
We picked the wrong lawyers for our first startup - kevinbracken
http://blog.gymsurfing.com/post/87196483724/3-ways-we-got-screwed-by-picking-the-wrong-lawyers-for
======
chiph
In the case of the LLC some friends and I had a few years ago, we got a
recommendation for a local firm from the lawyer father-in-law of the co-
founders (he was out of state, and the relationship meant he had a conflict of
interest and thus couldn't represent us himself). Big name, nice downtown
office. Which should have been a warning sign...

We had some questions about IP ownership in our day-job employee agreements
and asked the firm for an opinion. Rather than a simple one or two sentence
answer/explanation, we ended up with 3 of their people on a conference call,
one of whom simply read that portion of the agreement back to us. And then got
handed a $2400 bill for services rendered.

Pick your lawyer almost as carefully as you pick a co-founder.

------
tptacek
Apart from the good background here about how the wrong lawyers can mess up
your company:

Operating without vesting is the most common and probably most harmful company
formation mistake you can make. It is _amazingly_ dangerous to do, and will
very likely end up costing you something.

Any lawyer who doesn't spot that and totally freak out at you is probably not
the right lawyer for the kind of work we all do.

~~~
jarrett
On the flip side: Is there ever a situation in which cofounders _legitimately_
want to make it impossible to oust a cofounder without his/her consent? Or
should that always be possible for any sane company?

~~~
tptacek
No, I don't think there is. In a serious dispute between founders, for the
company to survive, there must be some mechanism to conclusively resolve the
controversy. A blood pact not to remove cofounders disrupts those mechanisms.

One way or another, a grave and unresolvable dispute between founders will
leave you with some performing partners and some nonperforming partners. It's
hard to imagine operating a company with a nonperforming partner on the books;
not only do they have dramatically less of a stake in the company than
everyone else, but they also have a gun to the heads of the rest of the
company.

It's worth adding that wanting to be on the books as a full
partner/director/founder of a company that wants you ousted is, for a
cofounder operating in good faith, irrational.

When you start a company with other people, you have to decide first whether
you're starting a _company_ or a _club_. A club can disintegrate as a result
of conflict and that's not a big deal. But if you're building a _company_ ,
then the welfare of the _company_ needs to be among the most important factors
in resolving disputes.

~~~
ottocoder
I have never heard the "club" vs "company" comparison before, but that seems
like a great way to describe the mindset of founders.

Is it possible to establish a company that is run like a club and are there
any examples? Or am I extending the analogy too far? Perhaps some research
organizations are set up along those lines?

~~~
tptacek
A lot of private law practices are run that way.

------
thehme
Not sure if anyone else picked this up, but for those who don't know
everything about startups, this article does not really help. All points are
missing more details and some are written assuming you know what is being
meant without explaining clearly. For #1, I see that the cofounder did not
contribute to the project, but what happened? why? was there a work contract
or expectations that were not met? etc. For #2, what does the author mean by
"It turns out that not every company in the US is incorporated in Delaware";
the author assumes everyone knows what is means and then adds that they "are
incorporated in New York State"?. Then for #3, the author writes:

"I asked what was the matter, and my attorneys said that “regulations”
prevented them from sending it. A full two weeks after they received the
check, they wired the money back to our investor and they asked him to wire
the money to us directly. How embarrassing."

While I think I figured out what was meant, somewhat, aside from the
"regulations" part, it was not clearly describe who was asking who what and
why exactly. I still don't understand what was not done correctly by the
friend attorney.

~~~
Breefield
Regarding #3, the regulations were "blue sky laws," which are more appropriate
for shady securities that scam elderly women into giving away their pensions
to hucksters.

This wouldn't have happened if the friend attorney was used to dealing with
startups.

~~~
jesusmichael
I doubt it was a "blue sky" issue. Since it seems like it was an "Accredited
Investor" and they would have signed an waiver to that effect.

Probably had more to do with the firm acting as a broker in the deal, and
violating some state statute on unlicensed brokers/dealers. They deposited the
funds, so they would be acting as an intermediary. If unlicensed could face
serious fines.

------
will_brown
As a lawyer with a former corporate law practice, for one of my side projects
I created a legal service company (ameristartup.com). AmeriStartup takes the
legalzoom concept, but tailored incorporation/compliance "packages"
specifically for Delaware Corporations and then beat legalzoom on their
prices. Great service, better value, addresses real world problems yet zero
traction.

I even reached out to YC direct to try to offer the
incorporation/compliance/registered agent services to YC companies at a
discount, I never heard back. I think a YC company (Clerky) did/does the
something similar and may already provide YC companies with these services.

~~~
opendais
I'm slightly concerned you are promoting this without mentioning the fact that
any 'tech' company is going to need to register as a foreign entity in their
home state as the salary for a single engineer is going to qualify you as
'doing business' in that state, especially if you also have any sales in that
state.

