Insights and Opinions

 

Tuesday, June 24, 2008

Roping in the Legal Eagles

from "Uncle Saul"





Johnnie Cochran was an effective, albeit smarmy, defense lawyer who would say or do anything to defend his clients (anyone up for a glass of OJ?). He was a master at encouraging jurors to disregard facts and base their legal verdicts on emotions and conjecture. Yet, despite his exceptional courtroom theatrics, you would be foolhardy to hire good old Johnnie to review your software cross-licensing agreement.

A startup-oriented lawyer may not be able to convince a jury of a guilty man’s innocence, but they can guide your venture through the menacing legal shoals it will no doubt face. Working with startup lawyers also minimizes the risk of losing control of your venture, as they can help you avoid common fundraising and investor pitfalls. Such attorneys can also add tremendous value in your negotiations with Big Dumb Companies (BDCs), as they can ensure that you focus on the deal points that are of most significance to a small entity. As such, a startup-oriented lawyer is a critical member of your extended venture team.

 

Substance Over Form

 

Be wary when selecting a professional services firm. Often, the Rainmaker with whom you initially establish a relationship will not be your primary point of contact once the Engagement Letter is signed. As such, you must be comfortable with all of the team members who will work on your engagement. In addition, there is often an inverse relationship between a firm’s size and the amount of attention that you will receive from experienced professionals. The larger the firm, the less “quality” attention you may receive. Do not be swayed by the hundreds of other startups the firm represents. Remember – you are hiring a lawyer, not a law firm. Before you sign an Engagement Letter, obtain written assurance that your lawyer will directly attend to your matters and that you will not be shuffled off to become a training ground for the law firm’s junior associates.

Like most mature markets, the legal profession is highly segmented with respect to the services provided and markets served. Even so, the majority of firms focus on servicing well-established BDC’s. Fortunately, in most communities, there are usually a few firms that cater to the specialized needs of startups. Startup lawyers tend to congregate in entrepreneurial enclaves. As such, your likelihood of finding an experienced, top-shelf startup lawyer will be higher if you place your venture in a geographic region which enjoys a strong entrepreneurial ecosystem.

Some startup attorneys will accept a portion of their initial fees in the form of equity. This will allow you to defer a portion of your of up-front legal costs. In addition, such an arrangement will further cement your lawyer’s incentive to help you succeed. When you hit the inevitable bumps in the road, a lawyer who has an equity stake in your business is more likely to be flexible with respect to payment terms and more willing to give you quick, off-the-clock feedback and guidance. Ensure that your lawyer’s goal is to establish a relationship, not just a retainer. If you are charged for every nanosecond you spend with your lawyer, consider finding one who is willing to “invest” more aggressively in your success.

When managing your legal affairs, never lose sight of the fact that your lawyer works for you. It is surprising how often entrepreneurs forget this simple fact. Your lawyer is a trusted advisor, but in the end, you run your business, your lawyer does not.

In Search of an Oxymoron - The Ideal Lawyer

 

When assessing a potential lawyer, consider the following criteria:

Yes Man - Many lawyers think that their job is to say, “No.” You can only hope that your competitors are working with such lawyers. Search until you find a businessman in lawyer’s clothing who will respond to your inquiries with replies such as: “Yes, here’s how we can do that.” In other words, find a lawyer who will take the time to understand the issues underlying your business and advise you how to best accomplish your objectives while minimizing your legal exposure. Such a lawyer will help you look at all sides of each deal.

Independence - Be cautious of any lawyer recommended to you by one of your investors. The reference may be well-intentioned, but the lawyer’s allegiance may be divided between the investor and you. Such a lawyer will not go out of their way to screw you, but when crafting the investor documents and in future investor-related issues, your lawyer’s allegiance must be to your company. He or she must be willing to fight for your company and go toe-to-toe with your investors. A lawyer with a long-term interest in keeping one or more of your investors happy might sacrifice your company’s best interest at a critical juncture in order to remain in good standing with the investor.

Act Like A Three-Year-Old – Do not be afraid to frequently ask your lawyer, “Why?” Your lawyer should be willing to explain the legal issues that impact your operational decisions. Ideally, you will be fortunate enough to find a pseudo-professor who is willing to take the time to explain the issues at hand. I established such a relationship with a fantastic lawyer and he taught me a great deal over the 10 years we worked together. Even though you will, to some extent, pay for such training in the form of billable hours, understanding the why of the law will ultimately save you money, as you will eventually be able to answer many basic legal questions on your own. However, be respectful of your lawyer’s time and acknowledge the fact that they have multiple clients. In addition, believe it or not, a few startup lawyers actually have a life outside of their legal practices.

