Startup Life

Hey! This is the 3rd post in my “Startup Life” blog series, where I write about my experiences and lessons learned working as a legal operator in the start-up ecosystem. ICYMI, here’s the 2nd post about how to work effectively with software developers as a lawyer. In today’s post, I share my thoughts on the value of making a good early legal hire for your startup.

A bug, not a feature

According to one study, only 1.7% of seed-stage companies have an in-house senior legal function. The majority of those operate in industries like financial, legal and insurance services; all highly regulated industries where there is a greater need for legal support.

This pattern continues as startups mature, with less than 10% of growth-stage startups having a senior legal employee on their team.

So then, the data suggests that when it comes to tech startups, early legal hires are a bug, not a feature.

Should that necessarily be the case? Sure, money’s too tight to mention for most startups and spending money on a grudge purchase like an in-house lawyer probably isn’t a top priority compared to say, sales execs or software devs.

But making the right early in-house legal hire for your startup can have a profound impact on the growth trajectory of your company. Here’s how:

Your time is valuable

As a founder CEO or COO, you have a million things on your desk at any time.

Between fundraising, managing investors, recruitment, solving product-market fit, developing your company culture and generally keeping the ship afloat, maintaining deep focus and attention to detail can be hard.

Legal DIY

Law and compliance is unfortunately an area where the devil truly is in the detail. And when you cross that devil, it’s usually very difficult to undo any mistakes.

During the very early stages of startup life, you might have the capacity to do some basic legal work yourself. Nowadays, with services like Stripe Atlas and templates available online for almost every type of agreement, basic legal services are more accessible than ever before.

Sure, legal DIY is possible but without some legal training and experience you still won’t know what questions to ask and up-skilling yourself takes time and focus you’re not likely to have.

Mistakes early on in startup life often rear their head by the time an investor does the first proper due diligence on your company, usually when you reach Series A. At the very least, your investors will want to know that your corporate structure is solid and that you actually own your IP – things that are very difficult to fix after the fact, and that can complicate fundraising significantly.

A good early legal hire can help set you up for long term success.

Early legal hires can also contribute to building a healthy company culture from inception by asking the right questions at the right times, providing you and the team with perspective on important transactions and levelling up your team’s knowledge fast on issues where they lack expertise. This will be especially impactful if you operate in a highly regulated industry, like fintech, regtech or healthtech.

The Hidden Cost of Outsourcing

Outsourcing to external law firms is an alternative to an early legal hire, but there’s a hidden cost.

The quality of the service and value for money you get often depends on the quality of the instructions you give. I’ve been on both sides of bad instructions and it never works out well for the client (lawyers usually get paid regardless).

Briefing external lawyers properly takes time because they won’t (and can’t) have the same context and knowledge of your business that you or your team do. If you want relevant and practical advice, you need to transfer some of that context and knowledge to your external lawyer (after finding a good one able to understand your business).

It’s an imperfect process that often means more time spent on Zoom calls explaining your business, sitting in meetings and sending/reading long emails – time you won’t have. Because there is usually only tail-end risk to consider, it’s easy to de-prioritise focus on legal issues for more pressing concerns like actually getting your startup off the ground.

A good legal hire will act as a buffer between you and your legal service providers by narrowing down the issues that you’ll need to apply your mind fully to, and dealing with the rest.

They will also act as a filter between external law firms and your company by only outsourcing high impact, specialised work when needed, leveraging off industry relationships and carefully defining the scope of work outsourced. This helps your company maximise the bang for your buck when using law firms.

In short, a good early legal hire allows you to focus on the stuff that you’re best at and that will really move the needle for your startup.

You can’t really place a value on that.

Speed up your sales cycle

If you’re selling to enterprise clients (especially larger ones with procurement teams), having an in-house lawyer to navigate the process from agreeing a deal in principle to signing on the dotted line will free up an immense amount of time and energy for your sales team. Time and energy that’s better spent on outbound sales efforts, nurturing prospects and chasing up inbound contacts.

