Many startups don’t yet need to hire a lawyer, or at least their money could be better spent elsewhere. I’m not suggesting you can just ignore legal issues at the beginning. However, with all the resources available online and the strong startup communities out there, I believe smart founders, if motivated, can find much of the information they need either online or by talking with other founders.
Big caveat: Never delay forming your entity. For tax reasons and to reduce your personal exposure, you need to take this step immediately. You don’t even need to use a commercial service for this. The Ohio Secretary of State’s website provides online forms for Articles of Organization you can fill out and file yourself in order to form a limited liability company (LLC). The fee is $125 and the form is available here.
At this stage, an LLC should meet your needs and the steps to keep you legal are much easier for this entity than for a corporation. And the Articles of Organization are all you need. Get it done and move on. Unless you’re already taking any of the steps listed below, you can’t mess up too badly with an LLC as your initial choice of entity.
So when do you need a lawyer? Here are the general principles I use when helping founders determine when it’s time to take the plunge. The list certainly isn’t exhaustive and it’s best to keep a friendly lawyer close to your belt to help spot issues.
Get a lawyer…
1. Before you partner up. Before you agree to split the equity in your company with anybody, consider getting an attorney involved. Once there’s more than one owner, it becomes difficult to change entities and your initial LLC may not be the best choice to prepare you for growth. In addition, your founding team that seems so perfect now may not work out the way you planned. If it doesn’t and you haven’t properly set up vesting arrangements or a buy/sell agreement, you could be stuck with one or more free-riders going forward or, worse, an ownership dispute.
2. Before you raise money. Never play fast and loose with the rules about how you’re allowed to take money from investors. Even borrowing money is usually considered to be the “sale” of a security and can get you into trouble if you’re not doing it properly. Besides being against the law, improperly selling an interest in your company (or borrowing money from investors) negates the limited liability of the founders. If things go wrong, the founders may find themselves obligated to repay the entire investment. I sometimes hear successful and vocal founders offer contrary advice, but −remember− things went well for them. The founders whose companies went south probably aren’t talking about it on Twitter.
3. Before you hire. Hiring employees raises all sorts of legal issues. Unless you’re experienced at it, it’s a good idea to consult an attorney to make sure you’ve got tight employment agreements in place and aren’t running afoul of employment regulations. More importantly, though, before you hire anybody, employee or independent contractor, to build or create any part of your product or brand, get a lawyer involved to make sure you properly protect your intellectual property. Remember, the general principle is that the designer/developer owns their work. Unless agreements are in place that change that principle, you’re likely to have issues if you become wildly successful or want to raise money from a sophisticated investor.
4. Before you spend your nest egg. Before you shell out a large sum of money or sign anything committing your company to a significant or long-term obligation, have an attorney look over your agreements. I hope this is obvious, but if it’s a bet-the-company type of deal, get a lawyer.
5. Before you launch. If you’ve somehow managed to get this far without partnering, raising money, hiring a developer or spending a ton of money, my hat’s off to you. Before you release anything to the public, though, make sure you’ve discussed your product and business model with an attorney. If you haven’t already, you’ll certainly want to take steps at this time to protect your intellectual property. In addition, privacy and consumer protection regulations can be nuanced; a good attorney can help issue spot areas that may cause trouble for you once your product is released.
In general, you may have some time before you need to hire a lawyer if you’re the sole owner, using your own money, and doing all the work yourself. As I mentioned above, though, don’t let a list like this substitute for keeping a friendly lawyer close to your belt. Most lawyers that represent startups will enjoy hearing your story and will be open with you about when it’s time to get them more involved.