Tuesday, July 25, 2006

Starting Findory: Legal goo

Startups have to do a fair amount of legal goo. Finding a good lawyer is important not just for legal advice, but also business advice and contacts.

It is hard to find good lawyers. If you can, try to find someone with substantial startup business experience in your sector (e.g. internet startups). Talking with someone who understands your business, is excited about it, and can offer parallels to others is extremely valuable.

Unfortunately, legal work is extremely expensive. $400+/hour is not uncommon. While many law firms will delay billing for small startups and may even write off some of the work, lawyers can do major damage to the burn rate.

Even simple things like assisting with negotiating an NDA can cost a few thousand dollars. That can be annoying. Folks at large companies you might be talking to think of legal work as costless or, at least, cost is unimportant. So, biz dev people at big companies are happy to play games all day long with you with legal agreements.

But, in these discussions, each time your little startup needs to turn to your legal team, you rip through the nest egg. More substantial legal issues may cost enough to even threaten the life of a startup.

On the issue of intellectual property protection, Findory did seek patents, but I am not sure I would recommend this path to others. Filing was expensive ($10k+) and extremely time consuming, stealing time and money away from building products, helping customers, and innovating on the core engine. Even worse, I now fear that patents provide little protection for a small startup. Not only do they take years to issue, but also they cost at least $1M and several years to attempt to enforce; clearly that amount of time and money is impossible for a small startup.

There are a few other pieces of legal goo I will comment on briefly. Watch out for conflicts of interest with bigger clients of the firm; Findory lost its first two law firms suddenly and inconveniently when they bailed due to conflicts of interest. Choose your incorporation carefully; LLC or S Corp provides tax advantages, but you need to be C Corp to take some types of funding, and converting can be a bit of a pain. Put reasonable terms of use and privacy policy pages up on your website. Grab related domain names; I neglected to get a common misspelling for findory.com -- findery.com -- which still causes headaches sometimes. Make sure your intellectual property and ownership agreements are in place for anyone who does work for your firm, including your contractors.

Overall, looking back at my experience, I think a mistake I made in the very early days of Findory was thinking too much of law firm as a mere source of legal advice. In fact, the most valuable interactions with our lawyers were the business advice and connections they provided. Despite the cost, it is worthwhile to find one that can advise you on all aspects of your business.

I want to end by emphasizing that it is important to understand that any business discussions with any large firm are going to be costly for a startup. Not only do you have the risk of disclosing information (regardless of NDAs) to a potential competitor, but also the cost of any legal frameworks necessary for the discussions can be risky for a tiny startup to bear. Be very careful with who you decide to talk to and make sure those discussions are worth the cost.

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