We all hate working with attorneys. That is, until you need one. And when you find one that effectively advocates on your behalf, you love them more than you care to admit.
Every startup needs great counsel. But few startups set themselves up to effectively use counsel. Some startups avoid using outside counsel out of fear that their limited budgets will quickly evaporate. Other startups leverage outside counsel, but end up overspending because they don’t optimize their engagement model. I have two simple recommendations – one strategic and one tactical – to optimize your legal infrastructure.
Build Your Legal Playbook
Strategically, startups need to position themselves to be acquired. This involves ensuring that your company avoids any agreements that would introduce unnecessary or unacceptable risks to a potential suitor. Most startups don’t have the benefit of in-house counsel, but that doesn’t eliminate the need for someone to play that role. Your executive responsible for your legal infrastructure should be a capable negotiator with a strong understanding of your legal strategy. Though all contract language is important, founders and executives should pay particular attention to three areas: indemnification, limitation of liability, and termination.
Language regarding indemnification and limitation of liability are closely related. You should work with your outside counsel to determine standard language that articulates your preferred and acceptable levels of risk. Your contract templates should include your preferred language. You should also have pre-prepared backup language for higher risk tolerances when business justifies it. Having this content in advance enables your head of legal to negotiate and structure contracts without constantly having to engage outside counsel and running up your legal bills on routine negotiations. Of course, I still recommend competent outside counsel when engaged in special or non-routine legal negotiations.
Termination clauses represent another important consideration in your agreements. Companies enter into contracts with the belief that they are in the company’s best interests. However, a company’s goals may change over time. A partnership agreement with company X may be advantageous today, but disadvantageous tomorrow if company X’s key competitor wants to acquire you. You need to ensure that your agreements provide you with the right to terminate at your convenience, with reasonable advance notice, and with minimal penalties. This gives you flexibility to pivot as your company’s goals evolve over time.
Don’t Leave Home Without It
Most startups envision an exit at some point in the future. For many startups, the exit will involve an acquisition. As CEO, I’ve led corporate development and the due diligence tasks for two separate acquisition cycles. I’ve also been part of an executive team that consummated an acquisition by Cisco. After driving or contributing to the activities and due diligence behind three acquisitions, I can speak from personal experience that the process flows much more smoothly when you run a tight ship on all your legal operations.
Specifically, one of the most important tools that should serve as the foundation of your legal operations is a contract management repository. The opposing legal team will ask for all of your contracts during due diligence. Having a tidy contract management repository enables you to deliver every agreement to the opposing counsel in minutes. I’ve seen companies spend weeks hunting for a few remaining agreements because of poor document management and controls. Combing through file servers and individual laptops for the latest contract templates and the fully countersigned version of agreements wastes time and money. Sloppy contract management ultimately results in delays and higher legal bills. More importantly, it injects unwanted concern into a suitor regarding any potential exposure from acquiring your company. Finally, another potential pitfall of failing to accurately track all of your agreements is that you will miss an agreement and fail to hand it over, exposing the founders or the executive team to legal jeopardy. Due diligence is a fast-paced, pressure-packed time where you don’t want to be pulling your hair out chasing down every last agreement, or creating any inhibitors to your company getting a clean bill of health.
A good platform such as DocuSign or Adobe Sign (formerly EchoSign) will not only provide you with a comprehensive contract management repository, but will also automate the process of contract revisions and digital signatures to fully execute the agreement. Clerky is an innovative startup that helps automate some a startup’s basic legal operations and forms. Regardless of which solution you choose, make sure to use the contract management platform for every agreement including, but not limited to:
- Articles of incorporation or organization
- Corporate bylaws
- Operating agreement / founder’s agreement
- Shareholder agreement
- Non-disclosure agreements (which may include non-solicitation and/or non-compete clauses)
- Job applications and offer letters*
- Intellectual property assignment agreements*
- Asset ownership agreement*
- Employment contracts*
- Financing agreements
- Stock option program*
- Restricted stock agreement
- Sales contracts
- Purchase agreements
- Master services agreements
- Consulting and professional services agreements (statements of work)
- Partnership agreements
- Lease agreements
- Insurance documents
- Workplace safety / liability release forms*
- Employee handbook, code of business conduct, etc.*
- Board documents (meeting announcements, minutes, resolutions, etc.)
- Advisor agreements
Items marked with an asterisk are often included in a job offer package.
Work with your outside counsel to determine your risk tolerance. Then establish baseline preferred and acceptable language for your contract templates. Then develop a playbook to guide the negotiations with prospective agreements. As you negotiate the agreements, make sure all contracts are stored in a repository to facilitate easy access when needed. Implementing these best practices will ensure a smoothly running legal infrastructure that enables instead of hinders your startup.