Lawyers don't know the first thing about running startups but a good startup lawyer will be able to think strategically right along with the founders - that is, will give advice, not in a ham-handed way that focuses purely on legal risks but rather in a way that in itself helps put those risks in perspective for the founding team so that they can see at a glance what the likelihood and potential severity of each is and how each relates to the potential benefits of the deal.
This fine piece points out that the founders should be doing this, and that is true, but the lawyers themselves should also be doing it. Otherwise, they spend all their time giving very unhelpful advice about why things can never get done.
Well put. I've gone through the legal process acting for an investor. A lot of the legalese felt like an insurance policy and was dreamed up by the lawyers (read: copy/pasted) for scenarios that neither the investor nor startup cared about.
Just like an insurance policy, the real test is when you have to make a claim. That's when you might be grateful for some of the terms. Having said that, I think the way Steve describes it is great. Basically, make sure that the strategy points are identified and dealt with by the management team, not the legal team.
The point is that both lawyers and clients should understand their roles. The lawyer's primary job is to explain to the client the legal consequences of a given course of action. Preferably, the lawyer will have the clients non-legal interests in mind that the same time, so that they can have an intelligent discussion about weighing the risks and benefits of a given course of action.
Correspondingly, clients should understand that lawyers are there to give advice. They are not there to give direction; they are there to give advice. It's always better if the client and lawyer both understand the clients strategic goals, so that they can have, as described above, an intelligent discussion about weighing the risks and benefits of a given course of action, but the overall purpose of the lawyer is merely to give advice.
But that puts you in a tough spot: deciding you know a legal issue better than your lawyer. Similar to telling your doctor "OK, fat and salt are bad for me; but I like them so I'm going to keep eating them". Why did you even ask?
So that you can make an informed decision. Also, there is often a middle ground. "Fat and salt are bad for me, so I will keep eating them, but now I will do it in moderation."
Similarly, there are times you may decide to take an action that will risk a lawsuit, but you can do so in an informed way by consulting a good lawyer. Paul Graham makes the point in http://www.paulgraham.com/softwarepatents.html that most startups should simply not worry about infringing patents. This is a calculated risk, but one they should know they are taking if they do so.
Similarly, there is a calculus of negligence (brief laymen's overview at http://en.wikipedia.org/wiki/Calculus_of_negligence ) that essentially says that if the probability of hurting someone else's property multiplied by the most likely damage is less than the cost to remove that risk, you simply accept the risk and be prepared to pay out the damage if it happens and do nothing to reduce that risk. This is a very calculated risk since if something happens you will be required to pay for it and the other party will rightly sue you if you do not. Yet the rational thing is still to just accept that risk, but you can only make that risk rationally if you have calculated that risk (perhaps with advie of a lawyer).
Maxwell Kennerly is an attorney, and thus defining his own role in legal consultations. I was at the doctor's office earlier today and made a decision about the costs and benefits of a medication which required considering the probability of side effects and the expense of purchase vs. the potential health benefits.
On a related note, NEVER put a doctor, lawyer, or accountant on a board of directors. It's very tempting because they often have many of the external signs of success. But many years of indoctrination have taught them to limit risk at all cost and that is deadly -- not just for your startup but for life in general. There are certainly exceptions, but in general their very choice of profession exposes what their priorities are.
Risk management is not the same as "limiting risk at all cost." The former will balance the reward potentials with the risk of investment; the latter will turn down anything that's not a lock.
OK...but I think 'limiting risk at all cost' is a bit of stereotype; doctors (and attorneys) do take difficult or even dangerous decisions which require them to weigh risk as a matter of course, which is why members of both professions carry malpractice insurance. Also, many board decisions do not require unanimity.
I question the idea above because it echoes a good deal of what I've heard about the pre-crash standing of risk managers at banks; during the bull market they got sidelined as party poopers and now many of the same banks are risk-averse to the point of paralysis. Surely there's room for a happy medium; growth-at-all-costs is no healthier than safety-at-all-costs, and we often read of reckless corporate decisions which end up costing shareholders far more than than they saved in the short term. Look at that recent Home Depot lawsuit for example - a $4m 'saving' turned into a $21m loss.
Further, 'external signs of success...choice of profession exposes what their priorities are' suggests that somehow members of these professions get ahead by charging fat fees for obvious common-sense advice; doing well by simply having a phobia of mistakes and accumulating their reputations by default. But 'making it look easy' is one of the things that distinguishes skilled from mediocre people in every profession. By that yardstick, programmers are just glorified button-pushers, capitalists are mere rentiers, emergency workers are all adrenalin junkies, and civil servants do nothing but push paper.
