Hiring a practical lawyer who is well-versed in the issues affecting emerging companies can be a smart business move for startups. Here are my top five reasons every emerging entrepreneur should hire a lawyer – and the right one.
1. A smoother due diligence process with investors
Most startups will need to raise money from outside investors, often in multiple rounds of funding. Sophisticated investors will conduct due diligence on the company prior to investing, and will request copies of entity formation documents, patent and trademark filings, material contracts, etc. Producing insufficient documentation in the due diligence process can be a huge red flag and may ultimately derail the investment. Involving your lawyer in these important matters for your business will help ensure that the due diligence process runs smoothly, and will give your prospective investors the comfort they need to stroke the check.
2. Tap into the lawyer’s network
A good startup lawyer will help startups with more than just their legal needs; they will also allow promising startups to tap into the lawyer’s network. Startup lawyers with lots of clients or who practice in a large firm often have relationships with potential investors, strategic partners and customers. Good startup lawyers recognize the value of making introductions to help their clients succeed.
3. Be smarter about structuring founder relationships
A good startup lawyer will help founders navigate issues with entity formation and, most importantly, will help founders structure their legal relationship with one another. Investors will tell you that the team running the startup company is perhaps even more important than the startup idea. It is crucial for founders to think carefully about how they want to allocate equity among themselves, and what will happen to that equity if a founder decides to leave the company. Lawyers are often called upon to assist with founder divorces, which are generally messy and painful. Thinking through founder separation at the outset, when everyone is getting along, can make the founder divorce process much cleaner and more straightforward.
4. Help founders be more strategic
Often founders can act with single-minded focus to achieve short-term goals, such as completing development of the product, garnering investor interest or closing a deal with a customer. This is especially true when a startup is new and has limited manpower. A good startup lawyer can act as a member of the team and help companies take the long view. From developing strategies for the protection of intellectual property to evaluating various funding options, a good startup lawyer can help founders be more thoughtful about their business.
5. Comply with the law
At its most basic level, hiring a lawyer can help founders ensure that they comply with the law. Founders don’t know what they don’t know, and a trusted adviser can help startups navigate the legal landscape and help ensure, for example, that the company doesn’t violate the complex securities laws when trying to raise funds and issue stock. Legal compliance is especially important for startups operating in highly regulated industries, such as the health care industry, where it is easy to get tripped up.
Emily Brackstone is a shareholder with Baker Donelson of Memphis, Tenn., and vice chair of the firm’s Emerging Companies Team. Her practice is concentrated in areas of corporate law, mergers and acquisitions, venture capital fundraising and fund formation, and health law. She serves as corporate counsel to emerging companies and more established businesses, advising on various issues related to entity formation, corporate governance, general business contracts and equity fundraising. She may be reached at (901) 577-8274 and by e-mail.