Building a startup is a messy, complex business. Puns aside, around a quarter of startups fail in their first year and up to two-thirds of them never deliver a positive return to investors (according to HBR.org). There isn’t a succinct reason as to why this happens, but rather a combination of variables which, when misaligned and miscalculated, create an outcome of entrepreneurial pitfalls that could have been avoided with proper legal counsel, financial advisory and business guidance.
Challenges
Data compiled by CB Insights shows that regulatory and legal challenges amount for some 20% of failures in the startup world, where founders rushed to get an MVP (minimum viable product) into the market eager to meet push by their VCs (venture capitalist) at the expense of their products’ lifeline. Starting lean, but also starting supported with experienced and industry-specific legal advice, make a significant difference to a new business’s shot at success.
Proper research and legal preparation protect a startup in the face of changeable circumstances, such as when unexpected pricing changes in required materials or legal requirements for the use of materials can throw initial business models a curve. Legal counsel with expertise in startup law with its nuances of entrepreneurial business acumen takes these elements into serious consideration, and due diligence with flexible solutions in the face of risks and changes can provide the expertise that save a new business from falling.
Postmortem analysis of failed startups (conducted by Legal Zoom) showed that some of the costliest mistakes they made included poorly structured founders’ agreements, lack of vesting schedules, loosely defined operational procedures and contracts, uncompliant employment contracts and haphazard HR documentation processes which led to disgruntled workforces and unprotected founders, and a lack of accounting for intellectual property considerations and privacy policies. Other leading reasons to failure included mistiming the incorporation process for the company, and bad bookkeeping for tax documentation. Where the gusto of a typical startup founder is essential, equally so is the discipline and detail-oriented thoroughness of steadfast legal counsel.
According to Harvard Business Review, in other situations where perhaps, a startup thought of its legal framework at the onset, bad advice by misguided bedfellows along the course of the startup’s testing periods led it into an avoidable quandary. Whether
its troubleshooting production glitches at a products’ launch stage, navigating solutions for founders’ discord, creating targeted and timed fundraising, or balancing the needs of investors with those of other stakeholders, the proper legal and business advice could save a startup its most treasured resources: money, ideas and time.
Solutions
Being surrounded with key people who compensate when founders can’t do everything themselves seems to be the golden nugget of wisdom for startups.
“When we come into the picture, we take a look at everything—a bird's-eye-view. Then we have candid discussions with the founders to understand where they are and where they want to be. After identifying risks and the founder's short and long term goals, we then begin the process of improving, and (most of the time) creating documentation necessary to protect the founders and the company from common pitfalls.” Adel Abrahim, principal partner at Privatus Counsel, offers sound advice on the added value that the right legal counsel offers a startup. "Clients later realize the value of an effective counsel's contributions to their suite of company documents. Contracts, policies and terms of use are certainly important; but equally crucial is having carefully crafted governance documents such as tailored articles and comprehensive shareholders agreements."
Choosing the right legal counsel can help startups save funds in the long term by averting risk and offering accurate guidance during turbulent times. The trick is in making sure to hire a law firm with startup experience willing to place the startup's wellbeing as a priority.
About Privatus Counsel
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