A couple of months ago, I completed one year as the general counsel (GC) for Inshorts, the widely popular news app which summarizes a range of news stories in just sixty words for easy consumption and understanding by the users.
I am Inshorts’ first and, to date, only legal hire.
Jumping into the ‘start up’ world from my highly stressful but stable job at a Tier 1 law firm was a big decision. It was also a great responsibility, made tougher by self-questioning on whether I had the requisite qualifications to handle the job (at this point, I was six months out of college).
However, what I realised very quickly was that not only is the ‘start up’ world generally devoid of good in-house lawyers, but also that for our category (i.e. recently funded start-ups) I was probably one of the only in-house counsels in the entire space!
That was confidence-inducing.
More so, I realised that, unlike the foresight displayed by the founders and senior management of Inshorts, most start-ups do not consider a legal hire until much later into their journeys (not until they are, at least, more full-fledged mid-sized companies).
To me, that is not the optimum strategy and here are my reasons for why start ups should get in-house lawyers on board early.
1. Intellectual Property
Startups especially tech/app based ones create protectable IP early in their life and often rely on it heavily to both get users and distinguish itself from competition.
Thus, given that the most basic features, designs, user interface elements etc (essentially, the ‘look and feel’) of a service are likely to be created at the very initial stages, it makes sense to get lawyers on board then.
Similarly, pure tech-based startups (i.e. which aim to disrupt the market by bringing in new technology) will not only create their protectable IP early on, but also, will find it harder and harder to protect the same as time wears on.
This happens for multiple reasons, starting with not having adequate internal mechanisms that protect trade secrets and assign inventions to the company; and moving all the way to not knowing the type or the correct combination of IP protection required (trademark, trade secret, patent, copyright etc).
And as time passes and competition increases, these companies can often lose their crucial first mover’s advantage.
2. Financing, business, contract making
Most startups have a major problem in staying away from bad contracts early on.
In contract negotiations, as I discovered while negotiating a range of content partnerships, advertisement deals, vendor contracts, etc, a lot of bargaining power is gained by simply understanding what a contract obligates you to do.
Understanding when you can get into contracts, and more importantly, when (and how) you can exit them is crucial.
Oftentimes, while the ‘commercials’ of a contract are well negotiated, startups lose out by not understanding the ‘fine-print’ (for instance, contrary to logic and market standards, some service providers will often refuse to indemnify the service recipient for losses caused due to bad service. Indeed, some may even ask the service recipient to provide one-sided indemnities).
In many of these cases as I experienced first-hand, opposite parties were often willing to make the necessary changes or make certain obligations (like confidentiality) mutual if that gets pointed out to them during contract negotiations.
It is as if unfair contracts are set out in the first place with the vain hope that overburdened startup entrepreneurs would not notice or understand the fine print.
This is true of potential financers too.
In other words, it is not like having a lawyer on board will suddenly give startups bargaining power over their investors or over large corporate players, but having one will surely save them from ‘hidden obligations’.
3. Omitting the much dreaded ‘Transition’:
Most small companies start out as relaxed, casual workplaces (almost ‘Google-esque’ in their outlook) which allows for maximum creativity, diversity with almost no bureaucracy or internal regulations.
This is important early on when companies are still trying to figure out their ideal model for success.
However, as companies grow, they feel the need to create systems and processes that can repeat their early successes over varied jurisdictions and markets.
This then requires a painful transition involving the wholesale imposition of a bureaucracy with lots of internal regulations.
The problem? That these regulations, at that stage, have to be borrowed externally as they have not grown organically with the company itself.
An in-house lawyer, in this context, is a company’s institutional memory. As a repository of records (not only of what actions were taken, but more importantly, as one who understands why they were taken), an in-house lawyer is able to grow internal processes dynamically with the company itself.
This is particularly important given that most early stage companies require a brand of ‘controlled flexibility’ wherein broad parameters may be set within which to allow for freedom.
For instance, while a start-up will require a policy against workplace sexual harassment, it may not immediately require a gamut of HR policies covering transfers, leaves, work hours, etc. Or, it may be that while a startup’s employment contract mentions 32 days of leave, the company may not have the bandwidth to actually track leaves for its employees.
The point to remember is that these types of situations occur on a day-to-day basis and the presence of an in-house lawyer will help in arriving at quick and easy-to-implement solutions to these issues.
4. Why in-house? Can’t I get this done from external counsel anyway?
An ideal in-house lawyer is someone who understands not just the law, but more than that understands the company (i.e. its history, day-to-day functioning, real-time bandwidth and most importantly, where all it plans to go in the future).
Remember, most start-ups themselves figure all this out as they go on, and therefore, it’s important to have an in-house guy who understands that and is able to keep options open.
Furthermore, there is often an information asymmetry.
That is, while an external counsel who deals with similar companies (i.e. say with 20 odd start-ups) has information about the general legal issues faced by such companies and will be able to provide varied options; it is the job of the in-house lawyer to decide what recourse is required and at which point of time.
For example, it is generally accepted practice that IP audits help discover and protect a company’s IP holistically.
But, IP audits tend to be expensive and if an in-house counsel is able to determine the basic set of IP registrations required for her/his company, an audit may not be required immediately.
In other words, while external counsel can provide a broad range of options, an in-house counsel can first understand the internal business needs of the company and then, narrowly tailor an ideal solution for the company.
Finally, we need to appreciate that many of the day-to-day issues faced by start-ups do not require deep jurisprudential analysis (for instance, is ‘x’ a conflict of interest; can the ‘notice period’ during an employee’s exit be waived; how do you build a ‘Chinese wall’ etc).
Going to external counsel for these questions is both time consuming (because, they have other clients too, and chances are most of them are bigger than a fledgling startup) and expensive (you do not need to go a brain surgeon to cure common cold!).
This therefore, becomes the final reason why start-ups ought to hire in-house lawyers early.