Legal Existence for Young Businesses

Over the next few weeks I will run through the stages of a business and comment on aspects of corporate law that often impact businesses in certain stages.  As your business grows and develops, so do business aims, legal objectives, priorities and strategies.  Each post in this series defines a business stage and offers a checklist for common legal developments.

This analysis also helps me understand the nuances of your business, which are the drivers impacting any legal solution we create for you. 

Stage 1: Existence

Searching for Problem-Solution Fit

From the moment you make the decision to set up a business, you’re in the “business lifecycle.”  It begins with an idea and a decision to take action.  Sometimes this includes formally engaging a business partner or partners or quitting a full time job.  The question often on your mind is whether the business idea is viable.  If your business solves a problem, will people pay money for your solution?  Is there enough cash to make it through the start-up phase?

Sometimes you have a business plan, but generally systems and formal planning are pretty minimal or don’t exist at all.  After all, the business owner is the business and is doing all of the important tasks.  During this phase there is a lot of uncertainty.  The priority is getting the business to the next stage.  And many businesses don't. 

In this early phase we see a lot of business owners interested in “lean lawyering.” Sometimes lean lawyering looks like using an online document preparation service with minimal or no actual contact with a lawyer.  It can be filing your own formation paperwork with the Secretary of State and not preparing an operating agreement.  It can be relying on advice from a family member or friend who does not charge you fees, or picking a lawyer’s brain informally at a happy hour or other networking event.  

Checklist for Existence with Lean Lawyering:

  • Is your business owned by more than one person?
  • Are you confused about any of the language in the documents you downloaded or bought online?  Did you explore your options before choosing that language?
  • Does your business operate in a new or highly regulated area (healthcare, education, transportation, agriculture, import/export, ammunitions, cannabis)?
  • Will your business benefit from a special qualification like Women-Owned Business Enterprise, Disabled Veteran Owned Business Enterprise, Minority Owned Business Enterprise?

While I’ve seen documents prepared by LegalZoom create a lot of confusion and expensive litigation, I let my clients know if there is a good do-it-yourself solution. For example, clerky.com has proved useful and cost-effective for certain clients who need a Delaware C Corp, VC investor vehicle.  It’s my first priority to provide value to clients.

Something to understand about online document services is that they are not allowed to give actual legal advice.  States have started issuing licenses to non-lawyers, sometimes called Legal Document Assistants or Limited License Legal Technicians.  The legal industry is trying to find the best way to improve access to legal information and use technology, especially to serve people who are impoverished.  The question alive right now is whether these services are causing benefit or creating more harm, because there are a lot of wrong fits and misunderstandings arising from these tools.

If you answered “Yes” to any of the checklist questions, you will benefit from a one-hour discussion with an experienced corporate lawyer.  If you schedule a business assessment, it’s helpful to email the lawyer copies of your legal documents (contracts, too) and let the lawyer know what industry you're doing business in.  It’s common to pay for a one-hour assessment.  It’s supposed to be a working meeting, not a meet and greet.

An early stage business legal assessment should cover:

  1. Review of your existing legal documents;
  2. Discussion of key provisions or elements of your legal documents, and options for improvement;
  3. Identification of laws that are unique to your industry;
  4. How to avoid personal responsibility for business risks;
  5. How to keep legal costs down; and
  6. If you have a business partner, discussions should begin on founder exit strategies. 

Some business founders understand the value of having an attorney engaged from day one.  An early stage business assessment works similarly for these clients.

The next posts in this series will walk through Stage 2: Product Market Fit, Stage 3: Preparing for High Growth, Stage 4: Expansion, and Stage 5: Maturity and Owner Exits.

Do reach out if this posted raised any questions or you'd like to offer comments.