We sat with Chen Mantzur, a partner at GKH – a leading firm in hi-tech law here in Israel – as he shared his knowledge and experiences on the importance of legal advice for startup companies in all stages. As a partner of SigmaLabs, GKH supports early-stage entrepreneurs in the Israeli ecosystem.
When asked why startups need hi-tech lawyers, Chen could not emphasize enough the importance of legal counsel for early-stage startups and the danger of skipping this step. “We’ve seen the same mistakes over and over again; the same issues keep coming back. If you build on a faulty foundation, your building can collapse in one day, and instead of promising value to your potential investors, you are simply becoming something they would like to stay out of. We’ve seen it happen too many times.” Amidst the hundreds of other tasks and responsibilities, the legal aspects of protecting your startup can often seem intimidating and complex – not to mention expensive. Not only is this step crucial, but it can be simple and approachable. Chen walked us through the basics of legal consultation for your startup – why? when? how?
WHY do you need a lawyer?
Founders sometimes skip legal counsel and instead try to deal with agreements themselves, looking online or consulting a friend. But this method exposes your startup to risk. “You don’t consult your cousin who happens to be a real estate lawyer,” explains Chen, “You get in touch with a hi-tech lawyer who knows how to protect your interests as a founder and how to protect the company’s interests.”
At the earliest stage, sometimes before the company is even founded, lawyers will help founders create contracts or “founder’s agreements” explaining the role of each member of the team, dividing up shares, and ensuring a safe, concrete plan in the event a founder leaves the enterprise.
As the company progresses, a hi-tech lawyer will help the startup to protect its IP, to sign agreements with customers or clients, to formalize the working relationships with the first employees, and to grant options. If you skip legal counsel, you make your company vulnerable to possible litigation or disputes. Once the company starts seeking funding, the presence of the lawyer since the beginning becomes even more central and can make or break a deal. Chen explains, “These mistakes make you a liability in the event of a future financing round. An investor will do incredibly thorough diligence from top to bottom. They won’t put good money into bad money.”
WHEN should you first consult a lawyer?
Chen advises that an entrepreneur seek legal counsel “as soon as other people become involved.” Right at the company’s founding, agreements and protocols need to be established, and this process is most effective and safe with the help of a legal professional. Even just between founders, you should flesh out all the issues that could be potentially harmful if a founder leaves. The issues become more complex as the startup progresses and grows, but a strong legal foundation from the beginning protects your company for later developments. This strong foundation and constant assistance along the way protect the rights of founders, shareholders, and employees when you start to see sales, series A, B funding, when you grant options, when you relocate to the states, when you start corporations in Europe, and ultimately when you exit or IPO.
Chen explains this with a straightforward guideline: “If you are starting your business, you should consult a lawyer. A lawyer who knows about hi-tech.”
HOW can you get legal help as a startup with limited funds?
Chen emphasizes the importance of seeking specialized legal help – lawyers who are experts in the field of startups and hi-tech. For example, GKH has around 400+ active startups at any given time and around 60 lawyers working only in this discipline. These lawyers represent VC’s, multinationals, and firms in every vertical, so they will know what you need at any point of growth and have the specific experience to keep your company in the safest place possible.
Of course, many startups are cost-driven or cost-conscious, so they may be hesitant to consult professional lawyers. Many prominent law firms in Israel who are accustomed to working with early-stage startups can sometimes offer very attractive legal fee arrangements. While seeking legal advice is the most effective route and can be quite cost-effective, GKH has also created a free online platform to help startups especially in these early stages. The platform, named GKH Pro and launching in the coming weeks, will offer resources to understand legal issues with startup development and provides basic documents – employment agreements, founders agreements, nondisclosure agreements, etc. – set to help structure companies and to standardize the process.
For many startups, there seems to be a gap of knowledge or understanding regarding the legal steps necessary to protect themselves. GKH has stepped up to support entrepreneurs in the Israeli ecosystem at this vulnerable stage, in part through their partnership with SigmaLabs. Chen comments, “We feel like the fit matches; there is compatibility between the people and the mission. SigmaLabs is very pro-founder and very much trying to give back, and so are we.”
This blog post was written with Chen Manzur, partner at GKH Law offices