Suit Up!

Getting legal

Legal advice is good for you. It’s even better for your lawyer, so you really need to know what you are looking for, if you don’t want to pay too much for too little. That’s why I’m going to dispense what little advice I can give about getting legal and your new startup company.

Do it professionally

Software companies should hire lawyers for QA positions. Honestly, if I could afford it, I’d have a lawyer write all my unit tests. They are experts at finding and defining all the little one-of-a-kind cases that you just wouldn’t bother with normally. One of the founders wants to work part-time? Gee, I wish we’d thought of that before we started working! Good thing your lawyer forced you to discuss these things when you were going over the Founder’s Agreement.

Do it early

The Founder’s Agreement is the first legal paper you need for your company. The Founder’s Agreement covers the basics of the relationship between the founders. It’s a good idea to discuss these things over, and a written agreement is really a good way to get these things settled. Dharmesh Shah has a great list of things that should be covered in this agreement:

  1. How should we divide the  shares?
  2. How will decisions get made?
  3. What happens if one of us leaves the company?
  4. Can any of us be fired?  By whom?  For what reasons?
  5. What are our personal goals for the startup?
  6. Will this be the primary activity for each of us?
  7. What part of our plan are we each unwilling to change?
  8. What contractual terms will each of us sign with the company?
  9. Will any of us be investing cash in the company?  If so, how is this treated?
  10. What will we pay ourselves?  Who gets to change this in the future?

Also, your lawyer can help you incorporate your business. I personally believe in binding contracts between founders at an early stage. This create a kind of commitment that just isn’t possible in any other way. By creating your shared company, you now own a part of something that isn’t just talk and ideas. Best of all, it is a vessel for money. Having a company is the best way to legally get money from customers and it’s also a prerequisite for any funding round (though, truthfully, when you get funded you have plenty of time to deal with legalities).  However, never underestimate the power of paying customers. They are the blood and life of your company. If you can’t get people to pay you, chances are you are building something nobody wants.

If you go to a lawyer who has worked with a few startups, he’ll probably have some templates ready. After all, if I can be totally frank, you guys basically want the same things as the guys he saw yesterday. And it’s a good thing, too, because that means you can get it for free.

Do it for free

Free is the new business model these days, so why can’t your lawyer cut you some slack? Well, apparently, he can. Shop around. Don’t ever pay in advance for legal advice, and don’t give away stock options up front.

Here’s the deal we’ve got, so keep in mind that it’s possible:

The law firm we work with deals with many startups, but they are big and they can afford dealing with us without taking any money up front. They allow us to run a tab for the hours we required for setting up the company. Since the papers are based on templates they’ve had ready, this was no big deal for them (or for us). If and when we manage to raise our round of seed money, they’ll do the legals for the funding agreement and out of that funding round we will pay our tab. We’ve already put down the theoretical money in our theoretical financial sheets.

Also, there’s the possibility of paying them some of the sum in stock options. Options are great, because they align the interests for your lawyer and you, however not everybody is comfortable with giving away equity. They let us chose, at a later time, what is best for our company. And they have to earn our trust before we commit.

Founding a company (here, in Israel, at least) is easy and fairly cheap. I recommend you get your papers straight before you regret it.

Suit Up!

It’s going to be legendary.