By Jason M. Kiefer, Esq.
I recently met with a group of student entrepreneurs at a local university to discuss the various legal issues that arise when starting a business. The conversation quickly moved beyond the actual legal issues themselves to how entrepreneurs with a good business idea, but a limited budget, can effectively address the legal issues that start-up companies are commonly faced with to make sure they get off on the right foot. The focus of the conversation highlighted the need for attorneys to not only advise start-ups concerning the law, but to also help them allocate their limited resources in a cost-effective manner.
As I discussed with the student entrepreneurs, the dilemma, or challenge as I like to see it, that they face in allocating their limited resources is not unique to student entrepreneurs, as all start-up companies are faced with this difficult task. There are several approaches that a start-up company can employ when it comes to allocating its limited resources to address the various legal needs of a start-up company. It is worth revisiting these approaches from time to time to make sure start-up companies and attorneys do not lose sight of them and choose the wrong approach.
The default approach that is often used by entrepreneurs is the ostrich (head in the sand) approach. With this approach, entrepreneurs disregard addressing the legal issues that a start-up company is faced with altogether because they have insufficient financial resources to pay for legal services or they simply fail to recognize the importance of doing so. As one can imagine, the ostrich approach is rife with peril and amounts to little more than playing Russian roulette with your business. As with the do-it-yourself approach, the start-up company may save some money on legal fees initially, but eventually the failure to proactively address legal issues upfront will lead to significant legal problems and/or additional legal work for the start-up company that will end up costing a lot more in legal fees than it would have to hire a competent and reasonably priced attorney in the first place.
Another approach that some entrepreneurs use is the do-it-yourself approach. This approach has been around since the advent of legal form books and has become increasingly popular with internet savvy technology entrepreneurs who use do-it-yourself legal services websites to do things like incorporate their business or generate legal agreements to save on attorneys’ fees. While there is a lot to be said about taking the initiative and doing things yourself to save money for your start-up company, it almost always takes far more to effectively address the legal issues that a start-up company is faced with than purchasing some form contracts on the internet. As a result, the do-it-yourself approach will likely lead to significant legal problems and/or additional legal work that will need to be done for the start-up company in the future due to the insufficient or incorrect legal work done by the “do-it-yourselfer”. And as is almost always the case with these types of situations, it will end up costing the start-up company far more in legal fees to remedy these deficiencies than it would have had the company hired a competent and reasonably priced attorney in the first place.
Thankfully, there is a middle-of-the-road approach for entrepreneurs on a budget that I (not so creatively) call the cost-benefit approach. This approach requires identifying the legal issues that the start-up company is faced with, performing a cost-benefit analysis for each one, and then prioritizing the order in which the start-up company will address them based on the cost-benefit analysis. While this approach is not necessarily the most comprehensive, least expensive, or easiest approach, it is the most cost effective approach when it comes to addressing the company’s legal needs on a limited budget. As a result, this approach helps start-up companies with limited resources get the most legal bang for their buck, helps minimize their exposure to risk, and helps ensure that the start-up company is being proactive in managing its legal affairs. As to the latter point in the forgoing sentence, I can’t stress enough how important and beneficial it is for a start-up company to be proactive in managing its legal affairs rather than merely being reactive. The old adage, “an ounce of prevention is worth a pound of cure,” holds true in addressing legal issues and is certainly the case when it comes to a start-up companies managing their legal affairs.
Despite the benefits of the cost-benefit approach, however, it often seems that many entrepreneurs overlook the cost-benefit approach and fall back on the simpler head in the sand approach or do it yourself approach. As such, attorneys should work diligently to advise entrepreneurs of the importance of (and perils of not) addressing the legal issues their start-up companies face, and how adopting the cost-benefit approach provides a means of cost-effectively and proactively addressing their legal needs even if they have limited resources. In turn, entrepreneurs should recognize that legal services are not a commodity when it comes to allocating resources. On the other side of the coin, attorneys need to take a value-added approach to their services, showing the value their legal services add to their clients’ businesses. Nowhere is the “counselor” aspect of an attorney’s job more important than when representing an entrepreneur.
Jason M. Kiefer is an Associate at Boylan Code, LLP, representing start-ups and established companies in a variety of business matters, including contracts, financing, mergers & acquisitions, and securities matters. For more information, please contact Jason at (585) 232-5300 or jkiefer@boylancode.com.
