Utilizing Outsourced GC for Different Business Life Cycles: Part 1 – Startups

APR 30, 2019 | PRACTUS LLP

Utilizing Outsourced GC for Different Business Life Cycles: Part 1 – Startups

Authored by Beth Lebowitz

In this series, we’re going to explore the legal needs of different business life cycles, including what kind of legal professional is best-suited for each. In this first piece, we’re going to discuss the startup business lifecycle.

Emerging from the development stage of business is both exciting and terrifying. Your brilliant idea is no longer just a concept, and it’s about to make its debut into the world. Taking your product to market isn’t as easy as setting up that childhood lemonade stand, unfortunately, and new business owners can quickly find themselves overwhelmed with the amount of legal recourse they need to take on. How is a freshly-minted entrepreneur supposed to know how to navigate these new legal requirements, including understanding what kind of legal assistance they need at this stage?

Startup Stage – Finding the Right Legal Counsel

Unless you find yourself in the situation of being inherently wealthy, or you’ve managed to bootstrap your way into some healthy EBITDA, your startup is going to need funding in order to put gas on the fire. As part of this, startups need early-stage strategic guidance in both their formation and initial equity grants. This includes analysis of the next few stages in your business lifecycle — when are you raising money? How much? What are your exit plans? Who are the founders? These are all questions a good lawyer who specializes in this area of law should help with.

From there, you’ll need legal counsel to help select the right entity type, plan for your capital raise, and issue the offering. These are large up-front projects as opposed to recurring legal needs, which means that an outsourced GC is not going to be your best bet for legal counsel. Traditional attorneys typically charge by the hour; however, finding a good corporate law firm and coming up with a budget for your initial formation and equity raise is a good idea. After the fundraising is complete, you may occasionally need this same lawyer to handle things like updating your charter, writing joinder agreements, and revisiting your capital strategy. An Outsourced General Counsel is an executive-level strategic position when your business is humming along and ready for recurring and repetitive legal and risk analysis, management, and systems.

When Should I Consider an Outsourced GC for my Startup?

After the funding is over, most startups won’t typically require nearly as much legal assistance. With a few exceptions for companies in regulated, capital-intensive industries, most startups have limited budget and volume of work to justify a GC.

The only exception is if your startup has raised a significant amount of capital (think $5M+), and is going to quickly engage a large market, with customers who require tedious contract negotiations, and throw in some regulatory compliance to boot. If your company falls into this category, then hiring an outsourced general counsel might make sense and is worth exploring.

For a company like this, an outsourced GC that can come in at an early stage to help create the internal processes, policies, and workflow, will help set a company up for success.

Don’t Waste Precious Funds on Unnecessary Legal Costs

Unfortunately, some startups rack up enormous invoices with traditional law firms. This is always hard to see. Here are companies with limited resources and the meter running, and here are law firms traditionally billing by the hour without the most efficient use of resources for startups. We call this misalignment of incentives.

Know that even though the law firm that helped you with your funding is exceptional, they probably aren’t your go-to advisor for the other business related items that come up. And, you likely don’t need a lawyer at all for many of the things you believe you need a lawyer to do.

Your startup simply doesn’t have the same recurring, day-to-day legal needs of a growth stage company. I don’t care who is advising you, or which Fortune 50 company your investor worked for — startups do not need full time general counsel. This would simply be a waste of your precious resources.

Why? Again, because save for a few exceptions, most companies don’t have ongoing management requirements in the areas of corporate governance, outside law firm engagement, IP portfolio maintenance, HR, contract process, etc. Scaling companies need these things on an almost daily basis.

It’s tempting when you’re in startup mode to feel that you need more outside resources than is actually true. Don’t fall into the trap of over-using traditional attorneys at this stage. Keep your head down, stay focused, and believe me, the time will come when you need more.

The Authors
Beth Lebowitz
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Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

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