~~~
will_brown
I offer 3 services: Incorporation; Annual Compliance; _Qualification_.

Under Qualification on the home page it reads: _Make sure your Delaware
Corporation is qualified in every State your Startup is physically present._

I will add that on my Learn More page, but do you have any other suggestions
to highlight that issue as it is on the Home page already?

~~~
opendais
Ah, I only looked at the Incorporation Page. Oops. :)

~~~
will_brown
Not an oops at all you provided valuable feedback. I will add some verbiage on
the incorporation page about the need to qualify to do business in other
states. Thanks.

------
cannam
As a non-American, I am slightly boggled by the bit about Delaware.

I kind of, sort of knew about Delaware, but the idea that _every_ startup
incorporates there? Are all the SV startups nominally Delaware businesses? Can
someone point to a nice potted summary of why a startup should incorporate
there?

~~~
gamblor956
Generally, there's no good reason to incorporate in Delaware unless you plan
(or need) to take advantage of its unique corporate laws for legal conflicts
in which you have the ability to determine jurisdiction. Otherwise, you simply
end up subjecting your startup to the laws of Delaware _and_ whatever state
the startup is located in.

(Tax-wise, you save little by incorporating in Delaware over a true corporate
tax haven like Nevada, and you still owe state income taxes in whatever state
the startup is actually located.)

~~~
jwb119
Maybe if you're a regular cash flow business. But if you're seeking VC money,
you absolutely should be incorporating in DE or you risk running into the
headache described in the article, IMO.

~~~
gamblor956
I agree, but that's only because VCs generally demand that the business be
incorporated in Delaware.

------
jackgavigan
Vesting is absolutely essential. Just Do It.
[http://jackgavigan.com/2014/04/23/vesting/](http://jackgavigan.com/2014/04/23/vesting/)

For lawyers, you need someone who's familiar with how startups operate.
Lawyers specialise in different things, just like doctors and engineers do.
Would you go to a neurosurgeon if you had a problem with your prostate? Or to
an electronic engineer if you needed a bridge built?

You want to find a firm that has had lots of experience with startups. As for
recommendations from other startup founders.

If in doubt, go to Orrick. I've heard nothing but praise for them and they've
been really generous in supporting LDN2SFO.

~~~
larrys
"If in doubt, go to Orrick. I've heard nothing but praise for them"

Which attorney in particular?

I am sorry if you take this the wrong way but I don't think a statement like
that is helpful.

First you said "I heard". So it's not your personal experience with any
attorney at Orrick that has helped you and not even the experience of a close
friend or acquaintance that you know (at least by the way you've phrased
this). In law this would be hearsay evidence?

Anyway all this does is build a legend of a firm that while may be suited for
a startup it may also not be.

As far as "support for LDN2SFO" that's nice but that is marketing and (I'm
guessing) pro bono work. All else equal I guess you keep that in mind. But all
else (pricing, the particular attorney) is rarely equal.

By the way I would feel (almost) the same way if someone said "Grellas has a
great reputation here on HN and has been generous in supporting HN so I would
choose Grellas".

------
mikeryan
As a note, there's some very large and experienced firms in SV willing to take
on a startup and do some amount of work for free at the beginning. I've had a
major firm offer 10k of work plus introductions to VC's and other folks in
their network. - Granted 10k is like 20-30 hours of some law firms, but still
that can be quite a bit of work and likely your first 20-30 hours of legal
advice can be your most important...

~~~
danray
In addition, serious SV firms will offer a fixed-price basic incorporation
package. This is great, not only because the fixed fee is low, but because it
tells you your company won't be the firm's guinea pig as it learns how startup
incorporations and financings work. You might be surprised at how many smaller
corporate firms (especially those not based here) don't have this sorted out.

------
pjbrunet
I would like to see more postings like this on Hacker News.

\- Best startup lawyers? Is there an app for that yet?

\- Do lawyers ever get equity? Why or why not.

\- Has microlending made this easier? (Open-ended question.)

\- Why doesn't the "Delaware corp" have more competition from other countries?

------
noonespecial
Lawyers specialize like doctors. Don't hire a podiatrist to do heart surgery.

~~~
kevinbracken
Best reply.

------
larrys
This is really no different than what non-computer people go through when they
assume that a "computer guy" that they know is a jack of all trades and an
expert in all areas and aspects of computing. (Simply because they know so
little so they have no way to assess competence.).

But even with respect to sub specialties (say computer security) there is the
tendency to think that someone who knows more than you knows everything.