With a solution-oriented and risk-neutral lawyer on your team, you will close better deals quicker.

Credibility in enterprise sales

Remember those enterprise clients I mentioned? The large ones with big bad procurement and compliance teams that you need to get past to close a sale?

Yeah, they don’t care that you’re the hottest new tech startup in town.

Their primary job is to eliminate as much risk as possible for the enterprise client, and your new-fangled tech product throws up more red flags than a matador in a bullring.

Before you can close that enterprise sale, you’ll probably have to pass an extensive vendor due diligence process where you’ll need to give the client comfort that your startup is stable and your product is compliant. It’s also common for enterprise clients, especially those in regulated industries, to explicitly ask whether their suppliers have a dedicated risk & compliance function (the answer = usually that’s the legal function).

Having an in-house legal function that’s able to answer compliance questions quickly and without you needing to pull in resources from the rest of your team will shorten your sales cycle and also lend credibility to your startup during the client’s buying process. The earlier you can do this, the bigger effect it has over the course of your startup’s life on your ability to close enterprise deals.

Once you’ve slain the procurement and compliance dragon, it’s then over to the client’s legal team to review your contract terms.

If you’re not careful, there’s a real danger of being forced to agree to bad terms to close a sale or getting stuck in negotiations that blocks your sales team from closing a deal. A topic for another blog post, but as a startup selling to an enterprise client you already have to navigate the ‘David v Goliath’ power dynamic during a negotiation.

By anticipating contentious issues and finding creative solutions to unblock contract negotiations, a good legal hire helps you level the playing field a little.

Trained to play ‘bad cop’

The relationship between sales executives or account managers and enterprise clients is arguably the most crucial relationship for generating and retaining revenue for your company. Navigating that relationship when it’s time to put pen to paper is tricky.

Firstly, your team will invest lots of time and energy in creating goodwill with prospects and existing clients and the last thing you’d want do is to sour that by them having hard conversations during contract negotiations about risk issues. Second, there’s a misalignment of incentives because of how salespeople are traditionally remunerated, and therefore a natural tendency for them to prioritise closing deals rather than mitigating risk.

A good in-house legal hire will provide invaluable support to your sales team by managing those hard conversations.

For one, they’re trained (and paid) to have hard conversations and are able to take a more objective view. They won’t/can’t have skin in the game and so don’t expect to be accountable for making the final call on decisions. There’s value in having a rational, slightly removed person in the room who is happy to ‘read the fine print’ and take the emotion out of decisions.

A good in-house legal hire also isn’t afraid to play ‘bad cop’ when needed, in the interests of closing a deal without jeopardising the sales team’s relationship with the client.

By removing your sales team from the line of fire, they’ll help your team navigate hard conversations while keeping key client relationships intact.

Early legal hire = more turnover

Between freeing up the founder / exec team to focus on the mission critical things they’re best at and shortening your sales cycle, having a good early legal hire can lead to significant gains across your organisation.

Gains that compound over time.

The above data gathered from 35k+ high-growth companies in the UK suggests that companies with a senior legal function have higher average turnover than those without.* Interestingly, the biggest proportionate disparity in turnover happens at seed stage, when startups are least likely to make a senior legal hire.

This suggests that hiring a senior legal hire in fact has the biggest impact for a startup at seed stage.

It’s easy to think that a startup lawyer will only end up being an expensive hire for an early-stage startup, who will slow down deals and paralyse the company with compliance and risk aversion. As with all things, there is a compromise and an early legal hire won’t make sense for all startups.

But if you manage to make the right early legal hire, your legal function can add massive value to your startup. They will be a feature not a bug, who will unblock you and your business and set you up for long term success.

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• Please share your thoughts on whether an early-stage legal hire is worthwhile in the comments below! 😃
• Don’t forget to follow me on LinkedIn for more cool stuff like this, and reach out in my chat if you’d like to connect.

*Admittedly it’s very difficult to say whether this is causation or correlation.