A Startup Knows It Needs a Lawyer When:

This is a follow on to my June 13, 2011 post about controlling your lawyer and was inspired by a comment to that earlier post.

Cost is the overriding issue for startups when it comes to properly engaging a lawyer.  My general retort on this point is this:  expect to incur real lawyer costs and get over it.  Of course, be judicious about the engagement, but a good business lawyer can be a huge asset.

Here are 5 clues that you need a good startup lawyer (and this is just 5 out of many):

1.   You are setting up a legal entity:  unless you are the only owner of the entity to be formed, then using an online legal service is pretty tricky and inefficient as there is no one to direct basic questions to like (i) how to deal with and document founder vesting, (ii) how many shares should I authorize and issue, (iii) what type of legal entity is best for me and my business based on a set of assumptions and (iv) what state should I form the entity in.   Setting up a legal entity that will have multiple owners from inception (like 2 or more founders) requires good lawyer input.  Lawyer time required (including vesting agreements for founders):  3 to 6 hours.

2.   You need (or think you need) a stock option plan:  granting stock options (and other forms of equity compensation to employees like restricted stock) should be done under a written equity incentive plan.  And each award to a given employee requires a separate grant agreement laying out the terms of the grant.  You need a lawyer to create the plan and grant agreements (on the grant agreements, once you have the form, you can probably use it for other future grants of the same type).   Lawyer time required:   3 to 6 hours.

3.   You are hiring employees:   hiring employees comes with a host of issues such as (i) non-compete agreements, (ii) ownership of invention agreements, (iii) employee tax withholding, (iv) employee safety policies (like no harassment and privacy, etc.), and (v)  how to properly fire employees.  This is just the tip of the iceberg.  Lawyer time required:  5 to 10 hours dependent on how fast you are hiring.

4.   You are raising money:   raising funds requires documentation regardless of type of financing.  You might be doing a convertible debt round or an equity round.  The convertible debt round will take less legal time.  Despite that the documentation is pretty standard, questions for your lawyer always come up.  If you are doing a convertible debt round, expect legal fees of between $3,000 to $10,000 depending on the number of investors and length of negotiation.  If you are doing an equity round (assuming preferred stock), assume legal fees of between $10,000 to $25,000 again dependent on number of investors and negotations.  Unfortunately, the fee amount is independent of the amount being raised.   One short cut that I can tolerate is if you are truly raising funds from family members that you trust, you can use a really simple promissory note for a convertible debt round or a really simple subscription agreement for an equity round (email me if you would like forms).

5.   You want to engage an outside board member:  an outside board member (as opposed to one that is also on the management team) should sign a board member agreement and also, assuming equity compensation, get a stock option agreement or restricted stock grant based on what has been negotiated.  A good lawyer will be able to help you with all these issues and even give meaningful input on how much equity the new director should get and appropriate vesting period.  Lawyer time required:   1 to 3 hours.

Now the good news is that once you get the initial dose of good legal input, the going forward legal time for similar issues will decrease.  But then again, hopefully your business will be growing, and, if it is, then your need for even more lawyer time will go up!

As a lawyer friend of mine once told me “I love spending time with you – the fact that it is billable is just icing on the cake.”   Start eating the cake.