When I was guest lecturing at an Designing Entrepreneurial Organizations class at MIT Sloan School of Management recently, I was asked by a student who was working on developing a startup, 'when should I consult with a lawyer?' The answer: yesterday. I often hear from entrepreneurs that they don't consult with a lawyer early on because they don't have much cash at startup and the lawyer will be too expensive - I need to put my cash into other things, they say. Sometimes, this is true: some law firms deal with startups the way they deal with larger clients. By involving too many people at high billing rates with inefficient processes. This often comes from law firm structures themselves, which are not designed for representing startups.
Another misconception is that people often assume that any lawyer can advise a startup company, which is why entrepreneurs will often select a relative or friend who practices in a different area of law altogether. That lawyer will probably spend more time researching than advising and the advice may not even be relevant to the company's particular situation.
So here are some things to consider when you are starting up:
1. Choose a lawyer yesterday. Your lawyer can be one of your most important advisors, and a true startup lawyer can be invaluable. Lawyers have the perspective of working with many different companies and seeing first-hand the avoidable mistakes that early companies make. I start with entrepreneurs before they organize, because some of those foundational issues become critical to the long-term success of the company. Setting up the organization, protecting intellectual property, determining the proper equity splits (worthy of its own subsequent post), and vesting schedules are just a few of the important decisions that need to be made up front. Too often entrepreneurs jump into the work without properly considering the ramifications.
2. Don't just go for a brand name. The problem with big name firms (having worked for them) is that the person you sign up with is not always the person you end up working with. Many large firm partners have great reputations of working with successful companies, but that often means they will not have time to work with you, particularly because you won't have the money to spend. Don't get me wrong, I don't mean to say that associates are not capable and energetic attorneys, but the system they work under values time instead of results, and as a result of the billing rates that large firms are charging, you will have trouble getting any of that. There are many terrific lawyers who work with small firms or who have left larger firms to start new ones. You can do some research and find out who they are. There is a tremendous amount of information out there - particularly due to social media - and never underestimate the value of advice from other entrepreneurs and companies that have already been established.
3. Be honest with your attorney and be ready to hear some honesty in return. Working with an advisor requires give and take in order to make the right decisions moving forward. There is no one right way to set up a company, and the decisions you will be making are dependent on the people involved. You should hire a lawyer to advise, not just to be a cheerleader. And remember that you should never start a company unless you have thought about how to end it. Be prepared for some uncomfortable discussions, and know where you want to go before you start. Your lawyer will help apply his or her experience to your company, but needs to understand all of the details to do it right.
Remember above all that your lawyer and other advisors will be a valuable part of your team. Work closely with them early and often and don't be afraid to move on if it doesn't work out.