The startup ecosystem is an emerging landscape in India, with more and more people joining the entrepreneurship bandwagon with great ideas, innovative products, and advanced technology. The consumers are ready and willing to embrace new products/technology that add value and provide solutions to their daily requirements, and investors are keen on backing entrepreneurs with such products/technology.
In this excitement of gaining traction in terms of developing a marketable product, looking for or raising investment and chalking out monetisation and marketing plans, entrepreneurs often ignore the legal bores! This includes compliances, paperwork, and legalities involved in doing business as such.
The common perception is: Why bother with the legalities of the startup operation now, when the startup is in its nascent stage and the viable product/prototype is not yet market ready? Or the more truthful perception: Why deal with lawyers – the human equivalent of sharks – who will bleed your resources dry and leave you with nothing but a host of incomprehensible legal verbiage and a fat bank statement? Sounds a bit harsh, but in essence this sums up how most lawyers are perceived typically by founders and entrepreneurs in India.
Is the above an accurate perception of how lawyers operate, or just a myth surrounding the legal profession? This will, in most cases, vary depending on the personal experience of individuals. However, in my experience, I have come across at least five common myths associated with my ‘breed’, as described below.
Startups don’t need lawyers!
Most entrepreneurs are of the view that only multinational companies, big conglomerates/business houses need the assistance of lawyers, owing to the vastness of their business operations and the ensuing legal requirements/complexities. A startup that is merely in the initial stages of its life-cycle does not require the services of lawyers.
This is wrong! A startup needs a lawyer as much as any other established corporation, albeit a lawyer who is well versed about the startup ecosystem. Choosing a proper lawyer becomes critical as a good lawyer, like a regular employee or a team member, adds value to a startup by identifying the key legal issues that could plague a startup and devising business efficient ways of dealing with the issues, without bleeding the startup’s resources. Basically, instead of saying, I don’t need a lawyer, startups should look for a lawyer specialising in startup practice and who can become a business enabler for the startup and its founders.
Lawyers=huge legal bills
I cannot deny that there is some truth in this. Lawyers are highly specialised and skilled in their work and over time this has resulted in them charging exorbitant hourly rates to clients. Some lawyers have taken advantage of a gullible client and ended up billing the most outrageous amounts for work done. Entrepreneurs believe that lawyers provide templatised, standard documents to the clients without putting the requisite efforts to identify and address the client requirements.
Also, given that all information, materials, resources are now freely accessible over the Internet, entrepreneurs feel that they can built out their own template forms from the documents available online (without paying the exorbitant fees to the lawyers). While I do accept that lawyers have in the past charged too much to some unsuspecting clients, the notion that anyone can be a lawyer and all it takes is to download a document from the web to get the work done too is erroneous.
Startups should be willing to understand that certain services can only be provided by lawyers. Lawyers too must be willing to consider that startups have special needs and they should be willing to work with those needs by re-looking at some of the traditional fee models associated with legal work.
Lawyers bury clients with legalese
Entrepreneurs want simplicity and lawyers typically give just the opposite of that. Lawyers tend to walk and talk legalese and this is off-putting to startups as they are not in a position to understand such legalese. Given this limited understanding of the law, startups want lawyers to hand-hold them through the legal documentation/opinions in order to enable them understand and take an informed decision. Sometimes, because of paucity of time, lawyers fail to meet these requirements.
Startups must make this expectation clear while choosing their lawyer. They should also ensure that they keep meeting their lawyers or having discussions on a need-be basis. This will also help lawyers cultivate a strong relationship with the founders and address their legal needs on an on-going basis.
Lawyers are deal breakers
The perception is that rather than acting as facilitators in a deal or a commercial transaction, lawyers tend to delay or lengthen the progress of the deal with unnecessary complications, technicalities, and legal intricacies. Startups that are looking for investments want the deal to be finalised at the earliest. According to them, hiring lawyers leads to protracted negotiations, going back and forth of documents and potential deadlock situations with both sides unwilling to let go of a point. We have often seen founders retain investor lawyers just to get the deal done (aka get the money!) in the shortest period of time.
This is not only a myth but a myth that could result in the startup signing documents they don’t read or understand. This has disastrous consequences and the founders may not be fully aware of what rights they have conceded in favour of an investor in the rush to get money. Hence, it is always advisable to first retain your own lawyer in any commercial transaction and to listen to your lawyer, which will then help you make an informed decision.
Changing dynamics: out of the box thinkers
Finding the right lawyer is actually the trick to get as far away from lawyer issues in any startup. This means first identifying what you want from your lawyer and then finding a lawyer who meets your requirements. This may not be easy but it will be well worth the effort. Begrudgingly, though we have to admit that lawyers themselves are responsible for creation of some of these myths, however, with the right fit, a lawyer can become your closest confidant and play the role of a mentor and a business enabler in the ever evolving startup landscape. The right startup lawyer will provide a strategic, long-term value proposition to your startup, which is focussed on growth and legal and commercial risk management.
In this regard, we have a practice for startups where involvement begins at the idea-stage (to understand the legal-commercial feasibility of the idea) and extends to business structure/entity selection (for example, Company (including one person company), LLP or a regular partnership), ongoing compliance (which helps in gaining investor confidence), IP protection, investment support, contracts, mergers and acquisitions, joint ventures and sale of business.
To summarise, startups that ignore the need to retain a lawyer right from the beginning do so at their own peril. Once the startups understand the importance of retaining a good pro-startup lawyer with relevant experience and the ability to think out of the box, the rest is often a considerably smooth sailing exercise.
About the Author:
Vidyut Bedekar is the head of Corporate, Investments and Startup practice at Bangalore-based Tree of Life Associates, Advocates & Legal Consultants (TLA - www.tlaindia.com). She has been in practice for more than 13 years and handles both the advisory and transactional aspects of corporate, commercial, M&A, joint venture and foreign investment law. Ms. Bedekar also handles the advisory and procedural aspects of the firm’s trademark practice and advises on transactional IP. TLA has set up a separate legal vertical called ‘Startup Partner’ which focuses primarily on startups.