Entrepreneurship

3 Ways We Got Screwed by Picking the Wrong Lawyers for Our First Startup

One of those oft-overlooked things that every startup needs is a lawyer. It doesn’t really gel with how startups think: everything we deal with, from new APIs to new companies, works in a super simple, user-friendly way. Law is complex, ugly, and old, and we are inclined to believe somebody should be working to “disrupt the law industry” too.

Once upon a time in 2012, for our first startup, we hired our friend to be our attorney. There were a few lawyers in our friend group, and a couple are very well-respected in New York. One of them does big corporate law, so I assumed I was in great hands when I hired him. I thanked him for taking on my fledgling business even though we didn’t have much money. My first mistake: I hired my friend to be our lawyer.

1. The Ousted Cofounder 

Paul Graham often says that 50% of startups fail because of cofounder disagreements; this nearly happened to us. Right after the check from our lead investor cleared, I started noticing some changes in my cofounder. I didn’t see any real work, the excuses began piling up, and I panicked. I brought on another dev friend on a temporary basis because I was afraid. A few weeks in, the new dev sent me a link that made my stomach turn: it was a Github commits graph, and it showed 0 commits from my original cofounder from the day our first check cleared to the present day, a period of nearly two months. My fears were confirmed.

I lost a lot of sleep that week. Should I fire my cofounder? I bit my nails to nothing. I shook nervously. I had my first real panic attack. I called our investors and they all said the same thing: the first guy needs to go. So I called up my attorney, and asked what the next steps were. He said the only option was to buy the shares. What?! Buy his shares?! I can’t afford that! I said. Why is there no provision in the Shareholder Agreement for this situation? You see, neither of the cofounders were on a vesting schedule. There was no way to simply “vote him out,” and it had been set up this way intentionally. My attorneys said this was to make sure our investor did not have majority control before our shares vested, and even though we asked for a vesting schedule, it never made it to the Shareholder Agreement.

To complicate matters further, we lived together, and I was not be able to terminate the lease without his consent. I ended up buying his shares for more than what was even in the company’s bank account at the time, with my own money. It sucked a lot.

2. Incorporating Outside of Delaware

It turns out that not every company in the US is incorporated in Delaware; many non-startup businesses incorporate in the state they’re from. We are incorporated in New York State. Literally every startup lawyer we have discussed this with has told us the same thing: this is really dumb. In a future financing round, we had to reincorporate in Delaware before we could close. It was expensive and time-consuming, because New York State has extra hoops for you to jump through if you want to leave. New York, I loved you, but you were breaking my heart.

3. The Check That Had to be Sent Back

The situation with our ousted cofounder severely delayed the next piece of investment we were expecting. It was corporate housekeeping that had to be finished before we could receive more capital. So after it was all cleared up, things seemed on track. An agreement was signed with our investor, the check was sent to our attorney’s office (seeing a theme here?) and then nothing. A week went by. 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.

Conclusion

When choosing a startup lawyer, fight the urge to hire a friend, somebody cheap, or somebody who doesn’t have any startups as clients. It sucks to have to spend a lot of money on something that isn’t directly growing your business, but the cost of choosing the wrong lawyers for us was surprisingly high. I am pleased to say that for this startup, we have amazing lawyers that are fast, incredibly knowledgeable, and have lots of startups as clients. We’ll never make the same mistake again.

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1 Comment
  • Eugene Dec 10,2015 at 1:06 pm

    I feel blessed to have come acsros your site Jeff! Im 29 yr old man with a fiance and 1 yr old boy who im trying to take care of im grinding away at my job everyday reeling like I should be accomplishing something greater and living a better life and for my family.. Ive tried online MLM like others and got nowhere fast. I truely hope you read this, because I feel I have the drive and commitment to not give up for my family. I want to be a millionaire! But not have it hamded to me!

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