How to avoid “captive” company counsel.
There are two general types of work that a corporate lawyer (startup lawyers are corporate lawyers) provides: strategy and execution. Very experienced, senior executives who’ve been in the game for a very long time tend to use their lawyers much more for execution than strategy. They know how to navigate the environment themselves, and how to negotiate, and just want good lawyers to paper things properly.
First-time entrepreneurs, however, are not seasoned executives. They’re often entering an environment of total opacity, where lots of the people they’re dealing with (investors, partners, etc.) have 10-20x more experience and connections than they do, and very misaligned incentives. In this context, entrepreneurs lean on their startup’s lawyers – who have very broad visibility into the market, and broad experience on a variety of deals – not just for execution, but for deep strategic guidance: how and what to negotiate, how to navigate the ecosystem, what to push back on, how to protect themselves, etc.
Unfortunately, because startup lawyers play such a pivotal role in helping entrepreneurs negotiate with and protect themselves from bad actor investors, those investors often make it a point to gain significant leverage over the lawyers in their local ecosystems: by sending deals in their direction, working with them on deals, etc. This is a huge problem.
If you are an entrepreneur working with a lawyer to negotiate a term sheet, how on earth can you trust the objectivity / impartiality of that lawyer’s advice when the people who sent you the term sheet have employed him on 20 other deals, and will do so in the future? Fact: you can’t. The conflicts of interest are simply too high. For that reason, one of the core questions any startup founder needs to ask a prospective lawyer is: what investors do you work for? Do not hire lawyers with deep ties to people you expect to raise money from.
Well-negotiated and fair deals result when both sides are represented by experienced, independent counsel. No matter what anyone else in the ecosystem tells you about how a certain set of lawyers will help you close on money, if you don’t take their independence from the money seriously, you will regret it in the long run.
Does my startup lawyer need to be local?
Checklist for choosing a Startup Lawyer.
In short: no, and anyone who says otherwise is simply lying in order to cut off competition from potentially better fit lawyers with broader geographic footprints. Virtually every serious corporate lawyer (startup lawyers are corporate lawyers who specialize in early-stage) with a well-deserved brand has clients across city and state lines.
Because the vast majority of startups are incorporated in Delaware, Delaware corporate law governs 99% of the issues they’ll deal with. The 1% will be labor/employment issues, which will typically be governed by the location of their employees (often multiple states), and local labor boutiques are easily engaged for that.
In fact, when you’re navigating negotiations with potentially influential local investors whose ‘reach’ covers a lot of the local legal market, there can be benefits to having counsel from someone more detached from the local community. See: How to avoid “captive” company counsel.
Go through the above-linked checklist to ensure you are engaging counsel that is the right fit for what you’re building – in terms of specialization, cost structure, culture, etc. – regardless of where they are physically located.
Lies about startup legal fees.
The following are a few points that any startup entrepreneur needs to keep in mind in terms of forming their company from a legal perspective.
First, formation is not the same thing as incorporation.
Incorporating a company is literally the act of filing a document in Delaware (or another state). It achieves 1% of what needs to happen in a proper startup formation. A full formation involves forming a Board of Directors (or if an LLC, Managers), issuing equity with vesting schedules, assigning IP, forming an equity plan, and a number of items. When comparing offerings from different firms, pay very close attention to what is actually included in a package, because it’s easy for firms to leave things out in order to appear to offer a lower price.
Second, don’t assume you want a “standard” Delaware C-Corp.
If you read info from Silicon Valley – and most content out there is from SV – you’d think 100% of tech startups are C-Corps. That’s not true. Yes, most are, but your particular business model and growth trajectory may make it a less obvious choice. See: More Tech Startups are LLCs.
Be aware of fully automated options.
There are fully automated and safe options like Clerky, if you are comfortable with no customization and a very standard structure. If keeping legal costs to an absolute minimum is a top priority, Clerky is far safer than a DIY project with templates.
LegalZoom and RockeyLawyer are not appropriate for a startup, because they are designed for small businesses, which have much simpler/less complex needs.
Most startups hire law firms. Hire one right-sized for what you’re building in the next 5 years.
See: Checklist for Choosing a Startup Lawyer and Why Startups hire law firms, not a lawyer. Most startup-specialized firms have fixed fee packages for formations that will allow for more flexibility/customization (and guidance) than a fully automated approach, without incurring excessively high costs.
Background reading: Should I incorporate in my home state or in Delaware?
Why does so much of the international business world speak English? Because it is very efficient to have a common underlying language for people in various places to communicate with.
Delaware is the english language of national business law in America.
The same is true with law. Regardless of what your feelings are about federalism in the United States, expecting American companies to learn and navigate 50 different states’ laws would be a nightmare. So the business community has, over time, coalesced around Delaware as a kind of uniform standard for companies with some level of cross-state scale.
The vast majority of angel and VC-backed emerging tech startups in the U.S. are incorporated in Delaware, regardless of where they are geographically located. And for that reason, all serious startup lawyers across the U.S. know Delaware corporate law, often better than their local state law.
There are of course other reasons why Delaware is preferred by so many companies and investors, much of which are explained in the above-linked post. But the main point for founders to understand is that scaling Colorado startups have good reasons for starting out in Delaware.
Delaware can save you money long-term.
Because so much of the startup ecosystem is built on Delaware corporations, all serious startup lawyers have large sets of form documents and processes built around Delaware law. Taking advantage of those forms and processes will save you legal fees.
So, yes, you will pay a few hundred dollars more a year to state agencies if you incorporate your Colorado startup in Delaware instead of Colorado. But you will make up for it in reduced fees charged by your lawyers, who’ll be able to lean on the well-developed Delaware-based infrastructure of documents, templates, processes, etc.
Both in the short term and long-term, Colorado founders intending to build companies looking to scale faster than a typical small business should strongly consider Delaware.
Sidenote: See also: Not Building a Unicorn for a discussion on how, while being a “startup” means going after some amount of scale, it doesn’t have to mean a Silicon Valley-style hyper growth trajectory.