Every new business will need a good lawyer, so it's crucial that you get the best advice your budget allows. Making a mistake can mean wasted money and time to get contracts redone and equity deals renegotiated. To make the process a little easier, we’ve identified five common mistakes that startups make as well as the clearest ways to avoid them.
1. Hiring a lawyer too soon. Some startups hire a lawyer before they know what they really want or need from their counsel. To learn more about the process, consider approaching a pro bono legal transactional clinic. Those geared to service entrepreneurs at a local law school can help with common startup needs like structuring entities and negotiating contractual agreements, explains Patricia H. Lee, director of the Entrepreneurship and Innovation Law Clinic at West Virginia University law school. In addition, the WVU transactional clinic is one of 27 active schools in a pilot program launched by the United States Patent and Trademark office that allows law students to practice intellectual property law, including drafting and filing trademark applications under the direction of licensed faculty supervisors. Startups save a considerable amount, paying just the $275 trademark filing fee for a single trademark and not the accompanying legal fees. However, availability of these programs nationally can be a problem. Also, students might only work at a clinic for two semesters, says Lee.
2. Hiring your Uncle Lou. You might want to hire an old college friend or a relative, but you should consider a specialist. Tom Cervantez, a partner at Business Counsel Law Group and a founder of Harvard Angels, an angel investment fund for Harvard Business School Alumni, concurs and adds, "If you hire someone that isn’t an expert in your area, they might not know the nuanced norms or structures, which can lead to mistakes -- and that lack of savviness on your part looks bad to investors down the road." To avoid gaffes, speak to other entrepreneurs in your field and ask for referrals. Cervantez and Lee suggest interviewing several lawyers about a range of topics, from the types of clients and cases they work with, to how they communicate and if they have time for a new client.
3. Believing that bigger is always better. Large law firms can be attractive to first time entrepreneurs but know that you might be paying top dollar for the lowest tier staff since partners often work on larger cases. "If you’re in the minor leagues you’re not going to get major league pitchers," Cervantez says. Lee urges startups to search for smaller firms that offer value and expertise. "There are great boutique firms that specialize in things like patent and intellectual property law," she says. Many of these boutique firms also contain partners that left large firms to strike out on their own. Go for the big guns later when your company is larger, making a major move or facing a serious lawsuit, since a big name firm may more resources and can be more likely to scare the other side.
4. Not haggling on fees. It might seem unimaginable to negotiate for an old-school trade like law, just remember: You're hiring them just like you would any contractor. There are many different arrangements for payment including monthly retainers, hourly billing and flat fee projections. You can also use equity in your company as a down payment. "Some firms will defer a client's payments through the process of seed financing and basic company setup for 1 percent of equity," Cervantez says. If pursuing that route, be sure to look at the fine print in the contract and use their services carefully, being aware of any fee caps. And watch out, experts warn, since you're essentially dining on credit.
5. Seeing a lawyer as just a lawyer. If you're planning to offer equity in return for deferred payments, then you're basically taking on your lawyer as a business partner and you should vet them as such. Make sure that they not only have expertise in your field, find out if they have contacts and knowledge that they can pass on to you. "When I work as a lawyer for a startup, I want to make sure you get investors," Cervantez says. "I’m gonna make a bunch of introductions and try to open more doors." Also, most entrepreneurs are going to do more than one startup in their lifetime, so their lawyer can become a seasoned advisor as they move from one idea to the next.