Monday, January 3, 2011

Beware:Legal Help and Legal Fees

One of the items that technical founders underestimate and frankly do not understand, is importance of using legal help and also importance of controlling legal fees.

Not having proper agreements and legal setup at the beginning of the company existence will cause many problems going forward.

One of the simple cases: When company is founded, it is very important to set up equity vesting schedule - if you just say that 100% of equity is yours, or split it among the founders, any coming investors will request recapitalization and will re-establish proper vesting from scratch, so after years of work you may end up vesting from zero.

It is best to find legal help through trusted recommendations. Also, you need to make sure that your lawyer has specific experience and references related to work with start up companies - especially your corporate lawyer.

Lawyers like doctors - you need corporate lawyer to deal with company matters, you need IP layers to work with your patents and at some point you many need a litigators well.

Also, as a founder, make sure to retain services of your personal corporate lawyer.

Understand this very clearly - company corporate lawyer is NOT your personal corporate lawyer.

When you starting the company it may seem that way, but you need to recognize clearly - your interests are NOT the company interests. They are aligned in 99% of the cases, but the last 1% is what really matters. Matters especially when investors are being involved.

Silicon Valley is full of stories when founders are totally diluted and left with nothing while companies are sold for 100's of millions of dollars, or when companies are liquidated by investors because they thought that profitable company is progressing too slow for their portfolio.

One sensitive matter here is IP. Founders are brainwashed, that IP should be automatically assigned to the company. The question is WHY? Of course, your business partner would want this, or investors may want this too. But this is clear conflict of interests. Why to do this immediately and to create a huge personal risk exposure?

There are many better options. For example: You may lease IP to your company (for annual fee with interest) and sign agreement that you'll assign it after initial investment of over 1M or even after exit of over 5M, etc (some reasonable condition). This way, if company have to shut down, your IP is not part of the assets and can not be taken from you. Also, since company would own you some money, you'll be establish yourself as one of the creditors. This will also prevent unscrupulous investors from "sending you to cleaners"

Remember, as a technical founder your ideas and your IP is what you have and contribute from an asset perspective and you need to keep it as long as possible and to make sure to be paid for it fairly, not to surrender it just because your partner or corp lawyer says so,

Another thing - always think not just about best possible outcome, but about worst possible outcome as well and make sure to be ready for it. What would happen if your partner leaves tomorrow (for any reason) - can he just walk away with all the equity? - What would happen with the company then? (this is why you need vesting, proper vesting cliff and a right of company to purchase his shares for a very small price, etc). Overall, you need trusted qualified legal advice.

Now in regards to controlling fees - you need to control your talking, control your agenda and control / inspect your legal bills. If you planning to engage into casual conversation with your lawyer - literally - check if this is billable or now. Lawyers derive lots of their income from phone conversation - so be extremely clear, short and precise!

If you plan to engage lawyer into some kind of clearly defined activity - like asking to prepare a document, etc - always ask how long would it take, as well if he can assign this task to associate with the much lower rate.

If your lawyer is dealing with something that can be very taxing for company finance if billed by an hour, request this to be bullied as a project with the cap and in general, try to assign cap (top limit) to the project.

At the end I would like to recommend amazing book that I found after long search - would I read this book earlier, I would have saved thousand of dollars -

Taming the Lawyers: What to Expect in a Lawsuit and How to Make Sure Your Attorney Gets Results (Taking Control)