The most common question entrepreneurs ask me is “What legal issues should I be concerned about for my business?” Although tempted to fall back on the mantra of the legal profession and respond with, “It depends,” I know that’s the last thing business owners want to hear. It nearly goes without saying, but no matter the stage, you should take charge of learning what you can and should do yourself, and when you can benefit from the advice of a professional. It is never too early to start a relationship with a great business lawyer that will get to know you, your company, your business and your goals. A great lawyer will not just handle current legal problems, but will also help to predict what is likely in your company’s future.
Now let’s look at a few stages of growth and examine some common legal needs.
When you’re charging out of the gate
When starting out, many legal needs are simple. That does not mean that they are not important. You will need to decide when to incorporate or form an LLC, and the best time to start investing in intellectual property like a trademark for your brand name or logo, or even a provisional patent. You will need to handle certain legal formalities properly like issuing stock or debt, and decide how to contribute property to your company. If you are starting with a friend or family member, you must hash out your roles, responsibilities and ownership. At some point, you should plan on leasing space. These are the legal foundations of your business, so be sure to get them in writing and file them in a safe place.
When you’re comfortably off the ground
After the newness has worn off, your legal needs will continue to grow. You should consider your sources of income and expenses, and have some form of written agreement with most if not all of them. Terms of service or contracts for customers and written agreements with vendors, suppliers and distributors are all necessary to understand everyone’s rights and obligations. You will be hiring contractors and eventually employees, and determining the difference between them. Failure to document these important agreements in writing will be the most likely cause of your first legal battle. When you are suing or being sued, you are not focusing on your business – and that is NOT where you want to be. Of course, some businesses, like retail shops or walk-in services do not lend themselves to agreements (your barber doesn’t make you sign a contract!). Doing business in a familiar way can often trump non-standard legal formalities.
When your business is thriving
The good news: your business is flourishing. The bad news: you have to deal with a few more legal headaches thanks to your success. You should be regularly engaging a legal professional to keep you on top of all legal formalities (like having good clean records of meetings, stock issuances, and organized written agreements). Regular legal housekeeping will make it a lot easier when you decide to raise money, get a loan or even engage strategic partners. Typically, this is when you also start seeing headcount growth. Becoming an employer brings with it not just management requirements, but legal ones as well. Understanding how to properly hire, counsel, fire or lay off employees is an art. You should always have an agreement in writing and engage a professional to help establish policies to prevent harassment, discrimination and a hostile work environment. When hiring people that will be key to your company’s strategy, this goes double. During this period of growth, you are more likely to see an uptick in lawsuits and legal threats, from customers to business partners to employees. Don’t fret and don’t take it personally. Remain calm and listen to your advisers.
When you’re ready to open up to serious growth
As you move from the legal issues of a startup or family business into a booming company, you may have investors and strategic partners knocking at your door hungry to get in on the action. You’ve likely seen significant revenue growth and are at a new stage in your business. When looking at potential partners – especially when it comes to venture capital – be sure to look past a high valuation to the team that will be a part of your company. Before you agree to any terms, talk to your trusted legal adviser and find a great team that has recent experience with counseling companies looking to raise capital.
Reach out to other companies that have received an investment and do your diligence. Most of the same advice applies when selling your company or merging – with the exception that you as the founder need to understand your continuing role, if any, after these transactions. Of course, if you are looking to grow even faster through acquisitions or raising public money in an IPO, those open up whole other baskets of legal issues – but they are high-class problems to have. When you get to this level, you should be seriously considering an in-house lawyer that is dedicated to your company and its needs. A great general or corporate counsel should be able to take all the legal worry off your shoulders so you can focus on the reason you started – running your own business and being your own boss.
– Chas Rampenthal is the general counsel of LegalZoom.com