Watch Out for Legal Fees Early On

January 12, 2013

in Legal

The official start of a new company is a legal transaction, involving at a minimum the following elements:

  • Registration with the State
  • Registration with the City
  • Formation of an Operating Agreement and potentially some other equity agreements
  • Formation of Employee Covenants Agreement, also signed by the founders, which covers employee NDA, assignment of work product, and other standard employee covenants

Back in 2007, as a first time entrepreneur, it was easy to walk into the offices of the major law firms and become awestruck at the regality of it all. It was easy to fall into the trap of thinking that you need to hire the “best of the best” to handle such precious documents.

In reality, you don’t need a major law firm (billing at $350-$600/hr) to handle such cookie cutter documents. There are plenty of $250/hr or less smaller firms with small business and startup expertise. There are even plenty of template documents online (such as this Start-Up Forms Library from Orrick).

Here’s how I recommend getting the 4 items above accomplished:

  • State of Georgia – Do it yourself online at the Secretary of State’s website. In the past, I used Legalzoom, but even that is a waste of money since the State’s website is so easy.
  • City of Atlanta – Do it yourself online. Some startups ignore this step. I found out the hard way that the City of Atlanta is very good at collecting their fees. They sent people through the halls of ATDC writing tickets a few years ago.
  • Operating Agreement – Look for templates online. Study them and see if you find any that fits your needs. Hire a small lawfirm ($250/hr or under) that will just review and/or make small edits to the template you’ve selected. This will be significantly cheaper than giving them a blank check to come up with an Operating Agreement from scratch.
  • Employee Covenants Agreement – Same procedure for the Operating Agreement, but you can probably find one that is perfectly fine and needs no modification. Maybe just ask the lawyer to look it over pro bono and suggest if there is any work do be done on it (they shouldn’t bill you for this).

My experience was a mixed bag. Due to winning several business plan competitions, we had racked up $10k from two different major law firms in pro bono work. The first law firm burned through most of their $10k writing our original Operating Agreement. Then we switched to the other major law firm, and they sold us on needing a rewrite of that Operating Agreement, which led to burning their $10k as well. So, on the one hand, it wasn’t money out of our pocket. But on the other hand, we could have used those prizes more prudently.

What tips do you have for avoiding legal fees early on in a startup? Do you have any go-to websites for legal document templates?

Previous post:

Next post: