemplated, not even the most optimistic lawyer could have expected the litigation revolution that was to follow. This was because of the innovations that followed.

First, “claims farmers” were allowed to enter the market with glossy TV advertising. Anybody contacting one of these companies claiming to have what looked like a dead cert case was then sold on to the highest bidding firm of solicitors with all the grace of a sheepskin clad football agent approaching the gates of Old Trafford with his arm around the latest wunderkind. This was the reality of access to justice in the post-Thatcher age.

Second, and I still sometimes have to pinch myself about this, the legal expenses insurers came up with a tremendous wheeze. The premiums that clients had been expected to pay for the insurance cover that would eliminate their risk altogether were themselves insured. And the payment terms were that the premium would be paid at the end of the case. If the case is lost, the insurance policy pays the premium. If the case is won, the losing party pays the premium. And then the same companies would provide finance to pay the fees of barristers and expert witnesses and insure those costs too. Lost cases are rare, but you can imagine that the hit an insurer takes when such a case arises is such that the premiums charged are massive. And the losing party, or, more usually, the losing party’s insurer, foots the bill. Oh those poor insurance companies, being fleeced by, er, those other insurance companies.

Given the availability of “legally trained experts” (honestly, this is what one of the present crop of claims farmers purports to offer in its current TV campaign), able to assist anyone with the semblance of a claim with no risk whatsoever AND the guarantee that all damages awarded will be safeguarded for the claimant (this being de rigeur after the scandal of the miners required to pay the referral fees to their claims farmers out of their damages), who can possibly be surprised that the litigation culture spread through England and Wales like swine ‘flu?

So, was this access to justice? Well, not if you were wanting to pursue a commercial litigation or intellectual property claim, where costs remained high but because of the greater number of variables, very few lawyers were brave enough to offer no win no fee agreements. I tried twice and both times had my fingers burned by clients that, how shall I put it, strategically withheld information that, when uncovered at the crucial time, utterly undermined their cases. I never did it again.

And not for the Defendants. Not any Defendants. Not that conditional fee agreements are forbidden for Defendants. It’s just that, if you were to represent a Defendant, how would you go about describing just what constitutes success? Litigation is not a black and white issue but is pursued in shades of grey. And not for two of the key areas of justice for private individuals: family, where legal aid remains, and criminal proceedings, where that legal aid is universal, regardless of means. And in employment matters, lawyers have always been allowed to act in return for a share of the winnings, something that is strictly forbidden in normal court proceedings.

And obviously, if your case is tricky; if you have clearly suffered but the evidence pinning the blame on someone else is suspect; if you have been injured but that has merely aggravated a pre-existing condition, you’re going to find your choice of lawyer radically reduced. That is, if you ever had a choice, because the lawyer that you get to use will probably be dictated by your insurance company or by the claims farmer you called.

Access to justice? Not really.

Does it have to be this way? No. I’m not saying that lawyers don’t do a good job. Of course they do. And anybody thinking that running a law firm is a licence to print money should wake up and smell the freshly ground. Times is tough, folks. In personal injury and most other areas as well. There are loads of conscientious lawyers whose primary aim is to find a way to help their clients to secure their objectives and only then try to make it pay. Dozens, literally.

In the dying days of the last Labour government, then Justice Secretary Jack Straw commissioned a report on the chaos that is the field of legal costs from Lord Justice Jackson. The resulting Jackson Report recommended that success fees and insurance premiums cease to be recoverable from the opponent and that to make the system work, levels of damages be lifted by 25% across the board. So the insurers still pay, but at least the claimants have something at stake and therefore have an incentive to look around for the best deal. And the lawyers that will lose out are only those that have made a living out of litigating over the levels of costs recoverable.

Somehow, I still don’t find this satisfactory. It still doesn’t address the imbalance between claimants and uninsured defendants, nor does do much to enable those engaged in commercial disputes find competent yet affordable representation. For some reason, we have chosen to make it so much more complicated than the way it works in the USA, where a lawyer can take a percentage of his or her client’s damages and businesses know that they have to budget a certain amount for defending litigation, and then keep skilled lawyers on retainer for that very purpose. The USA is where the phrase “ambulance chaser” was invented. It’s also the home of community justice, public law centres and the like. You don’t find many over there complaining about the absence of access to justice. They just get on with it. And if a party does behave really badly, an American court can still order that party to pay the other’s legal costs, but that is very much the exception.

The problem is that we are building not on virgin ground but with the conviction that we must imitate what existed before. And what existed before was an unsustainable legal aid system that protected the legally aided party to the extent that in 99% of cases, the losing legally aided litigant could not be required to pay the winning party’s costs. And yet were the result to be reversed, the losing party would have to repay the Legal Aid Board for the subsidies it had paid to the opponent’s lawyer. Compared with that, the current conditional fee system seems sensible, even though allowing a Claimant to pursue litigation without having to put anything on the table him or herself is to pursue a system that has no real foundation in reality. And in the realm of unreality, the bizarre is merely ordinary. Conclusion: lawyers are afraid of the new system not because there is any real jeopardy to access to justice – at least no more than there is already – but because they don’t want the job of having to explain to their – our – clients that they will have to invest in the process themselves. And what of the claims farmers? Let them find another market to leach on, say I. Something tells me they won’t go hungry.