What Every Entrepreneur Should Know About When to Use a Corporate Lawyer
- John W. Gaddis
- April 23, 2020
Entrepreneurs are often reluctant to spend money on legal expertise during an economic downturn. However, history shows that downturns can be an ideal time to invest in your business and its long-term prospects by focusing on a couple of critical legal items while simultaneously not sweating some of the smaller issues that can arise.
Working with smart corporate counsel can help strike the right balance and actually save you money by prioritizing what you need, when you need it, with just the right amount of lawyering. In other words, when you have limited dollars for legal issues, it’s important to know where to spend those limited dollars to maximize your company’s investment in legal resources without waste and inefficiency.
Experienced corporate counsel will tell early stage companies in most industries to focus on two priorities as soon as possible: capital table management and intellectual property (IP) ownership. Both of these things are important right at the outset of a company’s life, and both can have significant and irrevocable repercussions if they are not addressed properly at the start.
For starters, early stage companies should focus on capitalization table (cap table) management. This really means two separate things. First, make sure all equity arrangements are properly documented. Second, make sure incentives are properly aligned among founders. This doesn’t mean taking a blood oath with your cofounders to stick around for ten years. However, if a founder leaves to take another job, they probably shouldn’t walk out the door with 100% of their equity intact.
An experienced corporate attorney can help you manage your cap table, properly document each equity grant and ensure that proper incentives exist among founders to give the company a foundation for success. Having executive alignment and strong cap table management in place from the start will enable you to make smart and strategic decisions as the company grows, protect your company from a legal perspective – saving you significant time, money and hassle down the road – and it can serve as an important tool for providing competitive compensation and supporting employee recruitment and retention.
IP ownership is equally important for early stage companies. In short, every single person who touches the company’s intellectual property (whether an employee or contractor) needs to sign an agreement to assign IP ownership to the company. This will help prevent and, if necessary, efficiently resolve IP-related disputes down the road.
Many early stage companies initially hire contractors, or even friends, to help develop their website or app. Founders may toss them a bit of money but may not have an independent contractor agreement in place that says the IP developed by the contractor is owned by the company. A piece of that software code can become essential to a company’s business down the road.
If there’s no signed independent contractor agreement in place, the contractor may try to claim ownership, demand payment, complicate due diligence and hold up pending transactions. A sophisticated corporate lawyer can work with your company on independent contractor agreements (ICA) for contractors, Proprietary Information and Inventions Assignment Agreements (PIIAs) for employees and include invention assignment language to avoid significant potential problems in the future.
These issues are important because potential investors and acquirers will look closely at the cap table and related documentation and IP ownership as part of their due diligence. Seeing that equity allocations and IP ownership have been established proactively will give businesses the “benefit of the doubt” with investors and acquirers while doing diligence, and therefore makes their company more attractive, potentially leading to better deal terms, or at least minimizes the chance of a diligence re-trade on valuation.
On the other hand, uncertainty or lack of documentation with regard to your cap table and IP can be a risk and red flag for investors, complicating or potentially jeopardizing the success of the deal.
Once there is a potential financing or M&A transaction on the table, it’s much tougher to fix equity allocations and IP issues. There’s much greater risk of an equity holder or employee holding up company founders for money, therefore potentially jeopardizing the transaction and delaying due diligence and closing.
Working with a business-focused, sophisticated corporate lawyer who knows the stage of your company’s growth can save you money from over-lawyering by knowing what to prioritize and what might not be the best use of resources at each stage, enabling smart growth and helping you avoid pitfalls and risks in the future.
John Gaddis is a corporate partner at Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC (KO Law Firm), an innovative corporate and commercial law firm with a team of experienced lawyers and a practical, efficient, business-focused approach. Founded in 2003 on the philosophy that a different approach delivers better value, our business-first legal and industry expertise helps established brands and emerging companies achieve meaningful business outcomes. KO is headquartered in Denver and Boulder, Colo., and serves the software and SaaS, retail and manufacturing, professional services, energy, food, beverage and consumer goods, eCommerce and internet, healthcare and life science and ancillary cannabis industries. Reach John at firstname.lastname@example.org.