Inventory, wages, premises and cash flow are just a few of the concerns shouldered by the modern entrepreneur, yet there is a potentially bigger challenge awaiting many startup founders who simply are not getting the necessary legal foundation to underpin their future success.
There are a number of reasons why small businesses are not seeking legal advice. Andrew Allison, company secretary for opinion mining startup BrandsEye, believes entrepreneurs are not always aware of what he calls the “unknown unknowns”.
“These are the things that if you are not legally trained you are not going to spot,” he said, adding that many entrepreneurs believe the cost of legal assistance is prohibitive and just do not know how to go about finding a suitable law firm.
Although seeking legal advice is not always a startup’s first priority, a legal mistake early on can prove to be costly, if not fatal, to a business.
“There are several avoidable mistakes that, if a firm seeks legal advice right from the start, can be avoided or inexpensive to fix,” said Aalia Manie, senior associate at law firm Webber Wentzel.
A good legal foundation will not only reduce a startup’s risks and save it from potentially costly mistakes going forward, it will also improve a company’s sustainability and make it far more attractive to potential investors, said Andrea Böhmert, investment partner at Knife Capital.
Where to start
Getting the legal bases covered should not be an onerous undertaking. Allison believes the first step for any firm is to ensure that all paperwork is in good order.
“My advice is that all entrepreneurs should focus on documentation and ensure all their record keeping is in place. I urge small businesses to keep copies of their signed contracts with their employees, suppliers, clients and landlords,” he said.
“These should be signed by both parties and be easily accessible by multiple people. If a company can start by having those, any lawyer is going to have a much easier time getting their heads around the state of the business.”
Böhmert urges entrepreneurs not to download templates from the internet. She says often these templates are not locally relevant, which can be very damaging to a startup in the long run. Manie agrees and cautions against the use of generic templates that have not been tailored by professionals who have a thorough understanding of the nuances and specific risks faced by that business.
As an investor, Böhmert believes there are three key contracts that every startup business needs to have in place from the start. These are the initial shareholder agreement, employment agreements with a special focus on the executive team, and intellectual property assignments.
“When it comes to those key agreements, it is critical to go to a reputable law firm and get sound legal advice,” she said.
Manie adds that startups also need to ensure that the business has the valid legal rights to use their trademarks and technology, because having to rebrand or find replacement technology can be a costly affair – more costly than the initial legal advice – and can cause reputational harm or business interruption.