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How to Spend Your Limited Legal Budget for Your Startup

Thursday, March 30, 2017
You've got a shoestring budget for your startup and, you're being pulled in a million directions to quickly develop your product, find customers, and raise capital, all while ensuring you won't get into legal trouble now or in the future. Sound familiar?

Like any decision involved in running your business, how much to spend on legal expenses should be a conscious and thoughtful decision based on careful consideration of the pros and cons of the expenditure. Too often, such decisions are made on the fly as emergencies arise, and entrepreneurs end up spending much more than they should for legal services.

If you are feeling the pinch, let's look at the possible legal expenses you may be facing, so that you can anticipate the essential items for which to allocate your limited funds.

1. Early stage corporate documents:

These are legal documents that you want to get done correctly the first time. You don't want to skimp on these documents and have to try to correct them after something has gone awry. Some examples of such essential documents are:
  • Incorporation papers and corporate bylaws
  • Founders agreement: I've horror stories about startups that used a generic template from the Internet and found themselves in a pickle when founder disputes arose later.
  • IP assignment agreement: a lack of these documents can raise serious red flags during investor due diligence.
  • Other routine agreements, such as non-disclosure agreements, employment/contractor/supplier agreements, shareholder agreements, and sales agreements.
Here's a nice overview of the necessary corporate documents (https://www.entrepreneur.com/article/253997) on which you should consider spending at least a portion of legal budget. There are attorneys that specialize in drafting such corporate documents for early stage startups, so seek out those specialists for your most knowledgeable and cost effective options.

2. Financing expenses

When you are launching into fundraising activities -- in fact, before you start thinking about fundraising -- you should consider spending some quality time (and money) in finding a good, experienced lawyer to help you navigate these potentially treacherous waters. As experienced investors will tell you, there are few things more likely to kill a deal than having an inexperienced attorney representing the startup in a term sheet negotiation. You know that the investors and their attorneys have gone through many transactions, even though this one deal may be the only and most crucial one for you. The lawyer that represents you will be a reflection of you as an entrepreneur, so choose your counsel carefully. 

Some items for which you will want to budget are:

  • Due diligence preparation: Here's a classic post from AskTheVC.com regarding this process (http://www.askthevc.com/archives/2007/06/merger-and-acquisition-due-diligence-what-to-expect.html)
  • Negotiation of terms and agreements: A bad attorney can get you entrenched in a quagmire over trivial clauses and non-essential terms that don't affect the economics and control aspects of the deal; a good attorney will focus on those essential terms and pick only the battles worth fighting. 
  • Legal fees for your investors: You don't want this one to come as a surprise -- Check out another AskTheVC.com post by Jason Mendelson (http://www.askthevc.com/archives/2007/07/how-much-should-i-pay-lawyers-to-complete-my-financing.html)
3. Intellectual property protection

Intellectual property (IP) is one aspect that you will want to weigh carefully. It's easy to overspend on IP attorney costs and filing fees, if you don't have a cohesive IP strategy. For some companies, Their business strategy may center around obtaining patent protection around a unique technology. For others, the speed of execution of the product plan and first mover advantage may be more important than waiting for your patent applications to wind their way through the patent office. A thoughtful IP strategy should consider the business goals of the startup company and the types of IP protection, whether patent/trademark/copyright filings or trade secret procedures and invention disclosure process, that will maximize the value of the business. In many instances, as long as you can demonstrate some way of protecting your competitive edge and keep competitors at way, you may not need to spend a lot of money on IP.

Some factors to consider in budgeting for IP protection are:

  • Type of product: IP tends to play a larger role in hardware product companies than in software sales in many cases.
  • Stage of company: Will spending money on IP before you have even defined your target customer segment and a minimum viable product make sense for an early stage company? Oftentimes not. 
  • Exit plan: Has IP played an important role in comparable deals in your technology space? Do you plan to use the IP to monetize your technology even if your company were to falter?
  • Attitudes of stakeholders: Are the company founders, investors, and/or advisors IP savvy? Conversely, how much emphasis do your competitors place on IP protection, both offensively and defensively?
Specifically regarding IP protection, the Boulder SBDC will be hosting a workshop on IP considerations for startups on April 27, 2017.  Be sure to attend for further discussions of the nuances of IP decision making on a budget.

In all of the considerations above, recommendations from other entrepreneurs that have been in your shoes are your best bet to finding a good legal service provider. You're talking about the life of your company here -- you want to give it the best chance to flourish, without having legal troubles derail it prematurely. A lawyer experienced in working with startups can help you plan what legal expenses are absolute necessities, and which expenses can be budgeted for a later stage of the company. That adage about a stitch in time saving nine? That certainly applies here, and you don't want to be scrambling at the last minute when attorney bills can REALLY add up quickly.


BIO

Yoriko Morita is Founder and President of Patents Integrated, based in Louisville, CO. After earning her Ph.D. in electrical engineering, Yoriko left her life in the lab and combined her science and technology background with her business side. Since 1996, she has been creating and commercializing patent portfolios by combining her Ph.D. and MBA with the legal training she earned under the tutelage of a group of highly regarded Patent Attorneys at the Pritzkau Patent Group. Yoriko is a Registered US Patent Agent and Certified Licensing Professional (CLP). Part psychoanalyst...part secret agent...part corporate warrior. In the world of intellectual property law, Yoriko has built alliances and bridged the gap between organizations and negotiated contracts that have generated millions in revenue. After forming her own IP consulting company in 2014, Soumei Consulting, Yoriko put a variety of clients on a concrete and strategic road to commercialization. Her specialties include intellectual property (IP), patent licensing, IP strategy, patent portfolio management, IP law, patent prosecution, standard-essential patents, due diligence and patent standards.



Comments
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