*Republished courtesy of the New York State Bar Association
In today's day and age more and more entrepreneurs are starting businesses that push the envelope and they're looking for lawyers to help them grow their business. Finding the right lawyer can be difficult and from the lawyer's perspective advising a start-up can be a virtual minefield. Depending on the stage the start-up is at there is a lot to consider. There are three main categories a lawyer needs to consider in such circumstances- getting the company started, transacting business and protecting information. Some of the questions a lawyer can expect to be asked include:
1.) What type of company should I establish and what are the tax consequences?
2.) In which state should I incorporate?
3.) How do I establish a company?
4.) What formalities do I need for holding annual meetings, board meetings, etc.?
5.) How do I protect my trade secrets? Do I need to file for IP rights and if so, how?
6.) What employment law policies do I need to implement?
7.) Are my business practices compliant with securities laws and regulations?
As you can imagine, hiring a different specialist lawyer for each category of questions can be very expensive for a start-up business-especially if the money can be used to make the business more profitable. Therefore, many start-ups prefer to hire a general counsel to answer these questions. The General Counsel in turn will have to either very quickly become versant in corporate law, IP law, employment law, and commercial law or will have to be able to hire outside counsel at a cost-effective rate to advise on certain matters. Speaking from experience, there will be times when this is preferable and best for the start-up company. Of course, the mantra "time is money" is always at the forefront of the lawyer's mind and the head of the firm's.
Lawyers (especially compliance lawyers) often have a reputation for being the "no" person; meaning the answer to "can we do xyz" is "no". Considering a start-up firm is not yet an established firm in the industry it is preferable for the lawyer to be less of a "no" person and more of "yes, but if you do this..." person. Being a start-up lawyer requires a creative mind that is not only business oriented but simultaneously sensitive to the laws and regulations of the locality in which the business is established.
STEPS TO TAKE TO LIMIT POTENTIAL PROBLEMS
A good lawyer will anticipate issues that may arise in the future. It is advisable to be prepared beforehand to limit potential future issues. This requires an honest and in-depth consultation with the entrepreneur to "diagnose the patient"- meaning that the lawyer is better equipped to advise on legalities at the different stages of the company's development if the lawyer knows the business model and the entrepreneur's intention on how to grow the business.
An entrepreneur hires a lawyer to help them legally establish the corporation. However, the entrepreneur will often see themselves and the firm as one entity. It may seem counterintuitive but the lawyer is counsel for the yet to be established firm and the entrepreneur is merely the promoter of the firm until it is established. The lawyer however is hired to be the firm's counsel and if this is not clearly established from the beginning then at some point a conflict of interest may arise.
A potential conflict of interest may occur in equity financings in the instance where the company may benefit from diluting its stock but this would not be beneficial for the founder.
Drafting the right partnership agreement that clearly defines the role and position of each founder (if there is more than one) may also be helpful if future disputes arise. This is especially significant when the partners want to split the profits and losses of the business differently than their respective shares in the company. If this is not clearly stated in writing from the beginning the law does provide a default rule for sharing the profits and losses but this may not be what the partners envisioned.
Another potential problem arises when the company issues stock but the founder was not advised about the relevant securities filings. Such omissions can lead to the directors, officers and founder of the company being held personally liable.
Starting a new business can be exciting and entrepreneurs are typically in a rush to start making profits. But having proper legal guidance is crucial as there are many legal matters that arise before the corporation is even formed. It does not have to be daunting and an experienced business lawyer can be extremely helpful in getting things done correctly from the onset and even anticipating future hurdles or issues. A good lawyer will bring these matters to the entrepreneur's attention and together will help the start-up company succeed on a firm foundation.
Emily Georgiades, Esq. is a member of the New York State Bar, the Bar of England & Wales and the Cyprus Bar Association. She is a business lawyer with a Master of Laws in Corporate, Banking and Finance Law from Fordham University School of Law, was a Deputy General Counsel of a business consulting firm in NY and teaches an advanced course in Business Law at Queens College in New York.