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Matt Hyde loves startups. He loves the people who found them, the passion they bring to work everyday, and the problems they are trying to solve. What he doesn’t love is when those same companies end up dealing with major legal issues that could have been avoided.
A startup lawyer, Hyde knows it sounds a bit self-serving when he talks about the need for his service. “It’s always a little funny when you are a startup lawyer and you are saying, you basically need me,” said Hyde.
Still, he sticks to his message — lawyers might cost a bit more upfront, but they save startups time and money in the long run. “I’ve see enough entrepreneurs and startup companies where there are things that have gone really right because of proper planning and I see where things go horribly wrong or there is unnecessary pain,” he added.
His advice: spend a bit upfront to ensure things go smoothly down the road.
Dodging Landmines
Starting a company is challenging and time consuming enough without having to figure out the best corporate structure (you know, for that idea in your head that isn’t even a business yet), or how to split equity (which might be worthless today, but could make you a billionaire in the future). But these are the kinds of important questions that startup lawyers deal with on a daily basis.
“There are some fairly big and non-obvious mistakes people can make early on,” said Hyde.
One of those is making undocumented promises. Anything agreed should be written down, from equity to how the company deals with intellectual property (the heart and soul of most tech companies). It’s more than just a matter of resolving interpersonal issues that may arise. It’s also about assuaging the fears of potential investors. “Everybody’s fear is there is someone out there who was originally part of the team who is not there now, who had some promise made to them, not only in equity, but who would say that was my idea,” said Hyde.
Having documentation to prove who owns what can be the difference between finding funding and shutting down operations from your mom’s basement.
Another easy mistake Hyde sees is with employment issues. Many startups deal only with independent contractors. Hyde says that in many cases they are contractors in name only (and not in the eyes of the law), because they serve the functions of a regular employee. This can cause all kinds of trouble later on.
Securities laws often trip up new founders as well (he’s on the lookout for general solicitation – a big point of contention for the SEC). In addition, with no advice or the wrong advice, Hyde says that startups that try to negotiate funding without a lawyer (or with a lawyer who doesn’t specialize in this area) often ends up frustrating the investor because they focus on the trivial issues or slow down the process.
For the most common problems, Hyde says “these are all very easy to solve for at the initial stage,” but it means getting the right advice and being willing to pay for it.
Picking Diamonds from Coal
Picking the right lawyer can make all the difference. Hyde discourages people from using their cousin’s friend who is an estate lawyer or their college roommate who practices litigation. Finding a startup lawyer is essential – it will cut down on the amount of billing hours (compared to a lawyer who doesn’t specialize in this area) because they know the issues inside and out.
But beyond expertise, Hyde thinks founders should suss out a lawyer and truly see if they get along. Ideally lawyers will become key members and advisors to the company, so it should be someone you are willing to get on the phone with to kick around a few ideas. And don’t be afraid to give candid feedback. After all, lawyers are in the service industry.
Don’t be willing to hand over checks to lawyers without a bit of due diligence either. Hyde encourages founders to research applicable laws and follow some of the popular law blogs. He also tells people to review and ask questions about their bills.
In the end, Hyde knows it’s a struggle for bootstrapped startups to find the cash for a lawyer. His advice: “Pick a lawyer that specializes in startups, they will be able to hone in on the issues that matter…. Ask for estimates and updates on the bill.”
Just make sure that when your idea makes you a millionaire, you don’t have two million in legal fees because of bad planning.