In order to get the most out of your discussions with your lawyer, take one or more Business Law classes. A basic understanding of common law precepts, contract law and business law is one of the most important academic foundations you can utilize in your startup. If taking part-time evening courses is not possible, seek out an online curriculum.

Money Is Time

 

No matter how entrepreneurial your lawyer is, he ultimately is in the business of trading his time for your money. Thus, the burden of maximizing the return on your legal dollars is squarely on your shoulders.

Drop Dead Deadlines - Your lawyer cannot read your mind. Thus, every time you submit a request to your lawyer, make it very clear when you really need a response – this will help your Legal Eagle to effectively manage his time and ensure that he meets your expectations. This is a courteous, professional way to manage your relationship and will also benefit you. If you do not cry “wolf” every time you request something, your lawyer will know when something really is urgent and they will do whatever is necessary to meet your deadline. Nothing is more frustrating for a lawyer than to work late into the night in response to an urgent request, only to have the client not act upon the response for several days.

 

Draft First – As the businessperson with the most intimate knowledge of a particular deal, you should draft as much of the “business-oriented text” of your contracts as possible. At the very least, you or the appropriate member of your team should document the primary deal points in bullet-point form. The more specifically you document the business terms, the fewer iterations will be required to finalize the agreement. Even a highly attentive, business-oriented lawyer cannot put himself in your shoes. They do not work at your company, so there is no way they will have your insights. Thus, the more work you do upfront to document the business issues, the less you will ultimately be charged and the more closely the agreement will reflect the spirit of your verbal negotiations.

There is no magic language which makes an agreement legally binding; in fact, in most cases, the simpler the text, the better. Many a binding contract has been written on the equivalent of the back of a napkin. Once you draft the straightforward text, sans the legal mumbo-jumbo, ask your lawyer to review the text to ensure your layman descriptions do not result in an unintended interpretation. Plans and agreements written in plain language reduce confusion and benefit all parties. If you select the right lawyer, he will not load up your text with gratuitous legal jargon (leave that job to the BDC’s legal squad).

Bill Review – Believe it or not, lawyers and their staff are human (insert “gasp” here). They make mistakes. Just as you expect your accounting department to review your corporate credit card bill, you should always take the time to review your legal invoices. Your lawyer should provide you with detailed bills that describe each charge. Ensure that whomever has the closest working relationship with your lawyer reviews the bills for potential billing errors.

 

Sometimes You Do Get What You Pay For

 

Just as you would not ask your family physician to perform a coronary bypass, do not ask your corporate lawyer to help you write your patent application. Most corporate attorneys can give you general guidance with respect to securing your Intellectual Property (IP) rights, especially with respect to trademarks, copyrights and other non-patent-related items. However, you should seek a patent attorney when it is time to craft your patent application.

Entrepreneurs should only spend their cash on items that add value to their ventures. However, they also know when it makes sense to save money and when it is appropriate to pay a premium. The money you pay your IP lawyer should be judiciously spent, but you should not attempt to save money by working with someone without the appropriate experience in your technical domain. Familiarity with the relevant “prior art” is one of the most important considerations when crafting a patent. You do not want your IP lawyer to learn the prior art associated with your technology on your dime. Save money on your office furniture, not on your IP lawyer.

Appropriate patent “design” can allow you to later add related claims, yet still have the benefit of the initial filing date. It can also ensure that your patent is not too broad, which might make it indefensible, or too narrow, which might limit its applicability and thus its value.

In the eyes of a potential acquirer, your IP may be one of your most valuable assets. You cannot rely on the IP lawyer to coax such vital information from you. Similar to the process of creating a contract, you or the appropriate technical person on your team must first document the novel and unique technical aspects of your solution. In order to enhance its value and reduce the risk of someone easily circumventing your solution, you cannot abdicate responsibility by relying solely on an IP attorney to translate your technology into a patent application.

 

Your Lawyer is not a Doberman…

 

Do not be litigious – you cannot afford the loss of focus or the energy required to use the courts as a weapon. It is also unlikely that you will have the financial wherewithal to successfully wage legal battles. Some companies use lawsuits as an arrow in their competitive quiver. Rather than trying to tear down competitors by suing them into financial ruin, spend your time building value within your business.

