Don't Engage a Transactional Lawyer Too Late

Reprinted with permission from the March 2007 issue of TEQ magazine. This article is part of the magazine's "7 Deadly Sins" series.

The Sin

You are the CEO and founder of an early stage, emerging-growth company. You have world-class technology, an outstanding team, a strong go-to market strategy and solid barriers to entry that give you a great competitive advantage. But, you also have limited resources. You determine that business legal advice is too expensive and/or will slow things down, so you decide to "go-it-alone" on the basics, such as corporate structure, tax, IP, technology protection, employee issues and capital raising matters. You figure that if there are any missteps, you can clean them up along the way.

The Absolution

In short, quickly finding and building a relationship with experienced transactional attorneys is vital. Some of the most critical decisions that your early stage company will ever make will occur prior to (or in connection with) the first dollar of institutional capital that's raised.

In a world of increasing "expertization" and specialization, you need advisors that have the right experience, know-how to build relationships, understand your business and its industry, and understand their roles.

For emerging-growth, early stage and middle market technology companies, that means engaging transactional lawyers who: have extensive venture/ capital raising deal experience and connections, understand the critical importance of protecting and obtaining value for your technology, know that your "people assets" are your most valuable, and can counsel your company on everything from securities law matters to possible exit strategies.

But, most importantly, you need to find advisors that are the right cultural fit with you and your organization. Above all else, you want your attorneys to have the judgment and knowledge that will grow to become absolutely critical to your success since the art of applying limited resources to early stage business issues is prioritization.

The mindset when looking for strong business counsel should not be "what can I live without?" but rather "what is it that I ultimately have to do in order to be successful and who is going to be the best person to help me get there?" The rule here is to list the issues out (this should be a collaborative effort between client and attorney) and then prioritize based on resources, time and strategy.

The list is evolving and ever-changing, and should be an on-going discussion with a great deal of judgment and instinct involved. In doing this, the company and the advisor stay focused. Everyone involved needs to communicate openly and regularly and understand that some issues are at the top of the list (and some will always stay at the top given their nature), while others are at the bottom to be addressed later. This focus makes everyone more efficient. And it also helps your advisors understand your business better.

While not as an absolute – all companies are different – a short list of critical issues for a typical company would be something like this:

Get your basic corporate and tax structure right from day one. It's the basic blocking and tackling, but if it is not done correctly, you may never recover.
Always ask whether what you're doing (raising capital, hiring talent, issuing warrants, etc.) has securities law implications and/or tax consequences. These are two highly regulated areas, and the law can be unforgiving if adherence is not correct.
Protect your competitive advantage and guard your IP with everything you've got. Make sure you own it and then protect it.
Define the rights you have with your employees/consultants clearly. Getting great people is very hard; solving HR issues is exponentially harder.
Define the rights you have with your equity owners very clearly - options, warrants, stockholder agreements, and the like are not to be written on napkins or communicated via e-mail.
If you are regulated or will be regulated (e.g., FDA compliance for device companies), get experts who know your industry and who practice in these areas every day.

We all know how challenging it is to own, run and make a business thrive in today's market. We face intense competition, rising supply prices and a strong demand for talent. At the outset of your business when you start with a great plan and technology, it's critically important that you have the right advice - and advisor - guiding you along the way.