First thing we do, let’s kill all the lawyers

gavel

I’m sure you’ve heard that line even if you can’t identify it as coming from Henry VI, Part 2, Act IV, Scene 2.

But it’s very hard to start and run a new venture with some help from lawyers. While it’s quite possible to incorporate your business entity and perhaps even create equity agreements and all the other legal folderol needed if you plan to start a company, I’d strongly advise against it. In our increasingly litigious business environment the savings in cash are outweighed by the potential risk of an amateur making an error that could come back to bite you, especially when you raise money and undergo a venture capitalist’s due diligence process or in the event of a liquidity event when who owns how much of the company comes under very careful scrutiny. Employ a firm that’s experienced working with startups – not some real estate or corporate lawyer who happens to be a friend of the family!

I like to think of legal agreements as like insurance plans. Yes, they due cost money, but your goal is to never have to pull one from your file drawer. But if things go off the rails for some reason you’ll be glad to have well drafted documents and an experienced law firm on your side.  One tip: downtown lawyers tend to be far more expensive than lawyers who operate in the suburbs. As a startup you can find a competent firm that considerably less expensive by asking around to find a firm in the suburbs that doesn’t have the massive overhead of a downtown firm.

As entrepreneurial guru Steve Blank writes on ThinkGrowth in Why Lawyers Don’t Run Startups, founders need to know how and when to ask for legal advice and when to ignore it.

While my mother was an attorney, I had no interest in attending law school. However, when I worked at Software Arts, Inc. I ended up with the chore of being the go-between between our corporate law firm in Washington, DC and the company’s executives in Cambridge. The story of VisiCalc is long and complicated and I’m not going to delve into it here, aside from the fact that Software Arts had the rights to negotiate OEM contracts with hardware manufacturers like Digital Equipment Corporation and IBM to sell VisiCalc customized to run on their PCs.

It fell to me to translate the legalese of these OEM contracts into English and to create a “who does what, when” document so we could keep track of our obligations, such as technical support, and the obligations of an PC manufacturer, such as marketing. I learned the hard way that lawyers are virtually incapable of writing clear and concise statements. They might as well have been writing in Latin as far as I was concerned. So after four years of dealing with the convoluted “party of the first part heretofor, whereas…” documents I never wanted to see another lawyer or contract again.

However, if you want to start and run a venture, lawyers are a necessary evil. As Steve Blank points out there are two types of questions that need to be asked about any contract: strategy questions (which I would call business questions) and legal questions.

Reading the case study of Steve’s company Epiphany and the deal he was negotiating with a software company known as Visio (later purchased by Microsoft) will be a boon to any CEO or VP of Business Development who needs to negotiate a contract between their startup and an established company, such as your customer. The way things work is that the bigger, more powerful company issues the contract, expecting the startup to just sign and date it. As you’ll find from reading Steve’s story that would have been disastrous. Steve and his colleagues needed to decide what deal points theyt could live with that wouldn’t kill their company. They realized that their goals were:

  1. get a deal done
  2. on terms we could live with
  3. this required talking to someone senior at Visio with the authority to make decisions on their side. Only then could we have our lawyer spend any time on the contract.

And these should be your goals when negotiating with a customer or channel partner. Nail down the business issues with the other side’s decision maker, in this case the CFO, but it could be their CEO, COO or other senior executive. Just make sure you know for sure that whoever you are negotiating the business issues with truly is a decision maker, not just an influencer.

I strongly recommend you read Steve’s entire post, but if you don’t here are the lessons he learned:

  • Lawyers provide a service; they are not running your company.
  • If you find a lawyer who talks about solutions not problems, hold on to them.
  • In every company that gives you a contract there’s someone who wants a deal. When you run into contract issues, call them first for advice.
  • Recognize whether you have a legal problem or strategy problem.
  • The web has great blogs by lawyers who get it. Read them.

What I would add to Steve’s lessons is that lawyers see their job as mitigating risk, not maximizing reward. It’s your job as CEO to judge the risk/reward ratio of the business deal. While lawyers often have lots of business expertise from doing years worth of contracts, its your company and you, not the lawyers, are the business decision maker.

 

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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