It's really difficult to pick a good professional for all situations. And
unfortunately simply relying on other's opinion (which seems to be the obvious
way, referrals) may not work either. [1]

[1] Specifically, for law, part of what an attorney advises on is protection
against future things that might happen. [2] If a friend recommends an
attorney that they were happy with and they have only been in business a short
time how do you know that things will be find years later? Additionally, there
is a great deal of bedside manner and likability with any professional that
can cloud judgement. (Happens with medicine as well.)

[2] Not to mention the entirely separate concept of to much protection against
a super unlikely occurrence may impede a business.

------
fred_durst
This story sounds a bit one sided. Sounds to me like the other cofounder chose
a fantastic lawyer. I find it really, really hard to believe he did nothing at
all for 2 months. Its possible its true, but considering how aggressive and
forward your listed actions(bring in another dev weeks into the project to
look over his shoulder, pushing him out completely after 2 months, using your
own money to buy him out) I have a hunch this isn't the whole story. I wonder
if its a bit more about the two of you having a disagreement about the
direction of the tech/company etc and he became a bit unmotivated because you
started bossing him around and treating him like an employee and not a
partner. For example you ended trying to fire him like an employee and now
your publicly throwing your friend the lawyer under the bus.

~~~
kevinbracken
The ousted cofounder actually had no lawyer, he hates them.

As for our friend lawyer, he's a great attorney, but just for big corporate
law.

~~~
fred_durst
Hmmm, so the "cofounder" didn't even have a lawyer. Ok, here's a possible
guess on what might have happened.

You wanted to build an app for the idea you have. For gyms. From your
personality and app, I'm guessing you like working out. You needed someone
with some technical ability. Maybe you recruited this cofounder or he was a
friend of a friend? Maybe a close friend? You made a deal with him because you
couldn't pay him, but "generous equity" in the company. He stayed at your
house etc, because he wasn't getting paid in real money while you guys were
building the app. I have a hunch you had a lot more business experience and
money in the bank. Then it sounds like its likely a combination of him being a
bit over his head and realizing that he wasn't a real cofounder and was just
an employee. Then you decide to fire him and he says, "Hey wait, I've been
working for free all this time!". Then the legal bit ensues and you have to
"pay him" for his portion of the company that he likely said was for his work.

Did I get close?

And your comments about the lawyer are definitely not the kind of thing I
would do publicly about a friend and definitely gives me insight into your
character in general. You might want to reconsider keeping this public.

~~~
kevinbracken
This was our previous company, two years ago. It was an event product.

We each had equal equity and equal pay. He was a fine designer and developer
and was able to rapidly prototype for us just fine before.

Our vision for the product was very similar, and this was our focus 100% of
the time. We quit our jobs, moved out to California together, and were living
in a house working on this product day in and day out.

But after our living situation improved (nice food, house, car) his motivation
to work disappeared completely.

I'd say he got a pretty nice payout considering that company didn't end up
going anywhere.

------
woah
I'd like a little more detail on what happened with the cofounder. WTF? Did he
have a mental illness? I mean, I could understand some decline in performance
or something, but totally stopping? What was he thinking?

~~~
kevinbracken
He became very skilled at making excuses, and saying he needed to "step back
and strategize more." And it always kind of looked like he was working, but in
reality he was producing 0 lines of code. That's when I brought on my current
cofounder, who revealed that when he tried to work with cofounder 1, he got
pushback, aggression, and eventually discovered from Github commits that he
was doing literally nothing but living in our house for free and driving our
car.

~~~
wpietri
That sucks, and I'm sorry it happened to you.

For what it's worth, that sounds very anxiety-driven to me, and the response
of a relatively young developer. From a tech cofounder, some tips for next
time:

Structure the work so that there is frequent, visible progress. At my last
startup, the work was broken down into lumps that were at most a few days in
size. Modest, regular accomplishment makes progress transparent to you, and
smooths out the emotional roller coaster for you cofounder.

Be present. My last cofounder and I spent most of our time within easy
speaking distance. Later, as we hired more engineers, we kept him close to all
the engineers. Whenever we had a product question, we just had to turn our
heads to ask. The easier you make communication, the more you'll get.

When there are issues, explicitly bring up both process and emotion as needed.
The reason I became a developer was that it let me hide away in my parents'
basement and not talk to people. That was great for coding skills, but not so
great for knowing how to work with others or to understand my emotions. E.g.,
in this case you might have said, "Hey, I know that getting funding is really
putting pressure on us. Honestly, it scares the hell out of me sometimes. So
let's break the next few months work down into micro-deliverables. That way
you'll always have something clear to work on, and I don't have to worry that
things aren't making progress."

Depending on circumstance, it can also be worth bringing in a business coach
or therapist to help sort out these things.

------
thinkcomp
You can look up pretty much any lawyer in the United States on PlainSite
([http://www.plainsite.org](http://www.plainsite.org)), which I run, and get a
sense of the work they've done, whether on litigation or intellectual
property. Incorporation data is harder to come by--but it's at least more than
firms will give you. I'm hoping to add lobbying data soon as well.

