I’m sure you know about the benefit of separating your personal assets from your business assets by creating an entity like a corporation or LLC. Not doing that would be a mistake for most business owners, however it’s not a typical mistake because the need/benefits of incorporating are well known. The same thing goes for creating strong vendor and customer contracts. I’m not interested in trotting out all those often talked about and rarely made mistakes. Instead, I want to talk about mistakes you don’t hear about often and nearly every small business makes.
1. Spending Too Much Money On Intellectual Property, Too Early
If you’ve just raised $5 million and you’re convinced you have a killer name or logo, go ahead and put some money into trademark registration and protection. If you have a $20,000 startup budget, no matter how great your name or logo is, it’s probably not the best idea to throw some of that money into registering trademarks.
The most important thing for you to do as a small business is to make the phone ring, i.e., generate sales. Everything else is secondary.
Brutal truth – your small business likely has no brand to protect yet. That’s fine, if you do the right things at the right time, it will eventually. And, when you’re just starting out without a lot of cash, the right thing is to make sales, wow customers, and iron out your business model and market position. As time grows and your bank account grows, spend some money on trademark protection.
Possible scenario: What if someone takes my great name between the time of startup and when I go to register it?
Business is about taking calculated risks. Would it be the absolute end of the world if someone else registered your name after you started? By the way, you’d have common law rights to use the name wherever you had already been using it. You’d survive. On the other hand, if you spend too much of your budget on intellectual property issues, or generally on legal issues, you may not be able to generate the sales necessary to keep going. Spend wisely.
2. Not Establishing a Legal Budget
Most entrepreneurs come to me asking “What do I have to do to get started?” That is the wrong question. The question should be “What should I do to get started?” Legal services fall on a continuum of “could do” to “should do” to “must do” and almost all of it falls in the first two categories. Think of legal services as insurance – it’s really risk protection. Incorporating mitigates your risk. Having strong customer and vendor contracts mitigates risk. Filing trademark registrations mitigates risk. These aren’t things you have to spend money on. Whether or not you choose to do them is a function of your budget, other uses of cash, and your appetite for risk. What you need is an attorney who gets it – who understands business, who has been in your shoes. Lawyers like to act like they have the answers – “come to me and I’ll do everything you need.”
But, there are very few answers. There are best possible solutions for given situations. Your lawyer should understand your business needs and your legal budget and guide you in determining how to best allocate the dollars you have set aside for legal services.
Very important point – your budget doesn’t have to be set before you talk to your attorney. Your attorney should be willing and able to help you figure out a budget based on the Could Do/Should Do/Must Do items and your style, goals and willingness to take risk.
I appreciate that having the conversation is a bit scary to some entrepreneurs because they think if they tell their lawyer their budget, the lawyer will just run off and do stuff and blow the budget. But, trust is the foundation of a strong attorney-client relationship so you need to be able to have honest conversations with your attorney about the resources you have to address legal challenges. And, you need an attorney that understands that there aren’t a lot of right answers and hardly ever only one way of doing things. Lastly, you need an attorney with actual business experience, even if this experience is only from starting his own law practice – she needs to appreciate the whole range of challenges you have ahead, not just the legal ones. This is critical.
So now you’re probably wondering how to actually establish your legal budget. As you probably expect, that’s a challenging question to address. Very large companies – Fortune 500 level – spend .34% of their revenue on legal fees and services. See BusinessWire.
However, as a startup that won’t get you very far. As your revenues (or, startup funds) increase, the percentage you should be spending on legal services should decrease. In absolute terms, you’ll be spending more money but it should be less and less as a percentage of revenue. By the way, that idea holds true for most professional fees – accounting, compliance, etc. You ought to be able to achieve some economies of scale.
So, here are a few of my ideas for legal budgets relative to startup funds:
- $10,000 startup funds = $500-$1,000 legal budget (probably just incorporating, super basic setup)
- $50,000 startup funds = $1,000-$2,000
- $500,000 startup funds = $5,000-$10,000
- $1,000,000 startup funds = up to $10,000
These are just stabs at what might be appropriate for your business. There are so many considerations that are unique to every business and industry, indeed they’re unique to particular entrepreneurs. For example, if you’re raising money or if you’re in a highly-regulated industry, you’ll need to spend more. And, if you have a very small startup budget and you’re in unregulated industry, you may choose to spend nothing on legal services. That’s not necessarily a bad decision and don’t let anyone tell you that it is.
3. Letting the Attorneys Do Whatever the Attorneys Think is Best
Sometimes I do work for large companies and a lot of times they just want things taken care of. They trust me to have their best interests at heart and make wise decisions about exactly how and what needs to be done. However, they have large legal budgets and are willing to spend more money on the “could do” items – that makes sense. The more money you have, the more you should protect it with legal services (remember, think of legal services like insurance and spend more as your company grows).
But small businesses rarely have big budgets, so they need to be careful to make wise purchasing decisions, including with respect to legal services. So, understand everything your attorney is suggesting you do and where those items fall on the Could Do/Should Do/Must Do continuum. Then, you make the decision. The attorney has the knowledge about the law and hopefully about how to apply it to business generally. However, you are in the better position to take their advice and apply it to your particular company at that point in time.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.