Mentor sessions at FoodBytes! are always an enlightening experience, but when our London pitch companies met with Dan Saunders, Corporate Partner at Watson Farley & Williams, the room was buzzing with questions from founders who understand the importance of managing this side of their business.
Taking the necessary steps to protect your business and the people in it is a must for any startup and knowing how to properly go about this can be intimidating. But what if we told you that growing your business doesn’t have to mean big budgets and complicated legal counsel?
According to Dan Saunders, keeping things simple, identifying key risks and putting the relationship and not the legal document, at the center of building partnerships are the most effective ways to build an enterprise with legal protection that supports the business as much as it protects it.
Here are some of the most interesting questions that came up in Dan’s mentor session at FoodBytes! London 2018.
What’s the minimum legal protection an early stage company should have from the outset?
The starting point is making sure all of the company’s filings and shareholder arrangements are up to date, complete and appropriate for the business. Keeping your house in order with respect to your corporate documentation will not only demonstrate to investors and counterparties that you have a well-run business; it will also save legal costs in the long run.
Secondly, working with a lawyer to create an affordable toolkit of document templates suitable for the type of business you are running, makes good sense. If you’re a supplier of services or goods (or both), this will typically include a set of standard terms and conditions that can be used as a base for commercial negotiations with your clients and suppliers. While there may be an up-front legal cost to this, and not every counterparty will accept your business’ standard terms (with or without amendment), having a properly drafted starting point that you’re familiar with and understand, can save a lot of time and legal fees when negotiating commercial contracts.
Other key areas to consider are:
- Protecting your intellectual property – if IP is important to your business, you should get advice about how to properly protect and, if necessary, license it.
- Getting your insurance in order – it’s important to make sure your insurance is aligned with the level of protection the business needs. If you’re unsure or need advice, run it past an expert so you get what you need.
- Understanding your obligations as an employer – in any business, one of the biggest assets is people. However, given the level of protection employees have under the law, they can quickly become a big liability if things go wrong. A well-drafted standard employment contract can go a long way to helping avoid this, and it’s not always as expensive as you might think.
How important are contracts?
Good contracts are important, but they’re second to good relationships. Startups should aim to keep things simple, build trust, and where possible resolve disputes through conversation. While it can be useful to talk to a lawyer if you’re preparing yourself to engage a counterparty in a dispute, keeping a clear head, taking good notes and negotiating directly with the counterparty, instead of through lawyers, is often a better course for a startup.
Litigation is expensive and can change a business relationship irreparably, and if you go down that track, it can be difficult to come back.
That said, a commercial agreement should always be written down, ideally in a formally written legal document. If that’s not possible for budgetary reasons say, a good, clear, written record of what was agreed, even if it is not looked at by a lawyer, will still be very important.
If you do get a formal legal document drafted by a lawyer, it can be more efficient to engage them once the main commercial details have been thrashed out between the parties and written down in plain terms. That way, you can give the lawyer clear instructions on what you’ve already agreed to and avoid expensive back and forth negotiation between the lawyers.
Should companies stick to one lawyer and run everything through them?
It can be useful to deal with one particular lawyer that knows the ins-and-outs of your business, but there’s no hard and fast rule that says you should stick with one lawyer for everything. In fact, for large businesses, it is common to have a panel of different firms that they can choose from.
It’s also possible to get lots of free advice initially, if you shop around. Law firms are generally keen to talk to new businesses. Just like any other company, many of them will have business development targets, so it’s likely that they’ll be willing to help.
They can talk to you about what they specialize in and how they can help you, and if you use some real examples of the challenges you’re dealing with, you’ll get a sense of who understands your industry and who you might get along with best. You can shortlist from there, ask for quotes and identify which firm or lawyer is right for you and the services you require.
Do you have any tips and tricks that startups can employ when dealing with investors?
Don’t just look at the money or strategic advantage they are bringing, take the time to talk with investors and make sure you fully understand what they’re looking for in return.
For example, how much control do they want on day-to-day decisions? And have they explained their proposed investment structure to you fully?
If anything is still unclear, ask them to write down what they expect in more detail. That will allow you to take their explanation to an independent lawyer who can talk it through with you. Some law firms may be happy to do this first step for free on the understanding that, if the deal goes ahead, you will instruct them to help advise you on the formal documentation.
Another tip from someone who spends a lot of time looking at businesses with disorganized legal paperwork, keeping all your business documentation complete, well organized and in soft copy form can save a great deal of time and money on lawyers.
You may have a great product and a story that catches investor attention, but eventually they (and their lawyers) will want to see the documentation that underpins your business, like accounts, key customer contracts, employee contracts, office leases and constitutional documentation.
Irregularities and missing documentation can slow down a deal and eventually require more investigation from lawyers, which means a higher legal cost and potential ‘cooler’ on the deal. I suggest you keep a well-organized, password protected file for all key legal documents and update it regularly.
As we wrapped up the session, Dan reassured the group that their legal arrangements should be no more challenging than any other part of their startup business.
No one expects the challenge of legal protection for their business to be simple or straightforward and that can make it seem intimidating, but for entrepreneurs who are smart and brave enough to start their own businesses, a little bit of legal knowledge can go a long way.
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