Top

The uniquely high cost of legal errors for startups

Background reading:

One of the most influential concepts that entrepreneurs are told to emphasize as they build their companies is iteration. Don’t fret too much about getting things perfect up-front. Just get it out there, get feedback, and fix issues as they come up.  In my experience, the best founders do take iteration and experimentation very seriously, and for good reason. There is so much about your new business that you simply don’t know, and sitting around theorizing about it in the comfort of your own room isn’t going to get you the answer; the market will.

Of course, there’s always at least one counterpoint, and as it relates to startups, a big counterpoint is that for interacting with investors and other high-stakes partners, first impressions can really matter. The top people in any market are busy, and don’t have time (or need) to sort through noise. As entrepreneurship ecosystems have grown – undoubtedly a good thing – they’ve also become noisier, which has made getting noticed much harder.

As I wrote in Why Startups need signals, the growth in “noise” among startup ecosystems means that any way of credibly signaling to important players that you’ve got talent they should pay attention to is very valuable; something as seemingly superficial as a fantastic logo or website, or a well-polished pitch, can be the key to getting you the initial meeting that then allows you to sell the real substance behind your startup.

There’s one area in particular where taking an iterative, “move fast and break things,” “we’ll just fix it later” approach is time and time again shown to be monumentally expensive and dangerous for entrepreneurs: hiring lawyers. I know this because of how often our firm is hired to fix mistakes made by lawyers who are very clever at attending meetups, hanging out at coworking spaces, or getting their BFFs to recommend them, but unfortunately their cleverness doesn’t extend to actually doing legal analysis, deal structuring, and contract drafting correctly.

So why are errors made by lawyers so uniquely expensive for startups? It’s not that complicated, really: the permanence and “un-fixability” of contracts and legal liability.  When software code has bugs, you fix them. Issue version 1.2. When there’s an error in your accounting, you fix it. Revise the report. Maybe you owe a small fine, but it’s nothing earth shattering.

But think about how different contracts are. The whole point of a contract is permanence, and the need for mutual consent to fix errors. Contracts would be worthless if after everything is signed I could just call you up and say, “hey, btw, I’m sending you a v.1.2 of the contract, fixing a few things, without your permission.” In law,unilateral fixing of errors is often impossible, by design. Similarly, if you’re raising money from someone, end up taking their money, and it turns out you didn’t follow the right steps, the money is gone, and now they’re angry… there’s no “whoops, we’ll have a customer experience team work on that for you” option.

So not only are startup lawyers handling the most foundational, high-stakes assets of a business: who owns the company, who controls the company, who owns the intellectual property, but the medium through which they’re handling it – contracts and law – has a level of structural permanence that makes errors extremely hard, and sometimes impossible, to fix. Can you imagine why smart entrepreneurs might be a little “picky” about who their lawyers are?

For first-time entrepreneurs, here is a short list of the 3 most common causes of errors among lawyers engaged by startups: Talent, Team, and Time. 

Talent – Is this a lawyer with real specialization in early-stage corporate work, or a random generalist who can somehow draft you a will, help you with your apartment lease, and close your seed round all in the same week? Where did they go to school? What other reputable firms have they worked at before? What other established companies does their firm represent, and can you talk to them to get verification? Every field has its type of talent needed for quality, and in law, it’s analytical ability and precision in writing/communication. Look for signals.

Team – Startups are different from small businesses in their rate of growth, and also the breadth/complexity of legal issues they run into. No serious startup in the history of entrepreneurship has gone from start to exit with just one lawyer. Corporate, labor, tax, patents, trademarks, litigation, privacy, M&A, etc. Serious lawyers have access to these kinds of resources, to ensure the right person is handling an issue.

Time – On high-stakes issues where the cost of an error is really really high, rushing is the mother of errors. Many good lawyers still end up making mistakes because they are so over-booked that they simply lack the bandwidth to properly analyze their clients’ issues. This is why hiring solo lawyers, or very small firms, is extremely dangerous for serious startups. Firms well-designed for startup work have partners, senior non-partners, junior attorneys, paralegals, and other resources to segment work by appropriate skillset, and keep everything moving. As you grow as a startup, there will be 10% of issues that are very high-stakes, maybe 60-70% that are important, but less high stakes, and the rest will be pretty routine. If your single lawyer is doing all of that for all of his/her clients, bottlenecks will lead to rushing and then to errors. It’s inevitable.

Iterate. Move fast and break things… unless the things you break can’t really be fixed, and could blow you up completely. For those, like lawyers, slow down a bit and do your homework.

Sponsored Post. Contributor: Jose Ancer, Technology & Venture Capital Partner, Egan Nelson LLP