The prospect of getting some free legal advice was enough to get a lively crowd of fifty to brave the frigid cold (15 degrees), fog and light snow and show up at a local networking event. The event featured three guest panelists from law firms specializing in working with technology startups.
Prism Group was there and in this article we cover key highlights from the discussion. Note that we are not offering legal advice, merely reporting on the event, your mileage may vary and if you have a legal question we urge you to seek expert counsel and you might want to begin with one of the three panelists!
Here were the takeaways:
Don’t ask investors to sing an NDA at your first meeting. Investors won’t sign an NDA at such an early stage and that in your initial discussions with potential investors you will want to limit the amount of confidential information you disclose anyway. One panelist offered that asking for a potential investor to sign an NDA at a first meeting gives you a “minus one” for lack of sophistication. The bottom line is take care not to disclose too much, if any, intellectual property (IP) up front.
Some agreements you can standardize, some you can’t. Know what’s important to you. Negotiating a new deal with every customer can be time-consuming and expensive, but you can streamline the process. If your model is Software as a Service (SaaS), then most customers are likely to accept a standard contract. If your solution has significant IP, the panelists cautioned entrepreneurs to expect big companies to hit them with onerous IP language – they will want to own everything and put all the risk on you! Pay careful attention to the IP section and if technology is important to your business be cautious about what you are giving up.
The panelists agreed that the sooner you can think about contract management, the better. Get your standard documents in place and have a process for working through negotiations by defining in advance what are your “must haves” and what are merely “nice-to-haves.” Negotiating license agreements and IP is specialized, consider hiring someone who is experienced negotiating commercial and IP terms.
Legal counsel isn’t as expensive as you might think. The panelists recommended finding a law firm that specializes in working with startups. They understand limited budgets and can be more efficient to keep costs reasonable. One panelist mentioned that his firm attends client board meetings for free.
All emphasized the importance of selecting counsel that is experienced in working with startups. That they can offer pragmatic advice. “You might be thinking that I can’t spend ten thousand dollars in legal fees on a contract that is worth five thousand. We get that,” said one attorney. “We can help you develop your playbook to manage the contract process and make it more efficient.”
Another panelist put it this way, “You want a business partner. I’m busy like you and if we spend ten minutes on the phone, I’m not going to charge you. I want you to call and see me as part of your team, not someone who will nickel and dime you to death.”
If you want to bring on professional investors, be realistic about ownership. As you issue equity, there will be dilution, but as long as the pie of value is growing, then dilution is good. Most people would want to own one percent of a really big pie than 100% of a small one (Editor’s note: unless it is a Key Lime pie).
The panelists noted that it is wise to have the hard conversations at formation. Questions like how do you handle someone wanting to leave? What kind of equity vesting schedule makes sense? Having these prenuptial conversations before starting up will save you lots of headaches and heartaches down the road as situations change.
One lawyer remarked, “There’s also a big difference between teams where this is their first rodeo and those who have done it a few times.” When dealing with a seasoned team of entrepreneurs, the risk of one leaving unexpectedly is much lower.
Seek out specialized counsel sooner than later, it costs less to do it right the first time. As you might imagine, all three panelists suggested retaining legal counsel “as early as possible!” Although that sounds like a self-serving response, the panelists provided convincing reasons of why it is a wise course of action.
Getting your company setup legally the right way from the start can save money down the road. The panelists mentioned that their firms automate standardized startup documents in order to be efficient and make sure the important issues are handled up front. “Penny wise and pound foolish,” as one described the approach of waiting too long. “The cleanup is ten times harder and more expensive than doing it right the first time.”
Protect your IP both inside and outside the organization. All panelists said that a startup should have some sort of confidentiality provision and coverage of IP with all employees and contractors. As one attorney put it, “You can get assignments and other forms efficiently from a law firm used to working with startups. Everyone signs it from the start. It is much harder to get agreement down the road.”
Be careful about exchanging equity for services. The panelists mentioned that they see this arrangement often, but the risk largely depends on who the person is and what they are doing for you. Exchanging equity for services is okay, but only on a limited basis. There are tax implications and it comes back to the “size of the pie” situation.
“Do you really want someone on the cap table forever?” One panelist offered, “You can consider the use of options, too. It makes sense to get some guidance on what structure makes the most sense for your situation.”
Another agreed, “A few percentages here and there over time starts to add up.” And promises of equity made to a lot of people in a disorganized fashion without proper documentation it doesn’t show well to potential investors. “Granting equity is more complicated than you think it is. Trying to clean it up later is difficult” he added.
When should I convert to Delaware C-Corp? If you’re not already a Delaware C-Corp, the panelists suggested that it isn’t worth the time or money to convert until you have a term sheet in hand. Think about it up front to see if you should be incorporated in Delaware from start.
When partnering with a larger company, be aware of what’s important to you. The panel cautioned to be aware of what you want early on in an asymmetric relationship when the big player seems to hold all the cards. As one attorney said, “That kind of relationship is harder than you might think. From a business perspective, if there’s an 80-page agreement, figure out what is the most important. Focus on the top three issues and find an attorney that understands the strategic perspective.”
Another panelist added, “On the tech front it comes down to ownership. If your tech becomes a part of something owned jointly and you’re locked in to that one customer, it can be problematic.”
The panel agreed that it is important to define who owns what and who owns derivative offerings, products and even insights that you may glean out of the JV.
I have a great idea, how much does a patent cost? Surprisingly, some on the panel offered that you can do a lot of the work yourself and save some money.
If you have time to research what has already been patented and develop good descriptions of what your solution does, you can save a patent attorney a lot of time and expense. If you don’t have much time, then the patent attorney has to do more, making the project more expensive. One panelist suggested that the cost of making a good patent application ranges between $7,500 and $14,000, depending on a variety of factors.
A panelist clarified, “It really depends on the complexity of the application and your budget. If you tell me your budget is three thousand dollars, then I will give you the best protection I can at that amount.”
Talking to lawyers is something most people want to avoid, but this panel helped demystify the most common legal issues facing early stage entrepreneurs. From our perspective, the most important takeaway for entrepreneurs is find counsel who is experienced working with startups, because they can help you focus on what is most important and have found ways to be efficient helping founders get the most value for their money.
About Prism Group
Prism Group is a multi-talented marketing and investor relations agency for leaders that are serious about building value. Our proprietary processes for building brands, generating awareness and establishing Thought Leadership and award-winning work help our clients drive top-line revenue and bottom-line profitability. We leverage state-of-the-art technology to optimize productivity, effectiveness and ROI.
We focus on Energy Tech, Oilfield Services, Oilfield Equipment, Energy Finance and E&P sectors.
Prism Group is also a founding sponsor of the Energy Tech Showcase, where innovative companies meet customers and capital sources.