You have an idea for a tech startup and want to get it off the ground. You research the market, partner with individuals with the right technical skills, and begin fundraising. You may find that financiers and advisors ask you about what legal advice you’re receiving. But why? What do startups have to do with the law? After all, startups are all about bullish optimism, risk-taking, and the urge to ‘move fast and break things’. Lawyers, on the other hand, are stereotypically quite the opposite. They warn about risk, wonder about whether you’re going to be sued, and seem to you to be a bit of a drag on the whole project.
Perhaps that is the problem; your perception of the law depends on stereotypes perpetuated by movies, TV, and endless lawyer jokes. We’re not here to complain, and lawyers probably make more lawyer jokes than anybody else. But it helps to get a more realistic perception of what the law is about, and why legal advice is absolutely necessary for the success of your startup.
Preventative vs Reactive Healthcare
Before we discuss the legal profession, let’s borrow a concept from the medical profession. In medicine, a distinction is often drawn between preventative and reactive healthcare. Preventative healthcare means taking the necessary measures to prevent health risks in the future, while reactive healthcare is about reacting to and resolving health issues after they arise. Preventative health care includes getting vaccinated, a healthy diet, regular exercise, and quitting smoking. Reactive medicine includes surgical procedures or drug treatment. While preventative healthcare may require some cost and effort, it is far more effective than reactive healthcare which comes at a high financial and personal cost. Of course, preventative healthcare can only prevent some things, and reactive healthcare is often necessary and even life-saving (and look out for medical quacks who claim otherwise). But all things being equal, it is a far better option to diet and exercise than to get a double bypass.
Preventative vs Reactive Legal Assistance
Law, like healthcare, works similarly. There is preventive legal practice, which ensures that your business has the correct corporate structures, contractual arrangements, and regulatory compliance to help ensure there are no problems down the road. Then there is also reactive legal practice, which comes into play when things go wrong, such as when there is a dispute between founders or legal action from a customer or government regulator. If things get to this stage there is often a high personal and financial cost.
For example, say a startup has two founders who each own half of the shares in the company. Both work full time to get the company off the ground. Then, suppose one founder gets offered a full-time job at an established company and accepts the offer as it provides a more stable source of income. The second founder is incensed; he or she now has to work extra or hire an employee to take on the work, but the first founder still retains ownership of half the shares! The founders now find themselves in a dispute that will likely end up in court, or at least mediation. But had they sought early preventative legal advice they may have completely avoided the issue. Lawyers, who deal will such issues every day, would have predicted the possibility of this eventuality and drafted a Shareholders Agreement containing terms that address this very possibility.
It is true that lawyers think about what could go wrong. But this is done to find a way to make sure things go right, not to slow your startup down. If you leave your startup as it is, without professional legal advice, its health will suffer. And once that happens, rectifying the problems may come at a high personal and financial cost, and your startup may suffer irreparable damage.
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