… but They Make Great Guard Dogs

 

When you are sued and you are “in the right,” your lawyer may advise you to settle the case in order to put the lawsuit behind you and minimize your cash outflows. Do not do it. Repeat: do not act “rationally.” Even though it may cost you more money in the short-term to fight a fallacious lawsuit, when viewed from The Fringe, it is clear that such spending is a sound investment.

Spending your precious dollars to earn the reputation in the legal community as an irrational entrepreneur who will fight frivolous lawsuits, even when it is in your economic best interest to not do so, is money well spent. The last thing you want is to become an easy mark for unscrupulous lawyers who make a living filing extortionist lawsuits. There is a small army of smarmy lawyers who share “tips” regarding how to extract money from honest, hardworking entrepreneurs such as you. They also trade lists of “easy marks” – companies that roll over when faced with a frivolous suit.

Go Nuclear

 

During the Cold War, the Russians were fearful of President Nixon because of his heavy drinking and erratic behavior. His threats carried weight, as the Russians could never be sure of his stability or rationality. With one finger on “the button” and a bottle of Jack Daniels in the other hand, they were forced to keep their distance. It is difficult to imagine Brezhnev invading Afghanistan knowing that Nixon was wandering the halls of the White House late into the night in varying states of sobriety. Unfortunately for the Afghans, President Carter poised no such threat to the Russians.

When it comes to nuisance lawsuits, make it clear to the predatory legal community that you are Nixon and the bar is open. Demonstrate that you will act irrationally and outside of your own best financial interests to ensure that every lawsuit filed against you is lengthy and expensive for both sides. Clearly communicate that you have no intention of performing a quick ROI calculation and deciding to pay off the predatory lawyer to “make him go away.”

If you can successfully convey that the lawsuit will be an expensive effort for both parties and that you do not intend to fold, the predatory lawyer will see that the payoff is not there and they will move on to easier prey. Remember, even an unscrupulous lawyer’s time translates into money. If you make it clear that you plan to force them to spend as much time as possible on your case, then they will be more likely to move onto a company that will pay them off early in the process and thus net them a better return on their time.

The rash of spam lawsuits from a few years ago is a good example of how two-bit, loser lawyers who cannot make an honest buck go after companies who are trying to do the right thing. One of my ventures was hit by several such lawsuits and we refused to pay any sort of settlement. Only one of these cases ever made it to court.

Here Comes The Judge

 

When we arrived at the courthouse, the judge required us to first meet with the smarmy lawyer and attempt to work out a “settlement.” The lawyer was right out of central casting – he was as creepy a cretin as you can imagine. He initially tried to “settle” for a thousand dollars to “cover his travel costs.” He then asked for “a couple hundred dollars” and encouraged us not to bother taking the case to court so we could “get on with our day.” After a lot of fake smiles and attempts at launching an ingratiating conversation, he finally gave up when it became clear that we had no desire to pay him anything.

Once the case was brought in front of the judge, she levied the lowest possible fine she could impose: $80. She was very unhappy with the smarmy lawyer because her docket for the day was filled with his nickel-and-dime lawsuits. She berated him for bringing such petty lawsuits into her courtroom and told him that each case would be settled for the minimum fine. Sometimes justice actually does prevail.

Judas Suits

 

If Judas were around today, he would probably get a smarmy lawyer and sue Jesus, rather than turning him over to the Romans.

Treat nuisance lawsuits brought by disgruntled, former employees in the same manner as those filed by a predatory lawyer. If you settle, not only does there appear to be an admission of guilt, your largesse will also encourage future lawsuits. If you feel you treated the former employee fairly, invest the dollars to show the world that you will spend wildly to protect your principles – do not let your lawyer talk you into acting “prudent” and settling.

Most employee lawsuits are brought on a contingency basis, in which the lawyer attempting to perpetrate the extortion only gets paid if: (i) the former employee wins the case and is awarded monetary damages or, (ii) the company pays the former employee to make the case “go away.” Otherwise, the employee’s lawyer is not compensated for the time they put into orchestrating the shakedown. You can greatly reduce a contingency lawyer’s appetite for a particular case by making it clear to them that you are Nixon and they are Brezhnev.

