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Working with early-stage startups

To set the context for this discussion properly I acknowledge it is highly unusual for an early-stage startup in Canada (even in a high-growth industry) to have a full time in-house counsel on board.

Occasionally, where the complexity of the business, the inherent risks it is exposed to, the investment thesis it is pursuing, and other salient factors justify the expense, in-house counsel may be engaged on a contract basis. In the vast majority of cases, however, surveys demonstrate to a large extent early-stage startups carry on without legal suspenders and hire external counsel strictly on an as-needed basis (e.g. assist with financing rounds, IP protection, complex legal agreements, and to initiate or defend against material litigation).

Providing strategic legal support to a startup in its early stages is, in my opinion, qualitatively different than backing a late-stage startup or a mature organization in that it requires a significantly diverse mindset (e.g. acceptance of ambiguity and risk, perseverance, and curiosity) and service model (e.g. acute understanding of the business, anticipation of needs, and alignment of legal work with what is likely to be a dynamic investment thesis). From my personal experiences, here are some of the differences, and the skill sets and orientation, I believe are required.

360-degree communication

Early-stage startups have an investment thesis they pursue involving a value proposition and a constant validation and invalidation of assumptions. Attempts are made to identify the unknowns to enable new assumptions with a view to having the thesis merge with reality. In-house counsel should be attuned to the assumptions and be in a position to respond as the business model changes (e.g. product pull ins or push outs, new partnership agreements, escrow agreements where doubts are raised with regard to bankability, etc.).

Being forward looking and having peripheral vision with regard to future needs and responding to them are critical, particularly with high-growth startups closing in on a greenfield opportunity.

Two-way communications with the rest of the executive management team is essential. Sales funnels, opportunity tracking, engineering plans, and status reports on a centralized enterprise resource planning system are vital tools for ensuring everyone is singing from the same song sheet. Make sure you are plugged into them.

Understand the business

To be best positioned to provide strategic legal support self-study is required. This requires taking your legal hat off and poring over your competitor’s annual reports and other public filings, analysts’ reports, trade publications, and subscription services on your client’s business, understanding the ecosystem it operates in, identifying what the competitive differentiators are in terms of its products and services, the vertical your client will be selling into, and getting a grasp of how money is made in the client’s industry.

Out of this a number of things will fall, including a list of legal priorities to help make sure your client capitalizes on its strengths (e.g. anticipating the need for partnership agreements, licences in and licences out, component purchase agreements, etc., and getting started on them early).

Define your space

Chances are you will be surrounded by highly intelligent, creative, and technical types. They may or may not understand legal nuances but one thing is guaranteed — they will have no time to point you in the right direction in terms of the organization’s legal needs. You will need to identify them.

Apart from the routine commodity legal work and the usual blocking and tackling (which will take you back to your roots) you will need to perform legal triage on a regular basis. Identify risks, become a thought leader, and influence.

For example, you may need to sit in on engineering meetings and insist on creating gates in your client’s new product introduction process to ensure as products are being designed (even at the technical feasibility stage) proper patent searches are conducted, and as you approach the sampling phase patent applications are filed.

There are several prejudicial disclosures (such as the U.S. “on sale doctrine”) which could make it impossible for you to obtain patent protection. There is a significant risk that importing big company processes into a startup will stifle its creative juices and neutralize your ability to impact and influence. Legal support needs to be right sized and target the organization’s most pressing legal needs and risk exposures.

User friendliness

Savvy founders consistently shower themselves with a healthy dose of reality. Strategic, large customers (including more aggressive early adopters) will have questions regarding your client’s bankability (“Will they be here two years from now?”).

Of course if your technology is disruptive the concern is not as great. Notwithstanding this, early-stage startups need to eliminate reasons why customers will not do business with you.

Lawyers get a bad rap for being too conservative and striving for perfection. The startup culture is to provide samples and development kits to alpha and beta customers that are “good enough.” Legal support also needs to be “good enough” from the customer’s perspective, particularly in Canada where companies often fail to scale. If agreements are not short and concise you may very well be dead on arrival.

Anticipate, anticipate, anticipate

When startups chasing greenfield opportunities achieve significant customer traction they may hit an air pocket unless you have the key legal infrastructure in place ahead of time.

Well in advance of achieving success, in-house counsel should have a final set of transactional contracts ready to be deployed (e.g. product evaluation licences, purchase and sale terms, datasheet and white paper disclaimers, contractor agreements, manufacturing and supply agreements, distribution, sales representative, research collaboration agreements, etc.).

Too often the paperwork is thrown together at the last minute. For example, I believe it is incumbent on in-house counsel to sit with engineering as products are being designed, and with operations as they are being tested and certified, and simultaneously draft the product warranty, along with the disclaimers and exceptions.

Summary

You would not expect the head of engineering to ask for your advice on the topology of your next integrated circuit. You should also not expect him or her to define for you what your client’s legal needs are.

In my opinion, in-house counsel — to a much larger degree than with a late-stage startup or a mature organization — needs to understand how its client intends to make money, why customers may not want to do business with your client, and clear those roadblocks.

More than anything though, try to anticipate and define the organization’s legal needs not only for next month, but also six months and years down the road.