The biggest companies in the world were once start-ups. If the stories are to be believed, Amazon started in a small garage and Facebook started in university hallways. In my experience working with start-up founders, all of them have grand dreams and goals, they want to build the next Amazon, Tesla, or Facebook. But what happens when they are still in the garage?
Companies have different stages of growth. The first stage is called the early-stage startup which begins when a founder develops a potentially scalable idea for a product or service targeting a market that is poised to generate value and grow into a success. At this stage, the lack of resources, staff, and customers is made up for by the zeal and enthusiasm of a bright and passionate founder.
At this stage, the founder is concerned with meeting potential VCs, securing funding, getting a co-founder, and maybe hiring some initial employees to work for future equity or very small salaries. Having worked with many start-ups at this stage, I know the least of a Founder’s concerns is a lawyer, who most view as an unnecessary expense. But is this a wise decision?
Based on my own lived experience, I would say no, and I believe that most smart founders would agree. Creating a business from scratch is not an easy task and it is more than anything else, risky. Threats abound everywhere, from VCs who might take advantage of the founder through unfair agreements, to co-founders stealing the original idea and rushing to patent/trademark it, to employees who learn company secrets and then move to share them with competitors, the journey is fraught with danger. This is why lawyers are important.
A lawyer asks the right questions
When you are excited to sign a new investor agreement for your start-up, a lawyer will look at the agreement critically and ask hard questions to ensure that your interests are protected. I have previously acted for a start-up that was receiving an 8-digit investment from a popular VC company in their sector whose investment agreement was thoroughly one-sided. The VC Company had two sets of lawyers acting for it located in foreign jurisdictions while the start-up initially had no representation. My presence tipped the scale and we were able to amend the agreement to also suit the interests of the founder, not just the VCs.
A lawyer helps a startup to avoid costly mistakes.
I was once advising an early-stage start-up on compliance-related issues when I noticed that the founder had a habit of sharing sensitive information about their product with anyone who would care to listen. I cautioned them because this could lead to their ideas being stolen. It is wise to limit the information you share about your product, even to potential funders, until you have registered an intellectual property over it such as a trademark or a patent that guarantees that your idea is protected.
The writer is a lawyer who specializes in offering legal services to people in technology. You can reach him through firstname.lastname@example.org