After tons of questions on this topic, I’ve decided to talk about the best time a business should invest in a lawyer, and how to save money where possible.
Costs Versus Return
Startups struggle deciding whether to spend on legal services because these services don’t bring immediate rewards. Hiring a lawyer is a short-term cost that doesn’t increase revenue right away (lawyers reduce risk and costs in the medium to long term).
First let’s talk about the benefits of hiring a good lawyer. Your lawyer should help you create solid plans to 1) avoid losing money, 2) not get taken advantage of, and 3) not get your original content ripped off (websites, brands, blog posts, course material, etc.). A good business lawyer also makes you look much more credible to investors and helps increase the value of your business by documenting and safeguarding all your proprietary and original work (intellectual property).
That said, founders are typically risk takers, or they wouldn’t be doing what they’re doing, so their natural tendency is to spend startup capital on product, marketing and sales, and things that will generate an immediate return.
Still, there are a few areas where you really should consider using a lawyer. The short term financial cost in these instances is outweighed by the significant risks to your business if you are not legally protected in the right way. Here are some guidelines.
Business Terms and Conditions
You’ve got to be careful with these. Your terms and conditions ensure that you have a clear agreement in place for visitors. They allow you to limit what visitors are able to do with the information and intellectual property on your website. At the same time, well-drafted terms and conditions minimize the risk of visitors taking legal action against you or your business as a result of their use of your website.
At the end of the day you need to make a cost/benefit decision based on where your business is at. If you’ve got a little bit of traction, then the cost of getting your terms drafted early on is probably worth it. A couple thousand dollars isn’t going to be the difference between your company surviving or not, but being sued in your startup’s infancy could be.
If there’s one thing you should get a lawyer to assist you with it’s your business terms and conditions.
Company Incorporation and Shareholders Agreement
If you’ve just started brainstorming ideas then there’s really no need to incorporate. Only do this when you’ve settled on the business idea you’re definitely going to stick with.
Incorporation isn’t as clear cut as some websites lead you to believe. This is not an area that should be automated. Choosing the wrong legal entity can cost you tens of thousands of dollars in taxes and franchise fees that you could have saved if you used a lawyer to choose the most appropriate legal entity for your business.
If you incorporate, and there is more than one shareholder, it’s worth entering into a shareholders agreement as quickly as possible. Things move quickly in startups, and founders quit, so you should get a basic framework set up as early as possible. Also, if you’re planning on raising capital make sure you tell your lawyer so the agreement can be drafted with that in mind.
This is an area where people often think they can take the DIY approach, but most of them do it incorrectly. How would you feel if you spent tens – even hundreds – of thousands of dollars on your brand, product/service names, and even slogans and phrases that you could be legally forced to give up or that your competitors may freely use? That’s why the investment in a good trademark attorney is definitely worth it. Remember to ask your lawyer about a trademark clearance prior to filing a trademark application.
When Not to Spend on a Lawyer
As a new company, you’ll need ad hoc legal advice along the way. When legal issues come up you need to make a judgement call on whether getting a lawyer’s help is worth it. A good example is non-paying customers. If a client owes you a couple of hundred dollars, it’s usually not going to be worth retaining a lawyer since you’ll end up spending close to the same amount on legal fees. If the amount owed is in the tens of thousands, then clearly seeking a lawyer’s assistance may make sense.
To Summarize When to Use the Big Guns (read: a business lawyer)
Some entrepreneurs spend tens of thousands of dollars on legal services for complex documents for their business. At the other extreme some of you have probably drafted your own legal documentation, and ended up being sued or in a mess because you’ve not adequately protected yourself. Try to keep a bit of cash aside to get your basic legal needs sorted. When you start to see some steady revenue or raise your first round then you can tighten things up even more.
Since your legal needs are just as unique as the brand you have worked so hard to build, work with an attorney who understands your vision so you’re set up for success.