In the internet age, with Google doing your legal research and LegalZoom your contracts, you may have the illusion that your legal ducks are all in a row. This illusion seduces even those entrepreneurs trying to avoid disputes. "I always operate by what my grandmother said: 'An ounce of prevention is worth a pound of cure,'" says Matthew W. Richter, who co-owns Agora Auctions, an online coin-auction site. As a CPA, he carefully vets contracts, patrols his inbox, and deals with any potential conflicts immediately. Even so, he has faced problems. "My partner wanted to save money and used an online legal service," says Richter. "They completed the form saying we had employees in New Jersey. Which we didn't have." It took Richter a year of steady phone calls to the state to undo the glitch.
The problem is that you may not know what you need until it's too late. "Businesses can get pretty far without a lawyer," says C. Erik Gustafson, who oversees 300 attorneys at the Virginia law office LeClairRyan. Others assume their lawyer is watching the road. "'Why do I have to think about this?' 'Why do I have to worry about this?' I hear that all the time," says Barry Schwimmer, a partner at the Stamford Innovation Center in Connecticut, which advises startups. Schwimmer says too often companies believe that agreeing to work out problems in arbitration, rather than in court, will take care of everything. But, he adds, arbitration won't save you from aggravation and cost. Says one entrepreneur who's been through the process: "You still have to prepare your case. And that's time away from running my business."
That said, court is still best avoided. "You can't do well in a scorched-earth context in court," says Keith Ashmus, a partner at the Cleveland law firm Frantz Ward, "and those decisions are not hugely predictable." Consider these three places to hunker down with a lawyer to avoid problems down the road.
Owner and Shareholder Agreements
LegalZoom estimates that a business is started every three minutes using resources like its incorporation documents. While partnerships can be created in mere weeks, unwinding them may not be quite as easy. "In the beginning, they say they'll draw [a partnership] up if the business turns into something," says Robert Borghese, an attorney and a professor at UPenn's Wharton School. "But once it does, they're too busy to think about it."
Then you find each partner has different expectations. All issues need to be clearly laid out up front. "How do you want the business to mature?" says Gustafson. Are you going to let it mature? Or flip it like a house?"
Adds Schwimmer: "And all those involved need to understand fully what they're entitled to when they walk away or sell it. Or what happens when you need more capital and ownership shares are diluted. Everyone's always in a rush to get to a closing. But I try really hard to make sure everyone understands." Any later conflicts that arise, he says, "are incredibly detrimental to the growth of a company."
The rise of the gig economy is testing the boundary between who is an employee and who is an independent contractor. So it's no surprise that this is a fast-growing area of litigation. Misclassifying a worker as an independent contractor can be one of the most expensive mistakes you can make--costing thousands in back taxes, interest, and other penalties.
While the IRS has a 20-point test to determine who qualifies as one or the other, and the Labor Department has issued new guidelines, you may need someone to take a close look to see if you're abiding by the law.
Making sure you own the work you've paid for is another important consideration when using independent contractors. "I worry as much about the ownership of the created intellectual property," says Russell Rosler, partner at the Columbus office of law firm Vorys, Sater, Seymour and Pease, talking about what's in the contractor agreement. "The IRS doesn't care about that. But I promise you, your investors or buyers are going to be kicking the tires."
To contain legal costs, businesses sometimes "grab language off a random website," says Ashmus, wryly. "That's often delightful for lawyers." Some online contracts are irrelevant to the problem at hand, ambiguous, or difficult to enforce. "Or you may be agreeing to abide by California law," says Ashmus, "though neither party is based in California."
Your lawyer should also prompt you to think of all contingencies. "A poorly written contract can be a huge dollar-and-time suck," says Chad Burton, partner at Burton Law in Dayton, Ohio. "Dealing with it can drain the energy out of the owner and his team."
The Fine Print About Choosing and Using a Lawyer
The best time to find an attorney is before you need one.
1. Find the Right Match
Get the right flavor. "I once bought a company that had as its counsel an insurance litigation firm," says the Stamford Innovation Center's Barry Schwimmer. It had no expertise in that business. Result? Bad advice. "An experienced lawyer can say, 'You can do 10 different things, but this is the one that works,'" says C. Erik Gustafson of LeClairRyan.
2. Understand the Downside
"Never engage a lawyer or firm that doesn't clearly explain the magnitude of risk," says Gustafson. "Your lawyer's job is to not accept risk on your behalf," says Schwimmer. "It's your decision as to what is an acceptable risk. They're not going to benefit from you making the right decision or the wrong decision."
3. Negotiate Fees
Big firms, under pressure, are now offering structured fees, so you don't have to feel that every phone call is running up the meter. Chad Burton of Burton Law says many firms are trying to make fees more transparent and to work in innovative ways.
4. Trust but Verify
Lawyers are helpful analyzing risks in a deal, but a lawyer can't do it on her own. It's critical you spend some time getting to understand a contract's provisions, says Schwimmer. And not just with your lawyer but with the counterparty and its lawyer, to make sure both sides know they're agreeing to the same things.
Getting a Decision Without a Costly Fight
Many firms still view it as second-class justice. "In my experience, they just split the baby," says Barry Schwimmer of the Stamford Innovation Center. But Jeffrey Zaino of the American Arbitration Association insists that 90 percent of cases have a clear winner.
Proceedings - Evidence may be limited. Arbitrators with expertise in a field can be selected, and are paid, by the parties. Its similarity to a court trial, including costs, can be a downside.
Decision - Zaino says awards are enforceable. Going to court and asking for a summary judgment gives the victor a way to extract the spoils. And, he says, decisions by arbitrators are rarely overturned.
It takes less time. But either side can walk, leaving you without an outcome. Even so, Frantz Ward's Keith Ashmus says, "those discussions often come around later and help get things resolved."
Proceedings - Mediators may meet with the parties separately to find common ground. K. William Gibson, a lawyer and a mediator in Oregon, says, "both sides have to be willing to acknowledge the weaknesses in their case. Both sides will have them."
Decisions - Solutions can be creative. Ashmus cites a case between a manufacturer and distributor that resulted in the latter's being given another of the manufacturer's products to sell. How far should you bend? "You can't get emotional," says Schwimmer. "It's just economics, not life or death."