It's true you can't make an omelet without cracking a few eggs, and eggs that aren't cooked within a certain time will go bad. On the other hand, turning the heat all the way up ensures your omelet will be inedible.
Attorneys and accountants have a primary function of limiting and mitigating risk. Entrepreneurs by definition are willing to deal risk and are much more comfortable with putting their balls on the chopping block.
Be stupid? No. There are a few great accountants and lawyers worth their salt. Be wise, but remember it's your damn company, you've put the sweat in, and you should be calling the shots. Don't be a marionette for your counsel.
The analytical training a lawyer receives could be invaluable to a startup if that lawyer can break out of his extreme risk aversion.
In my experience, a good lawyer will truly impress you with his ability to think through a problem, but might surprise you with his ultimate conclusion. Virtually any risk makes him hesitant, irrespective of the potential return for taking that risk.
Deborah Tannen (the linguist and author of "The Argument Culture") tells a story about how bringing in lawyers to write up an informal agreement derailed it completely.
Some companies, however, referred the matter to their attorneys so a contract could be written. In no case where attorneys became involved-- mine as well as theirs-- could we reach an agreement on working together... The adversarial nature of the legal process had polarized us beyond repair.
Excellent advice and very timely for me. Especially the advice about finding an 'advocate' in the customer's organization with the authority to over-ride lawyers and negotiating high level points with him.
I think the article misses a few points. If you seek out a stereotypical lawyer (meaning nit-picky etc.), you get what you pay for - lots of lawyerly arguing, lots of problems raised etc.
Whose fault is it then if a lawyer impedes progress on an important deal? In my opinion, the fault lies with the business side. Lawyers provide a service - just like consultants. You wouldn't let a consultant run your business, so what's up with placing all the blaim on lawyers if deals get stuck? It's the business side's fault for not properly managing their lawyer and not telling him what exactly he is there for.
Legal education makes you an expert in spotting problems and helping put consensual agreements between people in enforceable language. It doesn't make you nit-picky per se, it's more a matter of character. There are first-hand lawyers out there who are probably even better at the business side than the business people themselves (think Peter Thiel) - they have an expert ability to spot lots of problems, and then proritize those and decide what's important and what not. Full disclosure: I am a Ph.D. student in law and that's what my education provided me with - an ability to prioritize problem-solving according to importance.
Whose fault is it then if a lawyer impedes progress on an important deal? In my opinion, the fault lies with the business side. Lawyers provide a service - just like consultants. You wouldn't let a consultant run your business, so what's up with placing all the blaim on lawyers if deals get stuck? It's the business side's fault for not properly managing their lawyer and not telling him what exactly he is there for.
I'm pretty sure that's exactly what the author is suggesting. For example, notice things like,
"When I was a younger entrepreneur my answer would have been, “Ok. See if you can get us better terms. Call me when you’re done.” This time I said, “Make a list of the issues in bullet form, send them to me and I’ll get back to you.”"
My interpretation was that he is saying, "don't let your lawyer run your company strategy, that's your job", and this is fundamentally what you are saying as well (though with different focus).
The owners of the startup I worked at were lawyers and it worked out pretty well for them as the company was bought for nearly $200 million. We did e-discovery and they knew the space well and had a lot of good contacts in the industry that got us in the door where we would have had no shot otherwise. I can't say I thought they did everything right by a long shot but they way it turned out for them its hard to argue otherwise.
> Michael Arrington is/was a lawyer and runs a startup. I think his legal background has given him the confidence to pursue legally sensitive journalism
And what a runaway success the crunchpad saga has been. Especially from a him being a lawyer point of view.
It's weird. If you look at a lot of startups ("startups"?) in Germany & Austria, you'll find people with a law background among the founders. I haven't yet figured out why this is the case.
That assumes I know enough about law to be able to tell. :) I do know that Germany has really odd laws about cease & desist notices. (receiver has to reimburse legal costs of the C&D - even though they're probably overblown)
This is yet another example of the "Know you role" principle. Basically people work best in well defined roles inside of a larger framework. without this you end up with founders trying to do a lawyers job and lawyers trying to do the founders job.
This brings up a point about people who provide solutions instead of just listing potential problems. I think this can apply to any field, and those who do it are much more valuable.
This fine piece points out that the founders should be doing this, and that is true, but the lawyers themselves should also be doing it. Otherwise, they spend all their time giving very unhelpful advice about why things can never get done.