Four things your lawyer probably shouldn’t be telling you as an early stage start up and four things they probably should
Naturally (and probably unsurprisingly!), as lawyers we think it’s important for start-ups to get decent legal advice, especially in the early stages.
However, what you don’t want at that stage (or any stage really), especially when cash is tight, which in the start-up world is a way of life, is your lawyer spending more time practising their sales pitch on you than giving you an honest appraisal on what you actually need.
Sometimes, that might mean a quick steer over a socially distanced coffee on some of the things you should definitely not do, rather than a lengthy list of things you need to pay for.
What you want as a start-up is a lawyer who is with you for the long haul and knows the most appropriate time for you to start thinking about a further piece of work. This is particularly with an eye on what you’ll have to promise when taking on investment or sorting out your exit. An honest and mutually beneficial relationship is in both your and their long-term interests.
With that in mind, here are several claims we have heard start-ups hit with in recent times, together with our view on how they might play out in practice:
The Claim: “Get your shareholders’ agreement sorted before you get your business sorted.”
Our View: It obviously important to have an early chat with your co-founders about how you want your business relationship to work. Not doing so at an early enough stage can cause issues down the line.
However, what you do not want to do is sit down to shove a pre-nup agreement in front of your co-founders on your first date, or before you and they have decided you can actually work together. In any event, if you are taking seed funding from any kind of established VC fund or group of angels/an angel network, they will normally require you to sign a proper shareholders’ agreement (sometimes in their preferred form) as part of the funding round anyway. Therefore, if an investment is imminent, you might want to save some money in the early days by waiting until then to sort a number of the constitutional matters out and get on with building the product and importantly selling in the meantime!
The Claim: “Get your patents sorted before doing anything with your business.”
Our View: In many sectors, keeping the exact nature of your product a well-kept secret is a far cheaper and more effective way of protecting your IP than taking out a patent. Patents can certainly be appropriate for certain types of product (for example those which could be easily replicated once put on the market), but the up-front costs of securing one, particularly in all your key markets, can often be prohibitively expensive for an early stage start-up.
You also have to think about how you are going to protect your patent, even if you can get one registered – sometimes David won’t quite have the money / lawyers needed to defeat Goliath when it comes to patent litigation.
The Claim: “Have your lawyer review every contract you sign.”
Our View: Whilst it is important that you read and understand any legally binding contract your business is entering into, that does not necessarily mean that you always need to have a lawyer review them for you.
For example, if you have your lawyer prepare a decent set of standard T&Cs for your business to use and advise you on the kinds of things you need to look out for (especially in the early days of your start-up), you may be able to survive with any simple mark-ups on standard issues without lifting the phone. As another example: low value software licences for widespread commercially available “off-the-shelf” software will typically be non-negotiable, so the value of having a lawyer review it for you might be minimal.
If you’re not sure on the meaning of anything you’re signing you should definitely speak to someone who can help, but having a lawyer who will give you an honest appraisal on the biggest “red flags” that you actually need to be concerned about is particularly helpful in the long run.
The Claim: “Have anyone you speak to about your business sign an NDA before talking to them.”
Our View: If you are going to develop your product / idea from conception through to launch, you will have to speak to others – potential co-founders, suppliers, investors and other contacts will all form part of your network. Early on, you will need to beta test your concepts / prototypes, or pitch your start-up as part of an application for grant funding.
There are, of course, circumstances where it would be appropriate to have third parties sign an NDA (or more formal contracts if they are getting involved in the business or contributing to it or your product), particularly where you are speaking to potential competitors, or someone who would be able to easily copy your idea or business.
However, in some circumstances, it can be impractical or inappropriate to have an NDA in place. Insisting on potential investors signing an NDA before you even speak to them can risk creating a wrong impression, and generally, there aren’t many people who will have the vision or capacity to pursue your start-up idea the same way you will.
Please bear in mind that this note doesn’t constitute legal advice and mightn’t be appropriate for all start-ups. You should speak to a lawyer about your individual circumstances before taking any action on the basis of this note.
If you need a steer on start-up issues generally please feel free to check out our start-up fundamentals guide available here
If you or your business requires further advice or assistance navigating any of the above issues, feel free to contact:
Partner – Contracts and Technology Department
Tel: +44 (0) 78 2732 5049
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.