5 Reasons Startups Should Hire a Lawyer Immediately

Nehal Madhani, of PlainLegal, graciously agreed to drop some knowledge about why you need to hire a lawyer ASAP. Enjoy!

Most startups fail. There are more factors that can cause a startup to fail than to succeed. So, startup founders owe it to themselves and their companies to maximize their chances of success. One of the most commonly ignored opportunities is legal issues. Here's why entrepreneurs should connect with startup focused lawyers as early as possible, and ideally before they even start their company.

The Likelihood of Success Can Increase

Lawyers are incredibly talented at recognizing patterns. A great startup lawyer taps into his or her experience from advising other startups to ensure that you and your company don’t fall into the same traps that caused others to fail. In addition, hiring a lawyer in the early stages can help you address the legal risks around the most common sources of startup failure, like co-founder conflicts.

For example, a lawyer can help you prepare a co-founder agreement to protect your interests and the startup. Having this agreement in place early on (particularly when the stakes are the lowest) can be extremely beneficial in case you and your co-founder(s) have any disputes.

Lawyers Can Increase Your Startup’s Value

Aside from helping you minimize risk, great startup lawyers can also help you maximize value. For example, if you were deciding between an LLC and a C corporation last year, your lawyer may have told you about the special tax benefits a C corporation would provide (like allowing you to exempt at least $10 million from capital gain taxes if you met certain conditions). Startup lawyers can also add value by providing introductions to VCs and angel investors and serving as an informal advisor based on their past experiences representing startups.

Fixing Mistakes Later Costs More

Many startups take the approach that legal issues can always be addressed later. This reasoning, however, fails to consider that it often costs more to fix or undo legal mistakes later, both in terms of time and expense. For example, founding your startup as a New York LLC using an online form generator and having to change it to a Delaware C corporation later costs more than it would have to form it in the first instance (assuming a Delaware C corporation would have made the most sense when you incorporated).

Not Every Mistake Can Be Retroactively Fixed

Some legal mistakes might not be fixable without penalties. For instance, if you violate employment laws by treating someone as an independent contractor when they are really an employee, you may be subject to fines and penalties by the state and federal government (even after fixing the mistake).

You Don’t Know What You Don’t Know

As a startup founder, you already have to do countless tasks that you’re not qualified to do. Legal problems tend to be particularly nuanced and often require interpreting “legalese” before you can solve them. Great lawyers understand these nuances and can help you navigate them to avoid unknown traps.

For example, if you set yourself up as a New York LLC, you may not have realized that you have to announce the formation of your LLC via newspaper notices that cost as much as $2,000 — a requirement that most lawyers in New York know. (PlainLegal is leading a charge to repeal the LLC publication requirement in New York. You can support us at LLCreform.org).

Although many startups founders wait until the last minute to address legal issues, founders would greatly benefit from hiring a great startup lawyer even before they start. Great startups lawyers can provide entrepreneurs with basic legal guidance, minimize legal risks, and maximize their chances of becoming a successful company.