29Mar

Legal Fees: How to minimize or rid the expense.

I’ve been reading a few blogs lately, particularly posts entailing the costs and procedures of a new start-up. There seems to be a growing trend of minimizing start-up costs and times, and I think it is great that entrepreneurs are finally learning of the many places and ways to downsize their investments to get a start-up running. (Keep an eye out for a friskily controversial new post we’ll have coming up on this topic).

But here’s something that caught my eye, an excerpt from Guy Kawasaki’s side of ‘da net’:

$4,824.14. The total cost of the legal fees [for Truemors] was $4,824.14. I could have used my uncle the divorce lawyer and saved a few bucks, but that would have been short sighted if Truemors ever becomes worth something. Here’s a breakdown of what I got for this amount of money.

Now before I go on, do know that what Guy dropped nearly $5 grand on was more than just a “Terms of Use” agreement (see here), but for the sake of this post I’ll be focusing on what’s out there.

First of all, do you really need something like a Terms of Use, or a Non-Disclosure Agreement to protect your start-up? Let’s take a look at what can happen, and what good one can do for you.

Hypothetical, disadvantageous situation:

There’s far too great of a variety of websites and services offered on the internet to list specifics for each type of situation, but to make my point, I’ll use a content sharing / storage service. Call it StartupX. Imagine this, you have no acceptable use policy (aka, a Terms of Service, or a Terms of Use), and you’re running a successful marketing campaign. A flurry of new users sign up, and life is good. Then you notice a few illicit files being uploaded, and oh baby take my word for it – these files are viral. By the time you go and check out what these users are up to, this trend will catch on. Since the users didn’t agree to anything prior to creating their account, they go wild.

Imagine by nightfall, your server has copyright infringement written all over it, with thousands of mp3’s, ripped or unreleased movies, and more. You wake up the next morning to find your inbox flooded with hundreds of cease and desist letters, take-down notices, and legal threats from the likes of the RIAA, the MPAA, and independent producers. You’ve dropped some dollar on your site (or worse, you’ve raised a few grand from angel investors, but then again this article isn’t about those ventures), and you really hate to see it go down. You’ve seen what organizations like the RIAA have done to other sites. That’s not you.

But what can you do? StartupX didn’t require, or even give users the choice, of accepting and abiding to a Terms of Service (because it doesn’t exist). You, as whole representative of StartupX, can’t ride on the fact that the user’s are to blame… and now, not their server, but your server, houses thousands of infringed content. Now correct me if I’m wrong, but I do believe this makes you the one responsible for these files. And now, you have no choice but to shut down your service, all because you couldn’t shell out the $5,000 in legal fees to cover a Terms of Service (Admittedly, though, this could be taken to trial, which would just mean more fiscal duties). But hey, look at the bright side, chances are StartupX just made some big headlines in the blogosphere.

So what can be done to prevent this kind of situation from ever arising on your field? Plenty. Of course the statement implying one needs to spend $5,000 to obtain a viable Terms of Service (above) is a joke – a ToS, and plenty of other legal forms and agreements, can easily be found all over the internet for a one time fee of $0. (Now this doesn’t go without saying, if you’ve raised capital, or are planning to launch a large service that needs to be scalable, hiring a lawyer to consult and write your agreements for your start-up is the best way to go). I’d like to end this post by providing a few useful links to free legal templates that are out there for your use. :)

Terms of Service

Non-Disclosure Agreement (Good when outsourcing development, design work, or other services that you may want to keep on ‘the down lo’, or may need to reveal some figures to)

Privacy Policy (Good when requiring personal or private information from your users)

Operating Agreement (See comments for some discussion on this topic)

And finally, if you’d like to Incorporate or set up a(n?) LLC, or trademark your name, the most recommended place around is LegalZoom.

If you enjoyed this post please feel free to comment, or share it (check out the “SHARE” button below this post).

 

Update: A few commenters have brought to my attention that the example situation I described may be a little too extreme, so maybe its best not to take the story too seriously, as one would still be protected under various laws or acts in the US (EG. The DMCA). The goal of this post was to remind entrepreneurs about the importance of legal work for your start-up. I loved the great discussion through the comments, by the way. 

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22 Responses to “Legal Fees: How to minimize or rid the expense.”

  • damien:
    March 29th, 2008
    8:10 pm

    This advice is worth its weight in gold. With new startups sprouting up daily it is almost a necessity to have your ass covered with terms of service, agreement policies, etc. Like mentioned above, it costs $0 for your average ToS and agreement policies. So why not just save yourself some time now and use them instead of winding up in court for a stupid user.

  • Spencer Fry:
    March 29th, 2008
    8:10 pm

    You’re actually forgetting the most important document. What you’re missing makes up 80% of the initial lawyer fees: the Operating Agreement. The Operating Agreement is simple if it’s a sole proprietorship (usually only 2-3 pages), but when you’ve got multiple partners and possible investors, it grows to 40-50 pages. My current Operating Agreement with me and two other partners is 43 pages and will likely grow as more investors are brought on, etc.

    If you figure that most good lawyers — and trust me, you want good lawyers — charge $250-$350/hr and $5,050 is only 20 hours of work. 20 hours of work adds up quickly if you think about a lawyer creating an Operating Agreement, filing the business with the state, drafting miscellaneous paperwork, preparing your company’s binder, filing trademarks, terms of service, privacy policy, etc. Honestly, I can’t believe Guy only paid $5,000. It seems to me as if he actually cut corners.

