Why Your Startup Needs a STRONG LEGAL STRATEGY!
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Hi, I’m Neil Fridman, Esq., Managing Partner of Fridman Law Firm. Today, I want to discuss with you why it’s important for startups to have a legal strategy. Even when they’re pre-revenue, before they’ve taken in a dollar of any cash whatsoever... I think a legal strategy is one of the most important things, along with your business model, your financial strategy, your go-to-market strategy. Having a legal strategy signals to investors that you are sophisticated in the way you go about things.
Even from the very beginning, whether you’re just one guy in a garage or two guys in a garage, having a legal strategy should be part of your business plan -- even if it’s just two paragraphs! And you might say, “Well, if we don’t have any money and we’re looking to raise capital, we haven’t taken in a dollar... Why do we need a legal strategy?” Well, it’s important because assessing legal risks, entity structuring and taxation very early on, can save you money, can save your investors money, by not having to engage a firm to redo what you may have done by yourself. I think it’s very important and should be part of the business plan. I don’t think that it should be something you think about later on or kick the bucket down the road until you have money. Creating a legal strategy helps you to define who you want to be, how you want to get there, simultaneously with the other big decisions about running your business.
Some of the most fascinating startups and most successful startups that I’ve worked with are the ones that have adopted a legal strategy even on Day 1, when they had no money, didn’t know where the money was going to come from and that was the last thing they wanted to think about. But they knew it was important to develop a legal strategy, just as it’s important to develop a financial strategy, a go-to-market strategy, how they’re going to get their MVP to market and understanding their total addressable market.
Successful companies think about this in the beginning. And I’m not just saying that because I’m a lawyer and I want you to pay legal fees. I’m saying that because I have seen the companies that are successful -- the ones that I’ve had as clients, the ones that I’ve invested in -- they think about these things early on and in spite of the fact that they have money. There are plenty of law firms out there that you can find that will help you even if you have no money right now. They will invest their time and effort in the hopes that you become the next big company. So it’s just a matter of you reaching out and finding them. Just as it is to find someone who is going to help you as an outside CFO -- you should have a law firm in the same manner. A lot of the time I spend with startups when I initially meet them is going through documents that the founders had drafted in the beginning that are just not suitable, or incorrect or even against Delaware law. For example, they had drafted from a document creation site or downloaded some form online that just doesn’t work. What happens is they end up incurring more legal expenses because they have to go back and fix that.
I had a client that raised capital from 22 investors that did not paper any of those documents whatsoever. They went to raise capital from two sophisticated institutional funds -- one was private equity and one was a venture capital fund. And when they were doing their due diligence on the company, they said: “We see on this cap table on the spreadsheet you provided us that you have these 22 investments. We see you took in the cash but where’s the paper? Where’s the documentation?” Well, they didn’t have it. Not only did they engage me to help them raise capital from these funds, but then, I also had to go back and paper all of this documentation from 22 investors, track them down in a timely manner, get all of these documents signed -- which is no easy task! This was a multinational company and people all over the world were investing. And with that, I also had to do a restructuring. So they had these two outstanding things that could have been addressed initially, had they had legal counsel from the beginning and adopted a legal strategy as part of their business plan and their model.
My advice to founders who think that [legal strategy] is not important -- IT IS! It could save you money, it could protect your assets, it could help you plan for taxation. That’s why I advise you to contact an attorney from the very beginning. Don’t use forms and wing it because that has created too many problems that I have seen and I want to help you avoid those problems. Thank you!
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