It’s hardly surprising that lawyers recommend emerging companies secure good legal counsel. However, even top early-stage funds and leading business publications stress the importance of quality legal advice to start-ups.
Of course, early-stage companies also face the realities of early-stage operating budgets. Unnecessarily attacking every issue with a battalion of lawyers is a great way to burn through capital, time and relationships.
Given the need for balance, here are five ways for emerging companies to make the most of their legal spend:
Seek fixed or capped fees for standardized work. Many top law firms provide various early-stage legal services for pre-agreed prices, including incorporation, form terms and conditions, employment agreements, trademark filing, and seed and angel investment rounds. If your firm won’t partner with you on this basis, that may signal they don’t regularly work with emerging companies.
Keep in mind that fixed or capped fees may not be appropriate for certain legal work. For example, some aspects of commercial contract or M&A negotiations are sufficiently predictable to warrant pre-agreed prices (such as preparing an initial draft agreement), but the other side’s willingness to agree to your terms is often out of your and your lawyer’s control.
Your own good forms are a good investment. Sample legal agreements are readily available on the Internet, but paying a pre-agreed fee to have your form reviewed by counsel is a solid investment. Your lawyer should ensure the contract adequately protects your company and accurately reflects the business deal you’re offering. You also may want counsel to confirm the agreement is sufficiently fair to both sides so that you’re not constantly entering into protracted negotiations.
Emerging companies can recognize significant benefits by having their forms prepared by lawyers with experience advising both mature and early-stage companies. Those lawyers have handled contracts in many different contexts, and you’ll be receiving large-company legal advice for a start-up fee.
Allocate legal work efficiently. Mature companies typically employ an in-house legal team to negotiate contracts. By contrast, early-stage companies often must rely on external counsel that are paid an hourly rate for contract negotiations.
Try initially discussing disputed matters at a business person-to-business person level, rather than instructing lawyers to trade drafts. If you and your counterparty agree changes, strongly consider having the other side’s lawyers revise the contract, and then review those revisions yourself. If the changes are clearly unacceptable, send back the contract. Only when you believe your counterparty has correctly implemented the agreed changes should you pass it to your own counsel to confirm your initial analysis, make any further revisions, and help you finalize a few highly technical provisions (e.g., intellectual property indemnification).
Pick your battles. Keep an eye on the bill if you’re negotiating a contract for which fixed or capped legal fees may not be appropriate. It’s not worth fighting every point if the deal’s strategic or monetary value doesn’t warrant it. Telling your lawyer to do whatever it takes to get the best deal possible may not be an optimal use of resources if it results in a £25,000 invoice for a £50,000 transaction.
Understand the US. As you achieve success in the UK, you may consider opportunities presented by US investors, customers and commercial partners. The tips above for managing legal budget apply equally in the States, but the potential risks of not taking proper advice are greater.
The US approach to litigation fuels an aggressive business and legal culture. Unlike the UK, each party to a US lawsuit generally bears its own legal costs. In other words, if you’re sued or threatened with US litigation, you’ll need to pay your own way in court -- even if you’ve clearly got the better case. The party threatening you knows you’ll likely settle instead.
Business relationships in the US reflect this dynamic, and the threat of litigation often is used as leverage to achieve favorable business outcomes. To manage this risk, you should: (a) ensure your contracts clearly define each party’s obligations; (b) establish internal arrangements to ensure your company’s compliance with those obligations; (c) acquire appropriate insurance coverage (although this may not protect against certain contract-based risks); and (d) obtain legal advice intended to avoid potential problems, rather than simply reacting to current problems.
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Running an emerging company offers no guarantee of success. But obtaining quality legal advice on a reasonable budget creates a strong foundation from which to build. Managing legal risk for the right price will allow you to devote more time, money and mental energy to core business and market success.
This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected] or via LinkedIn here.