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Corporate & Tax

Tips for Managing a Tech Startup Legal Budget

One of the challenges of launching and growing a tech startup is procuring the necessary legal advice and support with a very limited legal budget, especially in the early days when the company is pre-revenue.  Here are a few pointers on how to get the most out of your budget for legal services.

Select The Right Counsel

When selecting legal counsel, it’s important to select lawyers with ample experience representing startups, not just mature businesses.  Why?  In addition to budgetary constraints, startups have different needs and strategies related to financing, growth, and risk management. This is reflected in how employees are compensated and incentivized, how business relationships are structured and the DNA of a company’s formation documents.  Lawyers who routinely work with startups understand their unique needs and will be both more effective and more efficient (and thus less costly) at setting up a startup for success and growth.

Ask For An Initial Consultation

Before engaging a law firm, ask for an initial consultation to evaluate whether it’s the right fit.  Most startup-oriented firms would be happy to have an initial conversation at no charge.  Be sure to ask:

  • What is the firm’s experience representing startups in your industry or sector?
  • How and what do they charge for legal services?
  • Based on your business model and plans for growth, what do they see as your legal needs being over the next 12-18 months and beyond?

Develop A Legal Services Plan And Timeline

Lawyers who are adept at working with startups can help you prioritize how to allocate your legal budget.  If you need $40,000 of legal work done in your first year, but only have a $10,000 budget to start with, ask your lawyer to help you understand which legal services are critical to obtain now and which can wait until a later date when the company has greater access to cash. 

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Types Of Fee Structures

A vast majority of law firms charge on an hourly basis for attorney and paralegal time.  However, some law firms offer alternative fee arrangements.  Examples are:

  • A fixed fee “startup package” that includes entity formation and some of the essential documents you’ll likely need to get started, such as an employment offer letter template, a stock option plan and forms of confidentiality and invention assignment agreements
  • Other types of services might be available for a fixed fee
  • Deferral of payment until a financing event
  • Equity in lieu of fees

Equity In Lieu Of Fees May Have Hidden Costs

In the late 90s, it was not uncommon for startup-oriented law firms to accept equity as payment for legal services.  After the dotcom bubble burst at the turn of the century, this compensation model declined significantly in popularity.  Although, some firms today are willing to accept equity as partial payment, there may be unintended consequences.  Your lawyers should be zealous advocates for the company’s interests, not the interests of any particular class of stockholders.  If your lawyers own a significant amount of stock, this could create a risk of divided loyalties.

Doing it yourself might cost you more

If you try to draft a contract, file a patent or trademark application or set up an entity on your own without competent legal advice, although it might appear to save you money in the short term, it could end up costing you much more later.  I’ve seen companies spend far more to fix their “do it yourself” mistakes than they would have spent had they engaged counsel to get things done right in the first place. In some situations they’ve become embroiled in expensive litigation or legal disputes because of the corners they cut early on.  I’ve also witnessed successful entrepreneurs lose millions off the sale price when selling their company due to mistakes made early on that could not be fixed.

Don’t assume it will save you money if you prepare the first draft

It can cost more to have a lawyer review and revise a legal document drafted by a layperson than for the lawyer to start with their own template or even start drafting from scratch.  Before you try to draft a contract or other legal document yourself, ask your lawyer to recommend the most efficient starting point.  More often than not, it will be more helpful if you provide your lawyer with a bullet point list summarizing the key business terms to help them get started, rather than you attempting to draft the full legal document yourself.

When it comes to customer agreements and other repeatable relationship structures, invest in good templates

For agreements with customers and other types of relationships where you expect to have a similar relationship with multiple parties, invest in the preparation of template agreements that are designed to fit your business.  For even greater efficiency, ask your lawyer to structure your templates so that all customizable business terms (e.g., prices, quantities, etc.) appear in an exhibit or appendix, separate from the business and legal terms that are unlikely to change from deal to deal.  This will make it easier for you to customize the template each time you use it for a new transaction.

When it comes to unique business relationships, negotiate first and draft later

When entering into a unique type of business relationship, consult your legal advisors early to get their high-level advice on potential structures and terms.  Then, after you and the other party have negotiated the fundamental business terms,  ask your lawyers to prepare an initial draft of the  full contract.  This will minimize the revisions your lawyers have to make and thus reduce legal costs.  Although it’s normal to negotiate changes after the first draft has been prepared, ideally those changes would be to fine tune the details, rather than to rewrite significant portions of the contract.

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