Episode 23: Why It’s Vital to Invest in Legal

July 15, 2021

Spending the money on an attorney is something we see a lot of founders put off for as long as possible. That’s understandable. We get it. There are so many competing financial priorities for cash strapped startups. And investing in your company’s legal needs can feel daunting at times – but it really matters. 

In this episode of Conversations with CGL, we dive into the importance of investing in legal services, which is something that impacts all founders at some point in their journey. We will show you how your attorney can shield you from risk, provide creative solutions to common problems, and help build efficiency into your business relationships. Remember, good advice from the outset helps you avoid expensive cleanups down the line.

In this episode, you will hear:

  • Why you need to invest in legal matters
  • When to consider seeking legal advice
  • Certain events where you should absolutely reach out to an attorney
  • How to find the right attorney for your business
  • How to better prepare for your meeting with the attorney

 

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I’m your host Hannah Genton and I’m one of the founding partners of CGL. What if you could speak with top business leaders and CEOs about their professional insights and personal journeys. Each week we share authentic discussions with business leaders, where they flesh out substantive issues while also getting deeper into their authentic stories. Our goal is to bring you conversations on the fusion of business and humanity, success and authenticity, and the challenges of balancing life and work. Thank you for joining us.

Hello, hello, and welcome to conversations with CGL. I’m your host, Hamish on Tom. And today I’ll be discussing a topic that impacts all founders at some point in their journey. And this topic is investing in legal services. spending the money on an attorney is something we see a lot of founders put off for as long as possible, which is understandable. We get it. There’s so many competing financial priorities for cash strapped startups. And investing in your company’s legal needs can feel daunting at times. But it really matters. And so that’s something that I’d like to speak about today. On this episode, your attorney can shield you from risk, provide creative solutions to common problems, and really helped build efficiency and the your business relationships. This is why this is a really important investment for the founder of a company. And good advice from the outset really helps you avoid expensive cleanups down the line, which is something you’ve probably heard us talk about quite a few times by now, if you’ve listened to past episodes, we see that really frequently here at CGL, where clients have tried to cut corners, maybe at the beginning are not necessarily invested in legal and have done a lot on their own. And unfortunately, oftentimes, there’s quite a bit of legal cleanup that needs to happen, which is always so much more expensive. So if that list of benefits doesn’t convince you that investing in your company’s legal matters is a good idea. I’m hopeful that the rest of this episode does, because it really has a cost that you should make space for. So to start things off, I’d like to let you know when you should consider seeking legal advice. We often see founders who have read basic blog posts online and then used things like document generators, for example, to create early documents. These are things like founder agreements or incorporation agreements. But there are so many document generators available and more and more popping up all the time. They are understandably really alluring for cash strapped founders. But they don’t and really can’t take the place of guidance from an attorney who knows your business and how some of these decisions are made at the formation of your entity can really greatly impact your company down the road. I think this is a very important point, that isn’t always understood. An eager founder in setting up a company is keen to get things set up as quickly as possible and as efficiently as possible, which is completely understandable. But unfortunately, not understanding the long term ramifications of some of these decisions that are made at the entity formation stage can have a major impact on the company down the road, it can have a major impact about investment opportunities down the road. And so it’s very wise to make sure a founder is aware of what some of those long term consequences can be. We hear CGL recommend that founders reach out to an attorney as early as possible, at least for high level understanding of compliance issues, especially again, since doing things properly the first time is often always cheaper than cleaning up messes later. So even if you’re very cash strapped, and you want to hit the ground running, you don’t want to invest in legal, a lot at the beginning, completely understandable. Maybe just an hour, two hours of an attorney’s time to get some ideas of what some of the longer term ramifications of these decisions are even if you wanted to form the company yourself. It would be a wise use of a few hours invested in legal to get you some of that high level guidance early on. That being said, there are certain events where you should absolutely reach out to an attorney. These events usually center around bringing other people into your business or funding into your business sense. Oftentimes that’s where the risk starts to mount. So I’ll go through some of those common scenarios. Of course, this is an inclusive of all of them. But just some pieces that hopefully are helpful to you as you’re thinking about how to navigate this for your business. So, first, at the very least, you should seek about high level advice at very least, before you create a corporate entity. There’s a fun fact about this, actually. So Facebook was first registered without much thought, or any legal guidance as an LLC in Florida, this did not really work out for them, they ended up having to incorporate in Delaware, which was a different process. Obviously, the rest is history with Facebook, but that also flags they had to go through kind of these costs of changing the entity down the road, probably wasn’t the most cost effective route. That said, I want to just pick up on the Delaware piece. So incorporating in Delaware, also isn’t always the answer. There are wonderful reasons as to why a company should incorporate in Delaware. There are also reasons why it might not make sense for a company to incorporate in Delaware. These are very fact dependent circumstances, which is why it makes sense to at least at a high level, speak with a lawyer and at the very least a tax