Startup entrepreneurs are rarely legal experts and as a result there is an inherent risk that the smallest contractual loophole or badly written IP clause can expose their entire enterprise. This was (and continues to be) perfectly demonstrated in popular TV show Silicon Valley, where cheap lawyers and poorly constructed contracts cause never-ending problems for the Pied Piper guys . Though obviously for comedic effect, it’s not so funny in the real world and this made me think about my own experiences leading up to, and during, the sale of E-Tale. For the small percentage of startups that successfully navigate the early years and scale to the point of sale, organising your legal documents in advance will save you a lot of time and stress (and cost!) at the due-diligence stage.
5 things you can do now to get your legals on-point
1. Set up a ‘Deal Room’
Organising your documents in a tidy, cloud-based solution like Google Drive or Dropbox is a great way to start getting your house in order. It makes it easy to see what you’ve got, identify any gaps that need filling, and gives clarity when you come to reviewing and updating it all. The advantage of building out a ‘deal room’ early, is to avoid confusion later on in retrospectively trying to compile bundles of documents. Basically, when you begin looking for a buyer, or you’re approached about a buyout, you are hit with the realisation that you need to give the buyer access to ALL your contracts and legal documents. Storing these digitally would cut out a lot of manual search time, and you can update them easily. You can also share your confidential documents and data in real-time with the involved parties, whilst keeping them secure.
2. Don’t try to do legal documents on the cheap!
If you intend on selling your company, raising money or just want to have a well-run business, your legal docs need to be watertight! Downloading templates you find online puts you at high risk of getting it seriously wrong. I see them the same way as i see pre-built website themes – they look ok, but still require a lot of customisation to work to your specific requirements. The devil is in the detail. Some of the terms may not apply and you may not even be sure if it’s right for your business model. There is a reason people study law for years rather than just downloading generic templates and filling in the blanks. Try and work with a reputable law firm to create a template for your documents, contracts and shareholder agreements.
3. Get a standard commercial contract
Come up with a great standard commercial contract in favour of your company. Every company should have a standard form contract when dealing with customers or clients. The paradox is, there really isn’t a “standard form contract,” as every contract can be tailored to be more favourable to one side or the other. The key is to start with YOUR form of contract, make sure it’s broad enough to cover all eventualities, and hope the other side doesn’t negotiate it too much. Your standard contract should outline all the key responsibilities undertaken by each employee, their conduct, as well as their stock options or salary. It should also highlight your company’s confidentiality and intellectual properties, along with any competition clauses, forbidding employees to discuss any of your companies details externally. Confidentiality is crucial to the success of your company and the protection of your USP
4. Chose a decent lawyer
If you have ever purchased a house you will know the quality and the services lawyer provide can vary wildly. Ideally you need a firm that is big enough to cope with complex scenarios and small enough to care about you. Meet them and get a feel for how proactive they will be. Cutting corners when choosing a legal representative may seem like a good idea to save a few hundred but can cost thousands in the long run, especially if they don’t have the level of expertise you require. Contact different lawyers, check out their portfolio of work, get recommendations from business associates and others that you trust. Think of it as a long-term relationship with someone – you need to know that you are compatible with them!
5. Get your employment contracts in order
Startups often run into problems when they don’t maintain adequate employment documentation. You should prepare a core group of employment documents that each employee is required to sign. A starting list of employment documents for a new company would typically include Stock Option documents, confidentiality agreements and IP ownership clarity. There numerous examples of companies that almost tripped up over this – one of the biggest is Facebook and the confusion it caused around ownership with some of founding partners.
Don’t leave yourself contractually exposed – put these tips in place and you will avoid looking like Silicon Valley’s Gavin Belson, when you realise your employment contracts aren’t valid and you just lose a lawsuit you thought you were guaranteed to win…