“You know, it’s easy for the Monday morning quarterback to say what the coach should have done, after the game is over. But when the decision is up before you—and on my desk I have a motto which says ‘The Buck Stops Here’—the decision has to be made.” -President Harry S. Truman, in an address at the National War College on December 19, 1952
The buck always stops with the entrepreneur. Decisions have to be made right out of the block. And there is nowhere to hide when the earliest decisions of an entrepreneur can significantly impact the endgame value of a startup. Accordingly, a wise entrepreneur will seek the counsel of an abundance of advisors, including top-notch legal counsel.
Fortunately, our community is now blessed with several legal firms that specialize in supporting the entrepreneurial journey. Warning: if in your first call with an attorney you hear the billing clock immediately start ticking, you are probably talking to the wrong firm. Having said this, even the best of these folks can seem expensive in the early days of a company when the entrepreneur is not even taking a paycheck. Engaging outstanding corporate counsel early in the process is one of the most important investments you can make in your business, equipping you to make better, more informed foundational decisions.
Not convinced? Let’s imagine you must decide which business structure offers the best liability protection to you as an owner of the company. LLC, S-Corporation or C-Corporation – each has merit or can be inappropriate depending on the situation. You must run your corporation like the distinct entity that it is. An uninformed decision or a subsequent lack of discipline in following through with responsibilities related to a particular structure could result in a legal piercing of your corporate veil. When this happens, a court ignores the limited liability status of a corporation or LLC and can hold you personally liable for debts or other obligations of the company. Not a good day when that happens.
Are you planning to start the business with another hardy soul? How will you divide ownership stake or voting rights? Imagine your business is humming along nicely when one of the co-founders wants to stop working so many hours, retire, sell shares to someone else, goes through a nasty divorce, or passes away. You could end up in business with the divorced spouse of a co-founder who has an agenda diametrically opposed to yours, or worse. This risk can be mitigated with a buy-sell agreement. A buy-sell acts as a sort of “premarital agreement” and will protect everyone’s interests, setting the price and terms for a buyout. Every day that value is added to a business without a plan for future transition, it increases the owners’ financial risk.
Are you planning to start a growth mode business that you expect will need several tranches of capital? You don’t want to raise too much capital at too low a pre-money value or you will dilute the folks who are pulling hardest on the rope—the founding shareholders. If you convince folks to invest at too high a pre-money value, you run the risk of having to explain or endure a “haircut” on the next round for all of the existing investors. While the landscape is shifting with the emergence of crowd funding and other non-traditional forms of funding or investment, many situations will call for a private placement memorandum in which you disclose risk and explain use of funds. Your legal advisor can help you better understand the pros and cons of all the decisions you must make along this path.
Feel free to contact me, one of the other entrepreneurs (or staff members) at Next. We can help you engage the local legal counsel you need to be a good steward of your decisions as an entrepreneur.
This content was published by Business Black Box, the Upstate’s business magazine, based in Greenville, SC. Any replications or use of this content must be attributed to Black Box or Showcase Publishing.