Lesson 2: Prioritise Legal Expenses

Prioritize Legal Expenditure Over Cutting Costs Elsewhere

It's a common and tempting mistake to believe that you can save money by eliminating the expense of legal counsel for your start-up. If you aren't facing a legal case, why bother with it? If you think you can handle your paperwork, why hire a lawyer?

While you might be able to reduce costs in various aspects of your start-up, it's risky to exclude legal advice and guidance, particularly during the early stages of your business venture. Ignorance about laws, regulations, and the legal consequences of business decisions can have detrimental effects.

Choosing the Right Expert

Given that start-ups often operate on the forefront of established law, it's crucial to collaborate with a legal specialist who possesses domain expertise and a deep comprehension of your industry. Due to the frequent existence of "grey areas" in nascent industries, working with a lawyer who can help you navigate potential obstacles is advisable. Opt for a legal expert who becomes a genuine partner, not someone merely obstructing your progress. A valuable legal partner will outline the pros and cons of significant decisions and advise you on minimizing exposure, ranging from government inquiries to shareholder litigations. Additionally, they will assist in crafting language that safeguards your company.

Transitioning from Risk to Informed Decision Making

Your legal counsel should offer insights into potential risks—such as the risk of lawsuits or liabilities—allowing you to make informed decisions, particularly in those uncertain grey areas. It's essential to identify aspects of your business subject to ambiguous legal interpretation and then protect yourself in those domains. While achieving absolute legal clarity is rare due to inherent business liabilities, ensuring your company resides on the legally safe side is feasible. Minimizing surprises on the legal front ultimately benefits you.

Initiate with Personal Research

To economize on legal fees, a practical approach is to commence by conducting comprehensive research on legal matters yourself. Seek out articles, blogs, and, if time allows, books that delve into pertinent subjects. Engage in conversations with other start-up founders or employees. Participate in discussions on social media platforms, including interactions with experts.

However, don't consider all this information as definitive advice, as nuances and special circumstances might elude your grasp. Instead, when you consult a lawyer with the right start-up-specific expertise and domain knowledge, you'll possess a foundation of information and understanding.

This approach allows the lawyer to verify your findings or rectify any misconceptions you may have. This focused approach can reduce the time the lawyer needs to familiarize themselves with your business. As time is money in legal matters, this method enables you to save money without compromising the vital aspect of legal counsel.

Managing Legal Costs

To control legal expenses, research local pricing, attorney experience, and negotiate for lower legal fees. The key is to establish a long-term relationship with a professional who isn't charging exorbitantly. Our CEO recently engaged with a company burdened with over $100,000 in legal debt for work that should have cost $10,000. Both parties suffered due to engaging an attorney who wasn't suited for their needs. Experience holds significant weight in the legal realm, and while a $100-per-hour attorney might seem preferable to a $300-per-hour attorney, often the difference lies in the $100-per-hour attorney billing for 10 hours versus the $300-per-hour attorney billing for two.

Finding a Lawyer & Accountant

Every company needs a lawyer and an accountant. The key is to find good ones who offer you flexible billing. But first, let’s consider why you even need them at all.

A business lawyer will provide you with much-needed support for everything ranging from filing articles of incorporation to trademark help to assessing liability and avoiding or addressing lawsuits. An accountant will organize your accounts, review the financial figures with you on a regular basis and prepare your company’s filings for federal, state and local tax obligations.

Finding a good lawyer that is a good fit for you and your company can be a challenge, but you should “shop around.” We recommend that you find a lawyer that is very experienced working with entrepreneurs and can do the core legal work for your company.

Today, lawyers have become more specialized, as opposed to being generalists. One lawyer may focus on contract law, while another one focuses on intellectual property, and a third one focus on real estate law. You could go to a big law firm and get all legal services under one roof, but it will likely cost you an arm and a leg, so to speak. It is more affordable for an entrepreneur to work with a local attorney who has a track record working with successful start-up companies in the area.

You should ask the lawyer you like to charge you flat rates, so you can control your costs and avoid being surprised by a huge legal fee. Lawyers tend to give you hourly rates, but most will charge a flat one-time fee for routine legal services, such as forming a company. They may not volunteer it, but you should ask for it. You can also negotiate for a monthly retainer, which is predictable. If the lawyer asks for the whole flat fee upfront, we suggest that you hold back 10-20 percent as contingent on the lawyer completing the job to your satisfaction.

It’s similar with accountants. You will want to work with an accountant who is experienced with entrepreneurs and is willing to do flexible billing with you, including flat fees, monthly retainers, or at least cost estimates, so you can control your costs.

You can also look at legal website services, such as RocketLawyer.com and LegalZoom.com. 

You can also check out your local Chamber of Commerce for a referral to accounts. It’s also appropriate to ask friends and family or, better yet, other entrepreneurs in your area for referrals to legal and accounting professionals. The key is to start searching and vetting individuals who make sense for your potential business.