There’s an old adage that says, “Behind every great entrepreneur is a great lawyer.”
Okay, that may not really be so common, but the sentiment holds. In the business world, lawyers are not so much about keeping you out of jail as they are about facilitating good business decisions that protect your and your company’s best interests.
Kim Bennett, JD, founder of virtual legal firm K Bennett Law, makes a compelling argument for engaging with legal professionals early on, and shares how that can help your business grow, pursue investments, and ultimately, be successful.
Be Proactive, Not Reactive
Bennett recommends bringing an attorney in as early as possible.
“People think about it after there’s a problem,” Bennett says. “But if you want to keep costs reasonable, avoid the problems, get advice, and make decisions quicker, engage legal counsel early.”
If cost is a concern, Bennett recommends looking into alternative models rather than starting with full-time counsel. For example, there are attorneys that will work on a project basis, firms with special prices for small businesses, and virtual-based subscription models like Bennett’s own firm. Regardless of the type, she recommends using the same counsel for each project.
“Have someone who will grow with your business,” Bennett said. “Someone who will know your business, help perfect your strategy and even increase income generation.”
Ultimately, engaging counsel early on can help save money in the future by avoiding crucial paperwork or compliance mis-steps that could deter investors and siphon time away from reaching your end goal.
When it comes to raising capital, your friends and family are probably less concerned about the structure of your business entity or your business’ compliance with local, state, and federal laws. But if the business is at the stage where it’s ready to seek investment from angel investors or venture capital firms, know they’ll be much more stringent.
“You need to have all your I’s dotted and T’s crossed,” Bennett says. “They’re looking at how you started your business, who owns the business, the business’ obligations under your written agreements, your portfolio of intellectual property and how it is being protected, your employment agreements, and potential compliance and regulatory issues.”
Bennett says while DIY templates are a common route, they aren’t customized to your business and may exclude key provisions that would address future investors’ concerns.
“Make sure the company owns all intellectual property assets. If the company is not the owner, the business needs to engage counsel to draft agreements to properly transfer each intellectual property asset to your company.” Bennett says.
Bennett also recommends reviewing all your current agreements, which includes everything from entity agreements, service agreements, employee agreements and whatever else is linked to your business before you start seeking investments.
“The investors will want to understand how these agreements affect business operations and the ability to transfer ownership interests to another entity,” Bennett explains. “If key provisions are missing or not drafted properly, you may need to renegotiate and amend the terms of your agreements. If you’ve never engaged an attorney at this point, then this is the time.”
Going back to the first point, you want to be proactive, not reactive, when preparing your business for the investment stage. If the investor is the one pointing issues out to you, you risk looking sloppy and even losing an opportunity.
Know Your Worth
There is a range of intellectual property (IP) associated with companies, from patentable new technology to trademark, service mark, copyright and even trade secret protections for brand assets, marketing materials and business documents. Intellectual property is valuable and for many companies, its IP portfolio comprises the most valuable asset in the business.
“Make sure the business, not the individual founder or employee that created the intellectual property asset, owns the right to all intellectual property assets developed for the business,” Bennett states. “The business must own all the intellectual property in order to transfer those ownership rights over to future owners of the business.”
When seeking investment, it will be required that all IP be signed over from an individual to the company. Again, this goes back to making sure your business is set up correctly. And importantly, you should know the value of your IP and your business. At the beginning, you may be eager to get the idea off the ground no matter what and accept money that’s not in your best interest in the process. With legal counsel that understands your vision, you’ll have advisement to avoid giving up equity too early and for too little money. In some instances, pursuing loans could be a better option than signing away ownership.
Know Your Exit Plan
Bennett says one of the biggest rookie mistakes she sees business owners make is failing to thoroughly communicate their exit strategy with their co-founders during the business planning process. This can be bad for a few reasons, but namely because it jeopardizes the business and the relationships that built it.
“At first, it’s amazing,” Bennett says about business partnerships. “The relationship is great, you see great potential and then somewhere down the line something breaks down and the relationships deteriorate beyond recovery. Having entity documents in place that detail how important decisions are made during difficult transitions may prevent a business from falling apart or even dissolving.”
Bennett says proactively lining up the proper documents will drive how you move forward with people, the structure of the business, how you handle investments in your new venture, help provide clear communication across all individual owners, and finally, help you plan an exit strategy.
For Bennett, it’s all about making informed decisions that make your experience as an entrepreneur positive and successful.
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