This is a great informative blog post. Most start-ups don't know what they need, but there are many legal issues they face and have the right lawyer is crucial. Great advice.
Hiring and working with a lawyer is often confusing and daunting, especially if you’ve never done it before. But when you’re starting a business, it’s crucial. With the right expertise on your side, you can feel confident you’ve got your legal ducks in a row as you’re getting down to business.
We sat down with start-up lawyer Steve Kaplan to get the low-down on how to choose a lawyer and what to expect from the attorney-client relationship:
1. What should new entrepreneurs look for when hiring a lawyer?
First and foremost, look for “fit” (i.e., someone you trust, get along with, enjoy working with, feel has an interest in you and what you’re working on, and can relate to you). Referrals are often the best place to start.
Just as important, you want someone that is competent, responsive, and experienced with the types of legal issues with which you will need help. The considerations that go into incorporating a restaurant, say, can be very different from the considerations for incorporating a software company.
You also want the right seniority level for any given task. You don’t want a senior partner preparing documents for an incorporation, nor do you want a third-year lawyer negotiating with a seasoned venture capitalist for you.
Finally, you need to consider the importance of the specific matter to your business. You should be willing to spend a little more for your lawyer in a “bet the company” situation.
2. Why do start-ups need a lawyer? What are some common situations in which you would need to get lawyers involved?
At the most basic level, start-ups need lawyers to help them deal with three groups:
- The government. You don’t want to violate laws. You also need to be sure you are doing business in a way that doesn’t create unnecessary tax liability and that you pay the taxes you owe.
- Third parties and the public. It’s essential to make sure you take reasonable steps to control risk in your interactions with customers, suppliers, users, employees, and the general public.
- Each other. When multiple people form a company together, it’s best to establish the rights and expectations of the founders upfront in case there are disagreements down the line.
The most likely times for start-ups to get lawyers involved include:
- Incorporation and forming a business entity
- Hiring employees
- Negotiating contracts with customers and suppliers, including establishing terms of service for websites and license agreements for software
- Raising capital
- Obtaining patents (for some companies)
3. How do lawyers bill their time? What’s the typical hourly cost?
The lawyers most start-ups will deal with are likely in the $350-$800 an hour range, but this varies from firm to firm, obviously. Most big firms bill in increments of six minutes (i.e., 0.1 of an hour), but some charge in 0.25 hour increments. The range for hourly rates is huge. A junior lawyer at a small firm in a smaller city may charge $150 an hour, while senior partners in big firms in major cities have been known to charge over $1,000 an hour.
While the hourly rate is certainly a crucial part of the costs, you’ll also want to consider the mix of lawyers that will doing your work. Within a firm, the hourly rate for a senior lawyer can be three times more than the rate of a first-year lawyer (but for more complicated tasks, the senior lawyer may be able to do it in a third of the time). There isn’t one right answer as to the mix of senior and junior lawyers, but it is something to consider.
4. How much will it cost to incorporate your new start-up?
If you work with a lawyer, you can probably expect to pay between $2,000 and $5,000, though some firms will give discounts that get the cost below that. This can vary depending on complexity: how many founders, what “bells and whistles” will be included, whether you are doing an LLC or a corporation, and how you handle certain items, such as stock option plans, and so on.
5. When should you use a lawyer, and when is it okay to use sites like LegalZoom?
The real value of a lawyer at the incorporation stage isn’t really in preparing the actual documents, but in helping you figure out what you need (LLC vs. corporation, what sort of vesting schedule makes sense, and so on). LegalZoom can be good if you know exactly what you need, but it can’t advise you on what is appropriate for your specific situation.
6. If you’re on a small budget, which legal priorities should you focus on?
Priorities that need to be addressed early on include:
- Establishing a business entity of some sort (LLC or corporation) to protect you personally from business liabilities
- Establishing the ownership and equity rights of the company if there are multiple founders
- Ensuring the business’ intellectual property is protected and owned by the company (especially if it is being developed by independent contractors)
- Making sure you are paying attention to the tax consequences of what you do, particularly when it comes to granting people equity
7. What are the red flags entrepreneurs should be aware of when working with a lawyer?
First, a lawyer who doesn’t seem to speak the language of your business. If someone doesn’t understand the world in which you are operating, it’s harder for him to adequately represent you.
Next, a lawyer who seems to be learning how to do something on your dime. If you feel like your lawyer is doing something completely new to him, it’s unlikely he will be able to do it well or cost-effectively.
And finally, a lawyer who surprises you with extra cost. All clients want cost-effective solutions, so it’s important to have an understanding of what something will cost and keep surprises to a minimum.
Steve Kaplan, attorney at Pillsbury Winthrop Shaw Pittman LLP, practices in the areas of venture capital and private equity, mergers and acquisitions, and other commercial transactions. He focuses on a wide range of industry sectors including, software, web-based companies, life sciences, information technology, and government contractors.