advisor to get some guidance as to where makes most sense for your business. Setting up as an LLC has advantages. But maybe there are long term consequences to that, vice versa for an incorporation. So at a very high level, it’s just important to have a bit of a roadmap for your company. And try to understand those pieces before you pay the costs of forming an entity type. And also, the taxes and the filing fees associated with these certain locations. Another place where we do a lot of cleanup, and where it would make sense to seek out legal counsel is anytime you’re planning to do anything with equity, you’re granting ownership and your business to other people, or investors, it’s wise to make sure that this is done properly for a number of reasons. One, just having an accurate cap table, which I don’t think I need to go into too much as to why that matters. But also for the relationships with these people that you’re making promises to, we’ve seen scenarios where a company has believed it’s granted equity, and has unfortunately not done so properly. It’s communicated to these folks that they own a certain percentage of the company, which in fact is not true. And in order to clean it up, because of a number of factors. Sometimes it’s even more expensive to clean that up. Sometimes we’re not able to grant the equity that was originally promised to those folks. And so you can likely understand why from a relationship perspective, and a brand and credibility perspective, that is something you’d like to avoid as a founder. Some other common events where you should seek legal advice are when you start to take money from customers making sure that you have a clear framework for that, and you’re in compliance with kind of how you’re taking money from customers. Anytime you start to collect, use, or store personal information about any individual. This includes when you create a website and start to use tools like Google Analytics, I can’t emphasize enough and especially in places like California, the importance of privacy, and if you’re collecting any type of information on folks, there are legal issues that need to be addressed to ensure that you’re protecting your company from risk. Another scenario when you should seek legal advice if an investor comes to you with an offer, or any type of offer. Again, this kind of goes to the equity piece, but also deal mechanics, those are complex legal issues, where an attorney should be involved, as well as anytime you’re hiring or firing an employee or really anything employee related. And this is especially the case in states like California that have very complex employment laws. This is also where we’ve seen companies get themselves in hot water by not navigating these laws artfully. So it’s really important to have an expert by your side helping you manage these pieces in a more cost efficient way than it might be if you tried to navigate it on your own. So it’s very important to note that I am not saying that these are the only times that you would need an attorney. The reality is or at least that we’ve seen in practice, it’s common that founders tend to underestimate the value of legal advice and the costs of kind of this underestimation or my activity about the law can be really staggering for a company and by not getting this subject matter kind of expertise. You aren’t really in a position to prevent issues or risks that you aren’t aware of. And speaking with an attorney is really the best way to prevent business and compliance issues that can cost your company so much money down the road. So it’s just incredibly important. So then a common question that we get on this is okay, make sense, I need to have an attorney. And so if I’m going to invest in an attorney, I want to make sure that that’s a good fit. So how do you go about finding the right attorney for your business? And we get this question often. And I very much understand that finding an attorney can be difficult. And practitioners are always in a position to set their own rates. As a result, rates don’t always reflect the experience or the value that you’ll receive. So if you can’t rely on rates, what else should you look for? First, I would encourage you to look inward to the company, really spend the time to work out at least what your needs are or what your problems are. And then a lawyer can help you understand what your legal needs are based off of those problems. It’s really important to understand that no matter how competent of a lawyer, they are, lawyers aren’t able to do everything. It’s a very specialized profession. And so it’s important to find an attorney, or a law firm that can address the various needs that you may have for your business. It’s very common for businesses to have needs across a range of specialized services. This is why law firms exist, because law firms essentially have created a place where all of those subject matter experts are under one roof so that they can provide that specialized guidance to companies, which is very common for companies. Typically law firms are that team of attorneys that offer various services, as I mentioned, to the needs of a growing business. And in cases like this or like a firm like CGL there’s attorneys specializing in employment law, corporate transactions, privacy, intellectual property, and so on. I will say that it can be a red flag if an attorney says that they individually can do everything. There are incredibly experienced generalist attorneys out there and I don’t want to discredit their experience, or suggest that they can’t provide value. But it’s important for the attorney to understand or ensure explain to you that they can’t do everything to a certain extent. If you do rely on a generalist, you really should enquire about whether or not they collaborate with specialists, and confirm that those generalists are happy to refer out matters if they become too complex. If that generalist isn’t using expert advice, in certain instances, they do risk biting off more than they can chew. And sometimes clients will pay the price of this. So it’s also important to note that sometimes these attorneys can take longer to manage your matters and specialist attorneys because of just the like generalist knowledge there. So their pricing what also need to reflect that and once you found a firm or an attorney that you like the look of, I would say on the firm piece, really dive into the background of the attorneys that are there, find out whether they handle matters like yours in the industry that you operate in, have they worked with clients of your size, find out how many years the attorneys that are working on your legal matters have practice for in this profession, practice really does make perfect and you really want attorneys