When do I need a lawyer for my start up?
While your start up may need a lawyer sooner, typically, I find that start ups first need attorneys at one of three times.
First, when more than one person anticipates equity in the company. A lawyer helps to ensure that the parties: (a) document what each party is to receive; (b) address vesting issues; (c) make proper tax filings; and (d) ensure other important terms and conditions are in place to ensure that the departure of one does not impede the success of the Company.
Failure to address these issues properly can cause Company killing disputes over equity allocation later; permit one founder to walk away with equity far in excess of the contribution; create unintended adverse tax consequences; or otherwise impede the success of the company.
Second, when more than one person is involved in the start up and intellectual property is being created. Failure to properly put the intellectual property into a corporation so that the collective efforts are owned by a single entity can create havoc if one person leaves. Say two people are working on code and one of them leaves. If the code is owned by the corporation, then the departing party should have whatever pre-determined equity rights exist upon departure. But, if two people are working on the code not properly place in a corporation and one of them leaves, the departing person can lay claim to part of the code and impede use of it by the company or remaining founder.
Third, addressing issues with employers or while performing contracting services for others (or having had an agreement in place with a prior employer or party for whom you provided services to on a contract basis), you would do well to consult a lawyer to minimize any claims that working on your start up by those third parties.
What happens if I don’t see a lawyer early?
Maybe nothing. Maybe it will bring an end to your company.
Problems that can be addressed easily early become much more difficult and costly to fix later, particularly if the parties wait until a dispute arises. They can mean the difference between the success and failure of your company.
In one case I litigated, the parties failed to get the proper documentation in place over a number of years. Right now, one person is claiming up to 100% equity in the company and claims that the company does not own intellectual property. He filed a total of five lawsuits in three jurisdictions against five individuals and the company itself. Because they are being sued personally, the individuals cannot walk away.
While that kind of lawsuit is uncommon, it is not at all uncommon for disputes which could have been avoided through early use of an attorney to end a company or require a lawsuit to resolve.
Michael W. Prozan, Attorney at Law +1 650 348-1500 mike [at] mgcgroup [dot] comThis blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.