Why You Really Do Need A Startup Lawyer
If you are trying to decide whether you should hire a startup lawyer, you should begin by considering that tech startups are fundamentally different from conventional types of businesses. The legal issues tech startups face, whether it’s choice of entity, issuing stock, or taking on investors, require very specific solutions. Failure to handle these issues properly can have severe consequences for you and your startup.
When you break your leg, you don’t go to a dermatologist. Lawyers, like doctors, have specialties. A lawyer that handles criminal defense, or civil litigation, or your will, most likely doesn’t have the knowledge and experience that tech startups need. Even a lawyer that primarily handles conventional businesses like medical practices, restaurants, consulting firms, and the like, may not have the right knowledge and experience needed to work with tech startups.
The mistakes the wrong kind of lawyer makes can cause far-reaching problems down the road, and can be expensive to fix. For example, setting up a tech startup as an LLC, rather than a corporation, will cost you more money later when you have to convert the LLC to a corporation. Moreover, any qualified startup lawyer knows that LLCs don’t qualify for the favorable capital gains tax treatment under Section 1202 for “qualified small business stock,” but lawyers that don’t routinely work with startups may not realize this. Or even be aware of the issue. So when a lawyer sets up a tech startup as an LLC, the founders are losing valuable time to apply to the Section 1202 holding period, and may ultimately never qualify for the favorable tax treatment.
When deciding whether to hire a lawyer, you should ask yourself whether you want someone who can help you understand your ideal organizational structure. Most importantly, you should ask yourself who will be your lawyer when you talk to investors that could be essential for your business to expand and thrive.
How A Startup Lawyer Can Help You
At the most fundamental level, your startup lawyer can help you choose the ideal type of business. For tech startups, this will usually be a Delaware corporation. That’s what your investors will expect, so you don’t want a general practitioner to reflexively set you up as an LLC, just because that’s what he or she always does. It will cost you more money to fix that mistake than you would have spent forming your startup property. Your startup lawyer can also advise you on using vesting with stock grants to founders, employees, and developers, to protect the company from someone leaving after a few months with a large chunk of company stock.
One of the most significant benefits of hiring a startup lawyer is risk management. A skilled startup lawyer will often have experience helping emerging businesses in various industries, providing experience that spans solving common mistakes to more complicated problems.
This experience may often include helping you draft more individualized employment contracts, leases, or intellectual property assignment agreements that avoid problematic “standard” or “boilerplate” language, like non-competes (which are illegal in California). Attempting to use templates or other standardized legal documents without a lawyer’s advice is a common mistake we genuinely want to help you avoid.
Your attorney may also help you better understand how to structure compensation and benefits for founders, officers, and employees, including granting company stock and stock options. Even though many entrepreneurs are risk-takers, a skilled startup attorney is meant to help you manage that risk so you can accomplish the goals you set out to complete.
Aside from assistance with formation and risk management, your startup lawyer may also help you develop your strategic vision for your new business. A skilled attorney will generally understand how your business may survive within the context of your chosen industry. Part of this understanding will include the current and future business environment that may impact your startup’s growth. In this sense, your startup business lawyer may often serve not only as your legal counsel but as an experienced mentor who can help you avoid common mistakes.
Contract Preparation and Review
Perhaps one of the most apparent and underestimated benefits of hiring an attorney is the ability to make sure your business avoids any potential legal disputes over contracts for services, supplies, or space. Your attorney can help you draft agreements with employees, partners, or investors so that your organization is adequately protected.