who have managed similar matters for long enough to know what works and what doesn’t. It’s a very specialized skill set. Another piece of advice on this is how clients can better prepare for that meeting with the attorney. And there’s so much preparation that you as a client can do to help keep costs down and to ensure that what you get is what you need from your lawyer. First, as if you can take the time to organize your documents. Prior to speaking with your lawyer, it can save you a lot of time and also make the lawyers work much more efficient and sharper. So an attorney is really expensive. And then attorney is a very expensive administrator. So if you can sort out your files and arrange to have signed copies, for example of any formal agreements you made, provide copies of emails with any details of the informal agreements you’ve made. If you can have all of this together before you meet with your attorney, or having in one place. It makes it much easier for us as we dig into kind of things, to not have to play that organization game which just is time consuming, and probably not the best use of your funds and your attorneys time. Another piece that is very helpful is to make sure you’re really clear on your budget. And you should let your attorney know what you need or we help you figure out what you need. And you let them know what your budget is you Attorneys should essentially help you allocate that budget. So a good lawyer is going to let you know what’s realistic, and work within your budget to make that count, if they’re not willing to work within your budget, or if they’re promising you the whole world. And that seems a little bit too good to be true in terms of pricing might be a sign to do your homework a little bit more, and speak with some other attorneys and get some second opinions in terms of costs and things. But an attorney should be willing to work within your budget and provide you guidance, at least to how you can get to your goals within your budget plus point. It’s really helpful. If a client takes a moment to reflect on what your expectations are from your legal service provider, do you want to weekly call? Would you prefer to chat with your lawyer via email, like your attorney really know what you need from them to feel like you’re getting value so they can deliver it and let you know what impact your expectations will have on the budget? So if you expect to have weekly checking calls and meetings and those types of things, I think a good lawyer will say, Yeah, absolutely, we’re happy to do that. But that attorney should also communicate to you that might come at an extra cost, because it’s more time to invest in your matters. For many clients, that works fine. And that level of service works fine. But it’s just really important to have these conversations, and make sure that everybody’s on the same page in terms of what’s expected. A few more things that you can really do to stretch your legal budget or use your lawyer more efficiently. So going back to the first point, it really pays to be organized and coherent in your communications with your attorney. So where we’ve seen the system becoming a bit more inefficient, as a client, send multiple emails, for example, with a single question, that’s a lot to figure out and get back into, it’s much easier if you can organize your thoughts and send a longer email with all your questions in them, or set up a call with your attorney and get all the information that you need. So that’s one way that we can work together to make sure that those kind of legal costs are more efficient. We also recommend that you have one designated point of contact at your company, then there’s too many cooks in the kitchen. Here, lawyers might spend time coordinating your own legal efforts and trying to help manage things with your whole team, which can eat up your budget. Some clients prefer the attorneys do this. And I think again, the attorney should be happy to service you in this capacity. Just so long as everybody’s aware that this type of service management can be less efficient, when possible, being very clear with what you want before you give instructions. So we see this happen a lot, unfortunately, where on the business side, a client is still trying to figure out something and as an entrepreneur myself, I completely understand the process of figuring things out and changing your mind, and iterating. But where we’ve seen clients, unfortunately, rack up legal costs that maybe could be managed better is by communicating these kind of business objectives a few well before they’re formalized, and then the company changes its mind, and lawyers have to go back to the drawing board and change things around. Again, we’re happy to do those things. But it costs you money to do so. So from an efficiency perspective, if the business side can get completely coherent and clear on what its objectives are and what it wants to do, then communicate those things to the service providers, that can usually be a more efficient way to stick within your budget. And also, the last piece is find ways to stay on track, work with your lawyer to understand where they’re at with your budget. So at CGL, we have weekly budget reports. So we run in terms of timing, and where we’re at with the budget. And these reports, help our clients know and understand where their money is going and help them optimize the budget. And so this is a really helpful process for our clients that helps us stay on target here internally. And I would encourage you to have some type of system with your legal team that allows everybody to stay on track there. So I’ll wrap things up there for this week. That’s some of my biggest points of things we’ve seen in terms of why is a lawyer important. How do you find one and then once you do find one, how do you work with them efficiently. But hopefully this helps demystify what legal counsel does for founders and helps you feel or at least understand a little bit as to why it would make sense to invest in legal counsel early on. If we haven’t heard from you or if you haven’t contributed anything. I’d love to hear from you. I love getting comments on these podcast episodes. I love when people share feedback of how we can be doing better here. Or if you have an opinion on this topic you want to chat about it further. I love to hear hear from you. So if you have any thoughts or anything, please feel free to shoot me an email at Hannah at CGL dash LLP Comm. And if you like what you heard, you’re welcome to rate and review us wherever you listen to podcasts. And that is all for this week. So I hope everyone has a great week and we will see you next time.

Transcribed by https://otter.ai

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