Legal Basics Investor Should Know When Engaging a Startup Lawyer

A Guide for Startups on Choosing the Right Legal Partner

When a start-up is launched, it is not just the business that the entrepreneurs need to look after, but also the legal aspect of running it. Unless all the legal ducks are lined-up neatly in a row, your business could flounder. Hence, entrepreneurs need to hire a lawyer for their start-ups so that they can proceed with confidence, since,  a lawyer will take the legal nitty-gritty off their hands enabling them to focus on letting their brain-child take flight.

With numerous firms offering their services, it can be down-right confusing to decide whom to hire. It is not rare to see instances of ugly spats between the founders and their lawyers, which consequently leads to financial losses for the founders.

Not every lawyer can be the right fit for every start-up. To avoid any potential conflict, there are a few things that entrepreneurs need to contemplate and understand before they engage a law firm.

1. Do the Lawyers Understand Your Start-Up

This is the first question any entrepreneur must ask their prospective lawyers, especially if their start-up is heading towards making it big in a niche industry.  Each sector of any industry has its unique needs.

A start-up may face tremendous legal challenges and lawyers are required to steer the start-up away from potential legal landmines. Lawyers are required to be familiar with the regulations and vital information that apply to a particular segment of the industry that the start-up may belong to, and are required to have a certain level of specialization and expertise in the same.

Lawyers also need to be in sync with the start-up’s vision to enable them to foretell potential legal snags that might crop up and take the right action.

2. Experience With Start-Ups

A new start-up that is trying to establish itself in the industry needs lawyers that have had experience working within the early-stage ecosystem. In the inception stage, start-ups have unique requirements such as registration, procuring patents, copyrights and other intellectual property, procuring trade licenses, and so on.

Lawyers are required to draft the right documents regarding the structure of a start-up and help the entrepreneurs to come to an understanding with investors about equity sharing. Early-stage start-ups need counselling on funding and infrastructure requirements.

Working with established companies is vastly different from hashing things out with a new entrant. The onus is on the entrepreneurs to find lawyers and look-up their track-record to figure out how start-ups that they have worked with, have performed, in terms of structural and funding requirements.

3. Find Out Who Will Be Handling the Proceedings

Sometimes although start-ups hire reputed firms for a hefty price, they soon realize that the law firms deploy inexperienced lawyers to take care of the start-up’s needs. The lawyers may not have sufficient knowledge or experience to be able to give sound advice to the entrepreneurs in the most crucial stage of their start-up’s growth.

It is only fair for a start-up to be represented by an experienced set of lawyers, having spent a fortune for legal services.

4. The Payment Structure

While deciding which lawyer to hire, entrepreneurs must also understand how lawyers charge for their services and which payment model will work best for their start-up. Usually, lawyers opt for a ‘pay as you go’ structure, i.e., entrepreneurs pay their lawyers when they need to get something done, neither before, nor after.

Lawyers may also want to be paid upfront by paying the entire quantum of the legal fees before the lawyer undertakes the proceedings.

Some lawyers also prefer a retainership agreement. In such a scenario, the lawyers will always be around for all the entrepreneur’s needs. However, this arrangement can be a little unpredictable for the entrepreneurs’ ledger books, since, they are required to pay a specific fee to the lawyer as per their agreement.

There may be times when the entrepreneurs might hardly require the services of lawyers and during such phases, the money will be draining out of the account books for nothing. The obverse would be somewhat more profitable for those times when a lot of legal hurdles pose themselves, having a lawyer on retainership would be a cost-saving measure.

If entrepreneurs link up with lawyers through their investors, then lawyers might be willing to be paid in equity in lieu of cash because they have a long relationship of trust with the investors. This arrangement would mean that lawyers would be entitled to a predetermined equity percentage.

Whatever arrangement entrepreneurs and lawyers decide upon will impact how smoothly the business runs. This is why it is important for entrepreneurs to understand the deal and read the fine print before finalizing the deal.

5. Understand Why Start-Ups Need Lawyers

Before start-ups hire lawyers, they should know which situations might necessitate the services of a lawyer. This will give them an estimate as to how much they would have to expend on legal services. Besides, it is important to have sound knowledge about what the legal requirements might be. Remember, knowledge is power.

  • Incorporating the Start-up

Lawyers will draw up the requisite documents that will establish the start-up as a company or a limited liability partnership. This will help entrepreneurs secure their right to the start-up.

Lawyers will also help multiple partners arrive at a decision on how to split their profits to avoid serious fallout and economic loss in the future.

  • Coming to an Agreement With Angel Investors or Venture Capitalists

Investors are the ones who get the start-up off the ground for which they may charge an exorbitant percentage of equity. Lawyers can negotiate and push through a solution in the event of such investment transactions.

  • Intellectual Property Rights

Intellectual property rights such as patents and trademarks safeguard the start-up’s core idea, innovation, brand name, etc. so that no one else but the entrepreneurs can rake in a fortune out of the entrepreneurs’ hard work.

  • Hiring and Labour Laws

These laws are difficult to manoeuvre without a lawyer. Violating labour laws and human rights even, unwittingly can bring down the force of the law against the start-up.

  • Income Tax Laws

Tax violations have serious consequences. Lawyers can also advise their clients on how to save on taxes without infringing on any laws.

  • Regulations Determining the Industry

Lawyers help understanding the compliance of laws like the Companies Act, the Indian Contract Act, Information Technology Act, Foreign Exchange Management Act and many others whose breach could result in calamitous law-suits.

Even if the start-up is operating under a cash strapped budget, these are some matters that may require an entrepreneur’s attention or the business might fold.

The legal side of things is not something entrepreneurs can compensate on and hence, they have to be careful while hiring lawyers or they might not get their money’s worth. These points can help entrepreneurs make an informed decision while hiring help.


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