You can also greatly reduce the risk of employee lawsuits with a few simple preventative steps:

  • Employ consistent and disciplined hiring procedures, including background checks, backdoor references (i.e., speak with at least one person who knows the applicant but was not included among the applicant’s references)

 

  • Require all employees to sign iron-clad invention assignment and confidentiality agreements

 

  • Enforce the employment policies defined in your Employee Handbook and requiring all employees to sign a form acknowledging that they have read the Handbook and agree to abide by its policies during their tenure

 

  • Document all personnel issues, including the specific steps an employee placed on probation must take in order to avoid termination and whether or not the employee abided by the terms of the probation

 

  • Include two company employees in all personnel meetings with a problem employee and take contemporaneous notes during and immediately following the meeting

 

  • Encourage terminated employees to sign a release which absolves your company of all liability before the termination process is completed

A good startup lawyer will help you establish such policies and agreements from the outset of your venture.

BDC Bark vs. Bite

 

The bark of a BDC lawyer is often much greater than their bite. The usual approach of the BDC lawyer is to initially deal with an entrepreneurial company in a highly aggressive and threatening manner, in the hopes that you will be intimidated and scared into following a particular course of action.

Hold your ground. As every entrepreneur on The Fringe is well aware, BDC’s are most concerned with limiting their liability. Although they may bark loudly, they know that the US courts lean toward the “small guy” and thus they will think long and hard before doing anything that may expose them as a corporate bully.

I once received a very aggressive letter from a Fortune 500 BDC who felt that our remote access product was being used improperly by certain users to circumvent the BDC’s licensing scheme. They demanded that we send them our entire customer list and that we issue a letter to all of our customers indicating that they were not to use our product in violation of the BDC’s licensing terms. The indicated that if we did not promptly comply with their request, they would seek an injunction that would shut down our company.

This ludicrous demand is akin to asking the phone company to send a letter to all its customers telling them not to use the telephone to make prank calls and that if it does not send such a letter, its ability to offer phone services will be discontinued. Just like the phone, our remote access product was simply a tool. Some people will use a tool for the greater good and others will use the same tool for a nefarious purpose. We certainly did not encourage or even make it very easy for users to violate third-party licenses. However, if some of our users did misuse our products, it clearly was not reasonable to threaten our viability with a blanket injunction.

I called the BDC’s lawyer and “nicely” made it clear to him that his letter was insulting and that there was no way we were going to send him a list of our customers, let alone issue a letter to our users asking them to use our product “legally.” I also suggested that if his BDC was so worried about users violating their licensing scheme they might consider revising their legacy, shrink-wrap license to reflect modern Internet usage. Although he was not happy that we did not kowtow to them, we never heard from him again.

In another instance, we received a very strident letter that indicated that one of our product’s URLs was causing “confusion” with a BDC’s URL. However, surprisingly, if we agreed to pay a significant amount of money, the BDC would overlook this “confusion.” Hmmmm … does anyone smell extortion in the air?

Once again, I promptly responded to the overly aggressive letter with a quick phone call telling them that we felt their assertion was ridiculous and we would welcome the chance to prove it to them in court. As with the BDC with the legacy licensing scheme, we never heard from them again. The key to our success in both instances was that we had the guts to speak with them voice-to-voice and communicate our willingness to fight their assertions in court. We did not allow the situation to escalate by sending warring letters back and forth. Get on the phone and let them hear the irrational resolve in your voice.

Captain and Navigator

 

Your lawyer may be the most important member of your extended venture. The difference between a great lawyer and a good lawyer is startling and you will know it once you experience both.

Despite the importance of this relationship, your lawyer is not driving the bus. They will often sit shotgun, to act as your navigator and help you reach your destination. However, you are in the driver’s seat. It is up to you to fill the bus with the right people, ensure that the gas tank never runs dry, and keep the bus moving in the right direction.

To paraphrase the late, and not so great, Johnny Cochran, “If the lawyer don’t fit, then you better split.”


I rest my case.

"Uncle Saul" is a serial entrepreneur (who wishes to remain anonymous) who has led one IPO, was window-dressing in another and has executed several M&A transactions, all of which collectively generated over $450 million in shareholder value. Saul is a CPA and a Wharton MBA who never qualified for the PGA but likes to watch the NBA. Uncle Saul is also a songwriter who managed a successful rock band and plays an awesome iPod. He also teaches would-be entrepreneurs at a major California university. You can read more of his thoughts at www.infochachkie.com. .


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