~~~
kevinbracken
Yup, we screwed up big! :)

------
danielweber
I remember one start-up, trying to figure out how to disassemble the start-up.

Everyone thought it was a horrible idea. They were offended, like a pre-nup.
To be fair, there's a good chance I was probably in that group.

Not having it was really bad.

A similar thing happened with my uncles in an old-fashioned boring normal-
world business many years ago.

Unlike divorce, companies are not meant to be for life. Plan for separation.

------
lauradhamilton
I would also suggest reading documents (such as the Shareholder agreement)
before signing them.

This guy obviously knew about vesting, but somehow didn't realize it wasn't in
the Shareholder agreement?

------
jesusmichael
Lame article. Most if these issues that arose could have been handled easily
by a first year MBA.

1\. There are so many ways to get rid of this guy I can't mention them all.
However, vesting is a good idea. 2\. The incorporation, create a DE entity and
sell the IP to it. 3\. Most likely a broker/dealer statute that the lawyer was
grappling with. If a two week delay in funding is a problem. Then they have
bigger problems.

------
opendais
I strongly disagree with #2.

You have to incorporate multiple times if you start in Delaware [in this
instance, in NY as a foreign corp]. This increases costs as you need a
registered agent in both states, etc.

Startups are cash strapped and should only incorporate in Delaware if they
have no other choice. Otherwise, they are just paying twice for the privilege
of using Delaware.

~~~
danray
I'm not sure what you mean here. In almost every circumstance, a Delaware
incorporation is the best choice. As the author said, if you don't start there
and don't fail, you're likely to end up reincorporating there anyway.

~~~
opendais
I live in a state, lets say, California. From what I understand there is alot
of people there. ;)

[http://www.sos.ca.gov/business/be/faqs.htm#form-
question7](http://www.sos.ca.gov/business/be/faqs.htm#form-question7) If I do
business with anyone in California, as an employee who lives and works in
California, I'm engaging in intrastate commerce on behalf of the company.

I'm also "doing business in California" as I'm paying over $50k in wages for
tax purposes [since Engineers are going to be at least that anyway].

So, now I have to:

1) Incorporate in Delaware, Register as a Foreign Business Entity in
California.

2) I need to pay for a registered agent in both states.

3) I need a lawyer familiar with laws in both states or 2 different lawyers.

4) If I do business in Delaware [since incorporation in Delaware makes it
intrastate business], I now have a tax nexus in two states which complicates
my tax situation.

5) There is no tax or legal obligation to do this, so why shouldn't a person
wait until they have to add this complexity?

That is two sets of fees, tax structures, and potentially legal counsel I now
require. If I've got 7 figures in funding, sure, this is not a big deal. If
I'm bootstrapping with the $20k I have in my savings account, suddenly
doubling these costs is not insignificant and may potentially sink me and/or
cause me to fail a tax audit with the associated expenses.

I'm uncertain why you think it is 'always' a good idea to do this from the
start. Please explain how my reasoning is incorrect as I am not a lawyer.

Thank you.

~~~
opendais
I'm slightly amused that my parent post is being downvoted yet no one is
willing to respond to the reasoning I've presented.

I think HN really needs to track downvotes if only because it is intellectual
cowardice to try to bury a dissenting voice without explaining why.

~~~
Iftheshoefits
There isn't really a counter to your argument. I wonder if some of the
downvotes are from people who might feel a tad guilty about having conducted
what is effectively tax evasion.

~~~
opendais
Well, I hope that isn't the reason. I'd like to think people don't
intentionally engage in tax evasion.

------
zeeshanm
Good thougths. But I think your lawyer being a friend or not is not as
important. You need to hire right people for the given job in hand at the
right time. It is just that most often these right kind of people for hackers
not happen to be in their circle of friends. But not impossible.

------
ubi
TLDR;

Use [https://www.clerky.com](https://www.clerky.com)

[I have no interest in clerky, they just rock]

~~~
mrmch
+1 for Clerky; faster and more concise replies than my "startup specialized"
lawyers.

------
ngoel36
I cannot possibly say enough good things about choosing WSGR for my startup.
Unbelievably generous and knowledgeable. Contact me if you'd like an intro to
the people we worked with.

------
cleeb
Yep, Just want to say that we are starting all of our startups with
www.wilmerhale.com. I really can recommend them! Chris

------
rgraham
Anyone have recommendations for lawyers for bootstrapping?

------
goeric
Clerky.

