Handling legal affairs poorly can damage a startups success
It’s a commonly held perception that lawyers are ruining America, a view that can be especially resonant with entrepreneurs running startups who often find their legal dealings to be a major point of frustration as they grow their businesses. They complain that their attorneys slow down negotiations and the closing of deals urgently needed to bring in vital revenue. All that and they cost too much! As a former lawyer and business person working as a venture capitalist to help startup founders reach their ambitions, I know that handling legal affairs poorly can crater the chances of a startup’s success. Entrepreneurs who learn to manage legal counsel effectively increase their odds of winning customers and closing financings — decreasing their chances of running out of cash. A chief executive and her lawyer should work together like winners in a three-legged race, moving smoothly in tandem, each aware of their responsibility and how to respond to the actions of the other.
Managing your relationship with your lawyer starts with understanding the orientation of the legal mind. Entrepreneurs that run startups are comfortable wearing many hats to make their businesses successful and typically like to work in a non-confrontational, quick and collaborative manner. That’s not how the mind of your typical corporate lawyer works.
Law schools teach that the adversarial process is the best way to find the truth and to reach optimal agreements. That means starting at the most favorable (e.g. extreme) position for the client in a contract and wrestling every point with the “opponent’s” counsel. This approach to partnerships and relationships tends to push people’s buttons, requires poking holes in the “other side’s” thinking and takes substantial time. It’s a mindset that finds solutions through formidable posturing and strenuous debate. It’s often uncomfortable for people who prefer working collaboratively. As Benjamin Franklin once put it, “A countryman between two lawyers is like a fish between two cats.”
However, lawyers work like this for good reason: Their ethical responsibility is to be a “zealous advocate.” That commitment mandates lawyers to protect and pursue your interests, within the bounds of the law. However, it’s a thin line between zealous and overzealous if the client fails to prioritize the business’s interests to the lawyer.
Finally, your lawyer is an expert in legal matters only — and can only be held liable for legal advice. You’re responsible for balancing that legal advice, the timeliness of the negotiation process and legal costs against your customer’s needs and the strategic and financial value of any business relationship or partnership to your overall business.
While understanding the legal mindset is important, an entrepreneur needs to understand her own role:
- You are the expert on your business’s needs, not your lawyer;
- You are the only one who can make business and legal tradeoffs, not your lawyer; and
- You are the ultimate decision maker; your lawyer is there to offer advice. Sometimes the right business decision may be “acting against advice of counsel.”
Here are five ways to better manage your legal counsel:
Find a pragmatic lawyer.
Employing a lawyer, perhaps one that has worked in a startup before, who shares a similar work orientation is a great place to start. You want a lawyer who understands that winning means growing your company, not securing every tiny legal victory. For example, a lawyer negotiating a contract between a startup and Google should understand that getting the deal done is what matters most. If Google requires an indemnity, there’s little use in fighting the point with such a large company. It’s unlikely to move forward without such a term. So, effort is better spent managing the risks to the business of providing the indemnity, whether it be avoiding behaviors that might cause your partner to be sued, capping the financial downside of the indemnity or obtaining insurance to cover the risk.
Set clear priorities.
If you need to sign a deal this week to make payroll obligations, your lawyer needs to know. Likewise, if you need an upfront payment or a specific revenue schedule, tell your lawyer. Effective executives will specify what their priorities are and what potential tradeoffs they will consider.
Set time limits.
Don’t simply ask a lawyer to review a contract. Instruct her to spend two hours reviewing a contract and to schedule a half-hour call to discuss it with you. Read the contract yourself before the call. Note any areas of concern or questions you want to ask. This reduces attorney time spent explaining the contract and writing a carefully drafted email. This approach fits the agile mentality of most startups and enables productive, iterative interactions between the executive and legal counsel. You also may want to set deadlines for closing a deal as opposed to just the duration of effort. Lawyers respond to deadlines.
There’s a stereotype that lawyers go to law school because they’re good with words, not numbers. Unlike doctors who provide data regarding the risks of a procedure (the probability a procedure will be effective or the risk of infection), legal ethics constrain lawyers from making such statements because they do not constitute legal advice. So, if your lawyer flags an issue, you need to ask questions to help assess the level of associated risk. For example, ask how many similar cases or contracts the lawyer has worked on and how frequently this particular issue has come up. Then, ask about the severity of the outcomes and costs associated with taking the risk.
Understanding whether you could face a minor nuisance, a fine, jail time or bankruptcy makes it easier to decide whether to take a risk or not.
Remember, your lawyer knows the law and how lawyers behave. She’s also been trained to argue both sides of an issue. So, when you get to a contentious issue, ask your lawyer what advice the opposing counsel might give his client, your customer, as well as what arguments she might make to support their position. This may encourage you to compromise or to push back. Negotiations are like a game of chess — it’s much easier to win if you plot out your opponent’s likely moves in advance.
A good working relationship between a chief executive and legal counsel — with clear lines of authority and communication about what is needed and when — can make a big difference between success and failure for many companies starting out.
(This guest column first appeared in Entrepreneur June 2017)