The Importance of Formal Legal Paperwork for Even “Super Early” Startups

Often, friends decide they want to go in on a startup together. They may have known each other for a long time and have gotten along well and even admire each other's work. Inevitably, there will be misunderstandings down the road. Life happens. Perhaps one friend gets a job offer they weren't expecting, or perhaps the company manages to convince an angel to invest some money, or perhaps someone ends up pulling way more hours than the others. In a startup, you don't get paid. And if you're doing it correctly, you're probably terrified of all the time that you're spending and all the money you're missing out on if you just went to take a large company offer. Your best bet in protecting your friendship and the company is to create formal legal documentation before you take a deep dive into anything. Ideally, you do this before you do an ounce of actual work for the company – as soon as you have the concept in mind. It doesn't need to be a a huge pain or even expensive. Despite what you've been told, lawyers can add tons of value (especially when they save you lots of legal expenses down the road due to disagreements that initial legal work could have prevented).

I can think of countless times I have heard of startup clients going to a lawyer and lamenting all the problems they now face because they wanted to avoid the perceived inconvenience and laborious task of executing formal legal paperwork. They almost all kick themselves, because by trying to avoid the “annoying legalese,” they have wound up needing to spend much more time, effort, and emotional exhaustion on resolving major issues.

Almost any decent corporate/startup attorney can draft together a basic set of documents for you for very reasonable cost. This should cost no more than $1,500, and you can find good business lawyers who will do it for significantly less. If someone's charging you over that, you're getting overcharged. And $1,000 might seem like a lot, but if you consider most firms are going to charge you $400 an hour or more to straighten out an equity disagreement down the road, you can end up hitting close to 10x or more what you would have paid initially. We have attorneys at who can set you up with the legal docs you'll need the most for roughly $600-1000. It doesn't take much time to execute basic startup docs. You'll want bylaws, a certificate of incorporation, IP agreement, board consent, and a stock purchase agreement – just to name the bare minimum. And you'll also want to figure out how you should incorporate, which is the subject of another post.

Save yourself time, money, and a ton of stress. If you believe in your startup, then take the time to get it started on the right track. If your reasoning is that you'll wait to get funding before you deal with the legal work, then know this: Any decent investor will most likely not go near you with a ten-foot pole if you don't have your legal work in order. Startups are risky enough without having tons of fundamental legal paperwork missing from the equation.