Using Lawyers Well

Lawyers can be a tremendous resource for a startup CEO, but it is essential to use them well.  Knowing the role of a corporate lawyer can make all the difference.

An Epiphany

Nearly 30 years ago, when I was getting my MBA from Kellogg Graduate School of Management, I took a negotiations course. For one of our last mock negotiations, each business student was paired with a law student (taking a parallel negotiations class from a legal perspective). It was an illuminating experience. As business students, we had already done many mock negotiations amongst ourselves. After some back and forth, we would arrive at a mutually agreeable resolution. However, once we had the lawyers in the room, we lost sight of the negotiation’s essential business elements, went down legal rabbit holes, and took far longer to reach some semblance of agreement. It was an eye-opening experience.

Understanding the Role of Corporate Attorneys

In my negotiations course, I learned that the business principals in a negotiation have different roles from the attorneys. Because of those differences, we need to focus on different things to execute the process successfully.

Corporate attorneys bring specialized expertise and insight to the table. As experts in the law and contracting who have often seen many deals worked out, lawyers know how to structure legal documents in an enforceable way, identify the relevant laws and legal risks buried therein, and focus on protecting their clients’ interests those risks. Good ones are conversant with the options and legal strategies that can be employed for addressing the risks – and often have an excellent sense of what they would be advising the other side if they happened to be hired by whomever you are negotiating with.

Some Examples of Working with Lawyers

• Insightful Help with a Series A Negotiation: As we considered which points to push on while negotiating Series A legal documents with our future lead investor, my attorney helped me understand the scope, nature, and potential consequences of various terms.  He offered helpful insights about when the VC’s attorneys were offering industry-standard terms that were unlikely to get changed. He pointed out that we might not even want to because there is value in landing on simple, clean, expected terms. On other items, he identified when the VC’s attorneys were pushing for terms outside the norm. However, in the end, I was the one with the relationship and common interests with the lead VC.  It was my job to know what my lead investor alternatives were, to understand how valuable this particular lead VC was, to determine the relative balance of power in the negotiation, and to decide how many and which of the terms I wanted to push hard on and which ones I should just let go.  My attorney’s role was to help me understand my choices and their implications from a legal perspective.  My part as the business lead was to decide what business risks and compromises would be wise to take to achieve our objectives.
  
  
• Inappropriate Guidance:  Sometimes, however, people ask their lawyers for business advice. While some lawyers may be qualified to offer opinions on certain subjects, many are not. For example, I talked to a CEO who was trying to sort out a compensation mess created when a corporate attorney reinforced the erroneous perception of appropriate compensation levels for an academic founder, creating an unbalanced compensation structure that undermined the company. While ultimately the CEO retained different counsel, she still had to deal with the costly aftermath of the inappropriate lawyering. 
  
  
• Taking Risks:  When I was leading an early-stage startup company and negotiating a licensing agreement, the university lawyers insisted that my tiny startup take responsibility for indemnifying the university should they be sued due to our agreement. Because the legal liability was potentially devastating, my attorney insisted on pushing back against the major university on this point, even though they had already declared it nonnegotiable.  Ultimately, I had to choose between accepting a potentially massive risk or not getting the license I needed to secure the technology that was the basis of the company. The concept of a brand-new, unfunded startup indemnifying a major university was ludicrous, but it was a make-or-break license for the company. Ultimately, I instructed my attorney to cease and desist because I was willing to take the business risk. I figured that if we ever actually got sued, it would take down the company. Being responsible for indemnifying the university would merely accelerate that process rather than fundamentally changing it. That was my call as the CEO, over the objections of my attorney.
  
  
• Lawyers Who Lengthen Negotiations:  Recently, I talked with some of my peers about the impact of lawyers on negotiation timelines. One shared a story about how, in two separate instances, it took four to six times longer to get a deal done because the CEOs she was negotiating with opted to let their lawyers decide if the contract was a good idea. In both cases, the lawyers fixated on a new startup’s risks rather than the potential benefits. The lawyers raised side issue after side issue that had to be worked through while the business value was wasted as time slipped by, legal fees climbed, and opportunity costs grew. Now that startup CEO seeks to encourage potential customers to evaluate the business opportunity before bringing in the lawyers.  That allows the deal to be assessed on its business merits and provides a context and framework for evaluating the legal issues.

Tips to Keep in Mind As You Work with Your Attorney

• Deciding what business risks to take is the CEO’s job. While CEOs need to leverage their lawyer’s expertise to explore the legal issues and options, they must not abdicate their job of sorting out the business concerns and priorities.
   
• Having early conversations with attorneys is useful so you are aware of the potentially pertinent legal issues. However, make sure you do not get distracted by the legal risks and strategies until after you have determined the deal is worth doing in the first place. 

• Agree on the business relationship elements and where the value is before you tackle the contracting details. The tried and true approach is to settle the business terms first and then work out the legal nuances.  By developing a clear, business-focused, directional understanding, you establish an agreement framework before getting into the risk management of legal issues.
   
• Because deals always involve finding the middle ground between two parties, and there are always risks, any competent attorney will identify at least some. The good attorneys will help characterize the risks and identify strategies to mitigate them while not scaring their clients away from deals that should get done.  Ask yourself if you can live with the possible downside consequences? If you can, take the chance.

• Be sure to ask lawyers about the questions they are well equipped to address. Your attorney should provide analysis and options, as well as maybe a recommendation. Be clear with your lawyer how much negotiating leverage you have so that they can give appropriate advice.

A good lawyer can be a priceless partner if you learn to engage them effectively.