Legal Matters

As a startup founder/CEO, you quickly discover that you need to develop a working knowledge of legal contracts because there are so many contractual agreements that you need to review, and yet hiring an attorney every time you have a non-disclosure agreement or some other contract is often beyond the financial resources you have available.

Starting a company demands an incredible diversity of knowledge and skills to the point that practically no one has the breadth of skills required the first time they jump in and start. One area that startup founders are often not well-equipped for is reviewing or preparing contractual agreements, so this blog is about ways to get moving up that learning curve effectively and cost-efficiently.

Let’s start with a few clarifications:

1. There is a difference between corporate law and contract law. Corporate law covers what kind of a corporation you are forming, articles of incorporation, bylaws, and funding documents like convertible notes, SAFE agreements, stock purchase agreements, etc. Corporate law is so complex and nuanced that you must hire an experienced corporate attorney to assist you or run the risk that you will be taken advantage of by sophisticated investors or that sophisticated investors will decide that you do not know what you are doing and will refuse to invest. You cannot skimp on legal fees and hope for the best in this area.
   
2. There is a difference between employment law and contract law. Employment law covers employment applications, employment agreements, independent contractor agreements, confidentiality and assignment agreements, separation agreements, employee handbooks, Federal and State ID and tax forms. Again, this is an area where you likely need some support because the laws related to discrimination, compensation, labor, hiring, termination, and workplace safety are complicated, and you cannot afford to mess this up. These agreements will be part of fundraising due diligence as sophisticated investors like venture capitalists use lawyers to ensure everything is in order. For many of these, you will only need to get standard templates that you can then apply repeatedly. However, you should ensure you get customized templates for your business and involve an employment lawyer if you need to fire someone.

With that out of the way, many agreements you will need to legally review fall under the heading of contracts. Generally, a contract is a written agreement used when there is an exchange of value between two parties that is signed when one wants to buy goods or services from another. It protects everyone involved in a transaction by outlining rights and responsibilities and clarifying the scope of work, quality control, legal jurisdiction, and payment terms. One of the most common is a non-disclosure agreement between two companies to discuss a possible business transaction. Another common type of agreement is a standard licensing or purchasing contract from a vendor, which can include fixed-price, cost-plus, and time and materials contracts.

When you build a startup, you will contract various services and products to get the job done. Deciding when to engage an attorney becomes a vital judgment call because attorneys are expensive. Most early-stage startups do not have the financial resources to send every agreement they sign to an attorney for review, so ultimately, this becomes a risk assessment that the founders need to make. Here are some reflections on how I have made these decisions:

• Do you or does someone on your team have some experience with business law? I studied business law as part of getting my MBA before I ever started forming companies, and I also started my career in corporate banking. Both of these experiences exposed me to the underlying legal concepts related to business law. Not every founder has these experiences, but sometimes they have a mentor, colleague, or co-founder who does. You will undoubtedly have a leg up if you have learned about these principles before you begin founding. If it is all new to you, be on the lookout for opportunities to learn enough so that you can review simple documents like a standard non-disclosure agreement for anything unusual.
  
  
• Do read the contracts before you sign them. I know this may sound silly, but, as consumers, we become very accustomed to just clicking “yes” to software licensing agreements and other purchasing documents without doing a detailed read. You should NOT do this with agreements you are signing on your company’s behalf, especially not those customized for your company. The more contracts you read, the more you build your experience base. Over time, you will get better and better at identifying standard terms versus unusual ones. And, if you end up using a lawyer to review the document, you should learn from every edit they make, expanding your understanding of legal concepts. Ask questions and understand the rationale behind the recommended changes.
  
  
• Regardless of where you start in terms of having some personal experience with contract law, make sure you have access to a commercial or contracts attorney, ideally one with expertise in your industry. If you get stuck or see something that seems concerning, get some expert legal input. Sometimes there are standard terms that are industry-specific. One time my CFO and I turned ourselves into pretzels trying to figure out how to respond to one of a pile of legal documents that a pilot customer wanted us to sign. We made it endlessly harder on ourselves until we connected with an industry-specific attorney to get some advice. It turned out that what we thought was a complicated representation we needed to make (or maybe couldn’t make!) was much more straightforward in our industry than we realized. The industry-specific attorney quickly cut through to the nub of the question and helped us address it and move forward with signing up our pilot customer.
  
  
• Judge when to pay for a legal review based on the risk of the agreement. Arguably, you would consult a lawyer routinely in an ideal world with endless resources. However, this is rarely the case in a startup, so in the absence of an in-house counsel or a massive bank account, you will need to decide when to take some risk and review a document yourself and when to pay up for legal help. Sometimes, you should just review what the documents say because you will not have enough leverage to make any changes, and it is a sign or don’t sign situation. For example, as a tiny startup, you are unlikely to get a massive corporation like AWS, Microsoft, or Bank of America to change their legal documents, so you will hope these documents have already landed in a place that you can agree to sign. Sometimes, you will lack leverage, and there will be some genuinely onerous terms that the other party refuses to change, and you will have to decide whether to take the business risk of signing. I remember one such example where I was licensing the core technology that formed the foundation of the business and was forced to agree to indemnify a public university. It would have killed the company if such a claim was ever enforced. I discussed it with my attorney, understood the risks, and signed anyway, because we would not have the startup without the technology license, and I thought it was most unlikely that the indemnification scenario would actually occur. Finally, there are times when the contract is pivotal to the business’s success, is customized to the specific situation, or is high-value. In these cases, the risk is high enough that it will likely make sense to pay an attorney to work with you to ensure everything is handled appropriately.

When someone dreams of being a founder and decides to take the plunge, they are unlikely to ask themselves if they have enough legal knowledge to start a company. Yet, for many first-time founders, navigating a startup’s legal dimensions quickly emerges as a complex skill that demands attention to get right. This is one area to put on your continuing self-education list since the negative consequences of poor decisions can be significant or expensive. You can also help mitigate your lack of experience by adding team members like an experienced CFO when you can.

Disclaimer:  Just a reminder that I am not a lawyer, and you must make your own judgments about when to secure legal advice.