What you’ll learn from this article:
- Key business opportunities and challenges common to growing and scaling businesses that raise legal concerns
- The five legal infrastructure pillars that every growing and scaling business needs
- The sometimes ignored, but essential, legal protection that a business owner should know about
- How to improve business operations through better contracts
- The milestone events when every business owner should have strong legal counsel
Our firm works with numerous entrepreneurial businesses that are growing and scaling – in fact, you can say that is one of our “sweet spots” – and for me personally, it is one of the most rewarding and satisfying aspects of my work. Our clients are innovators and creators in a number of industries, but most especially life sciences, food and beverage, fashion and other consumer retail products like stationery, and B2B service providers. The business owners we work with are highly talented and experienced individuals, most of whom have had long careers in other ventures before launching their current business. Some are serial entrepreneurs and others are taking over family-owned businesses, working to modernize and grow the business they have inherited beyond its origins.
What are the top business opportunities and challenges that should trigger a legal consult?
A common feature of these businesses is that they face new opportunities and challenges that they need help navigating – like growing their employee base, launching new products, entering different trade channels or adding larger and more sophisticated customers. Others are seeking investors, acquiring other businesses, entering new business partnerships or even parting ways with a co-founder. This requires our team to not only bring to bear our legal knowledge in the various areas in question (corporate, employment, intellectual property “IP”, sometimes even dispute resolution) but also our business acumen, learned from our own experiences either owning a business or being an in-house lawyer, and from working with hundreds of clients in similar situations over the years.
Eureka! Moments: It’s all about the business
We especially love when business owners find Eureka moments in our discussions and gain insight into new ways for expanding or operating their businesses, not just improving their legal infrastructure (although of course that’s important to us too!). I can think of several discussions we have had with clients this year alone when these moments occurred. For example, we helped one client figure out where her IP was so she could better protect it and articulate its value to investors. We have helped another client think about ways to restructure a business partnership with another company that licensed her IP that wasn’t quite working for either of them; the new ideas have great promise for growing both their businesses. And with yet another client, we reflected on the various transactions we assisted her with last year, in order to figure out what were her non-negotiable terms in her consulting business, especially focusing on conserving her time as she scaled and ensuring her vast body of IP was protected even as she created new IP for others.
Legal infrastructure: What growing and scaling business owners should consider
So if you are a growing and scaling business, where should you be thinking about improving your legal infrastructure? We typically focus on five different areas with our growing and scaling clients:
- Robust foundation: Ensuring robust foundational documents, compliance with government regulations, and insurance coverage
- Protection of key assets: Solidifying essential IP protection
- Clarification of team roles and responsibilities: Enhancing employee and independent contractor agreements
- Improvements in business operations: Strengthening contracts with suppliers, customers and other business partners
- Preparation for milestone events: Preparing for the next big step in the business, which could be things like obtaining investors, selling the business, acquiring a business and/or facing the exit of a founder.
Why go back to the basics?
Often times clients will come to us with having already established an entity and been in business for some time. We typically want to review their organizational documents (for example, sometimes business owners have an entity, but no owners agreement), their compliance practices and insurance coverages to make sure that the basic foundation of the house is in order and that no changes are needed given where the business is in its life-cycle and plans for the near future.
The most highly valuable but sometimes overlooked area of the business
As an IP focused firm, naturally a big focus of our work is on IP protection. But this also makes sense for all businesses, since studies show that over 80% of a business’ value these days is in its intangible assets, no matter the type of business. This includes the brand or trademarks of course, as well as creative works or works of authorship (covered by copyright), and any inventions. An often overlooked but extremely valuable area is also trade secrets, which are more than just the “secret sauce”. For example, many of the businesses we work with have systems and processes that might be inventive and highly valuable and not able to be protected by patents, but instead are trade secrets. In general, regardless the type of business, IP is often central to what the business does and the core of its competitive value. It is also an area that is heavily overlooked in terms of legal protection, or one (especially for trademarks) where clients have used either DIY efforts or something like Legal Zoom, which may not really be providing the protection they need even if they have obtained seemingly good results.
Clear employee and independent contractor relationships protect business assets
Another obvious area for consideration is the relationships our clients have with their employees and independent contractors – and in particular the documentation of them. Often our clients have no documentation, or it is outdated or doesn’t cover key areas such as IP ownership. We also find that clients need help determining when independent contractors need to move into being employees and we help clients navigate that transition seamlessly. One goal in this work is to try to provide clients with solid custom templates for employees and independent contractors that they can use going forward, working with us only when unique arrangements are needed and/or to update the templates as the business grows. Savings of legal fees are a definite benefit of templates, but templates also provide simplicity of administration and create consistency across the business, all of which are essential when growing a business.
Well-thought-out contracts help improve business operations
Another big part of our work with growing and scaling businesses is on their vendor and customer contracts, as well as contracts with their business partners. This is again an area where we find clients have under-utilized lawyers, either doing it themselves (maybe find a template from the internet) or working with an attorney that may not have really understood the nuances of business or all the legal issues that play (for example, if it is an IP heavy business, and the lawyer did not have deep IP experience, the agreements may not have all the protections needed). In addition, we have often found that contracts that may have been great when the business first started need updating – perhaps because the clients’ business model or processes have changed, or because they are now providing new products and services or working with new customers with different wants and needs. As with employee and independent contractor templates, we also try to provide clients with solid custom templates for use with their customers, getting involved to modify or update the templates or create a custom agreement only when needed. In this area, like with our client mentioned above, one of the values of creating templates is helping our client solidify their business processes and also identify essential terms for future deals. Again this results in not only cost savings, but also in consistency and simplicity in operations.
Milestone events: Not a time to skimp on legal advice
The last area we assist clients with is preparing for investment or another milestone event such as a joint venture, the exit of an owner of the business or other succession planning, or selling the business or acquiring another one. When it comes to investment, clients need to understand that they have a number of options open to them for securing necessary capital to grow. Some options can help them avoid a loss of control over the business, which can be a very important concern, especially if the business is a certified women-owned or minority-owned business for example (as many of our clients are). Clients also need to ensure that they are complying with federal and state securities laws over these transactions, which is often news to companies first getting involved in this area. We also help companies prepare for due diligence to ensure that there are no surprises on the way to the deal table that might tank the deal or cause the purchase price to change unfavorably. For example, maybe the company needs to change its corporate structure to better attract investors. Poorly thought-out employment or independent contractor agreements (or a lack of them) can mean that the business does not technically own the IP it thinks it owns and that efforts need to be made to recapture that IP. In addition, if one hasn’t already applied for trademark registrations – or the trademark registrations are not sufficiently comprehensive, that can negatively affect business value. Also, as noted above, adequately identifying and describing other IP assets, such as trade secrets, in a thorough manner can also enhance business value during the transaction. These are only a few examples of the minefields (and opportunities) that business owners may face.
An educated consumer is our best customer
The potential areas where a growing and scaling business should improve their legal infrastructure are vast. Naturally one concern then becomes budget. One of the most important things we do in working with businesses like this is when we help them prioritize these tasks, so that we are doing the most important tasks first and saving less critical ones for later. Over time, the goal is often to reach improvement in all of these areas, but as business owners and executives, we understand that that cannot happen overnight, and we are realistic about what is a must do now versus a nice to have. Of course, the answer to that question of which is which varies depending on the business and its goals. While we need to know the business well enough to make appropriate recommendations, we believe it also essential that our clients are educated enough about legal matters to make smart choices for themselves. Like the old slogan said, “an educated consumer is our best customer.”