“The simple answer is ‘it’s never too soon’,” according to Olivier Reisch. A partner with DLA Piper, a law firm, Reisch knows startups are focused on getting their product onto the market, and “all the finer legal details might not necessarily be the first priority. But I have seen quite a number of cases where that came back to bite the startup afterwards.”
He cited the example of a small Luxembourg firm “that was heavily dependent on a hardware manufacturer in China. And instead of seeking any legal support, they just kind of winged it.”
While that worked fine for a while, “at some point, there was a disagreement on certain provisions in the agreement,” said Reisch. “It went to court and in the end, it cost our startup here in Luxembourg several million euros in contractual costs. So had they invested, in the beginning, a few thousand euros into having the agreement reviewed by a lawyer or having some form of legal support when they entered into the agreement, I’m very confident that they would not have ended up in the same situation.”
Costly mistakes
He has seen plenty of other errors by startup founders. For example, sharing information about a “cool new product” without a non-disclosure agreement. An NDA has, Reisch reckoned, “basically two purposes. The first purpose is obviously to make sure that people keep the idea to themselves. And the other purpose, of course, is to establish that you had the idea at a certain point in time.”
Often, entrepreneurs do not realise they fall under certain regulatory frameworks. For instance, “anything edible, then immediately you have health legislation concerned or food labelling issues that might pop up.” There are all sorts of rules on making clothing and accessories. He said an inspection or complaint could “quite immediately kill your company”.
“Sometimes, regulation is not a bad thing either, especially for financial services,” because firms can seek authorisation in their home country but will be able to operate across the EU using the bloc’s “passporting mechanism”, he noted. Without that EU rulebook, “instead of doing the exercise once, you’d have to [apply] 28--or soon 27--times.” Nonetheless, founders still have to be aware of national regulations that apply on top of EU rules, such as in the healthcare sector.
Getting started
Reisch said that entrepreneurs could begin by checking within their circle of family, friends and colleagues. Maybe a legal professional can take a quick look at documents, which is better than nothing.
“There are also law firms like ours that offer specific packages to startups. We have a programme called ‘DLA Piper Accelerate’, where startups basically can download a certain number of [generic] legal agreements from our website.” These include templates for employment contracts and company bylaws for several countries. “But it will only get you so far.”
His and many other law firms are open to meeting company founders for networking purposes. “It’s not a matter of being on a clock from the first minute, but we are always happy to meet startups if only for a chat, or discover what they are doing, and then sometimes we can work something out that works for both parties, sometimes we cannot,” Reisch said.
At the end of the day, startups may just have to buckle down and pay for legal services. “Yes, legal advice can be seen as expensive,” said David Alexandre, a senior associate at DLA Piper, “but not as expensive as the problems you could have if you don’t use legal advice from the outset.”