    I won’t ramble any further, but if you’re really serious about your startup and it’s your only job and your entire life, you’ll want to protect it and yourself properly by using a good lawyer. Many are reasonable, though, and will understand that your startup is cash poor and will allow you to pay over several months.

  • Spencer Fry:
    March 29th, 2008
    8:51 pm

    Let me also add that I know this is an “indie” startup blog, so a lot of people here aren’t trying to start the next Google. It’s still wise (as long as you can afford it) to get a good lawyer to help you along. Coming up with that money is for another blog post. ;)

  • Julian:
    March 29th, 2008
    9:06 pm

    Spencer, although you’re very correct in what you say – and I really appreciate the comment – If I’m not mistaken, an operating agreement is typically instated (or most costly) for an LLC.

    I’m not positive but I’m quite sure that Guy is running Truemors himself, which as you say, yields a less demanding operating agreement – which is possibly why he got away with spending $5,000 on doing things properly.

    Yet admittedly this article was more focused on a few simple legal forms, I brought in Guy’s case as more of an attention getter, but just to prove comments are a great stream of discussion I’d just like to add on to what you said.

    Many self-funded, ‘lone venturer’ start-ups like to cut corners at first with costs, and legal fees and agreements seem to be the least important focus with new, smaller ventures. This is why many can’t justify spending a few thousand on a decent lawyer, especially when their entire start-up investment was a mere few thousand.

    This is also why so many resort to tailoring free online forms to fit what they need, which is why these resources are so popular. I’ve added this link to the main post: http://www.formation-llc.com/freesingleoperatingagreement.htm

    Feel free to correct any mistakes in my thoughts, by all means. :)

  • Julian:
    March 29th, 2008
    9:24 pm

    I just gave my lawyer a call and he wasn’t positive on this but said a decent operating agreement for a sole proprietorship will run you about $3-5,000. Reading up on this kind of agreement it seems like its a must have for joint ventures… I’ll look into it and possibly come up with some kind of follow-up post down the road.

  • David:
    March 29th, 2008
    11:42 pm

    Great article, Julian. Perfect dosage of legal information.

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  • ygdy:
    March 30th, 2008
    8:09 am

    To the author:

    I think you may be exaggerating on the benefits of a Terms of Service document.

    Even in the absense of this document, you will still be afforded with the benefits associated with various laws, including the DMCA in the United States. What these documents are good at are clearly setting out what obligations and responsibilities each party for the avoidance of doubt and also for shifting responsibilities (ie liability) to the user (customer). (Liabilities which the user would not otherwise have..)

    It is important that you actually fix the user with “notice” of these terms of use, otherwise it is arguable whether they apply in the first place.. Simplying linking to the terms of use at the end of your website is generally not deemed acceptable for fixing the user with notice. You should force them to read the terms before interacting, and using your website

  • Babu:
    March 30th, 2008
    9:19 am

    i think this is great resource for a startup entrepreneur – $5k is a lot to spend on lawyers – most of your stuff related to incorporation can be done by the services provided by the people like legalzoom.com – the rest of the stuff like ToS can be done via free resources available on the net.

    Also remember that u don’t know whether u will succeed with your startup so spending 5k is a lot and what if you’re working on multiple ideas simultaneously then it is advisable that u minimize your expenses as much as possible by taking help of free stuff available on the web, and once you start making money (either by revenue generation or from angels/vc), you can then afford to hire a good lawyer.

  • links for 2008-03-30:
    March 30th, 2008
    11:34 am

    [...] Legal Fees: How to minimize or rid the expense and list of free legal agreement templates | Indie St… (tags: legal) Sam’s Links [...]

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    March 31st, 2008
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  • links for 2008-03-31 « Mandarine:
    March 31st, 2008
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  • Yokum Taku:
    March 31st, 2008
    1:10 am

    A company that plans on raising institutional VC financing in the future should not skimp on legal fees in the beginning. It often takes more time to fix something than do it right from the beginning. Most competent startup attorneys will have the flexibility to defer legal fees in exchange for the ability to purchase founders stock or other arrangements if the attorney believes that the company will receive VC financing in the future.

  • Jason Emerick:
    March 31st, 2008
    5:41 pm

    Automattic makes their Terms of Service and Privacy Policy for WordPress.com available under the Creative Commons Sharalike license.

    http://automattic.com/privacy/

    from http://wordpress.com/tos/

    “(Note, we’ve decided to make the below Terms of Service available under a Creative Commons Sharealike license, which means you’re more than welcome to steal it and repurpose it for your own use, just make sure to replace references to us with ones to you, and if you want we’d appreciate a link to WordPress.com somewhere on your site. We spent a lot of money and time on the below, and other people shouldn’t need to do the same.)”

    Another option…

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    April 1st, 2008
    5:18 am

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  • Dan:
    July 31st, 2008
    6:40 pm

    Want a site that is cheaper and easier to use than LegalZoom. Go to http://www.legalezeusa.com. We beat Legalzoom’s prices and can file an LLC in half the time.

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  • Barry:
    January 20th, 2009
    12:08 pm

    Most consumers cannot afford to hire an attorney as, in today’s market, they are charging up to $500 per hour with a minimum charge per hour of $300. Furthermore, most attorneys do not have the time nor the staff to prepare most of the documents that the average consumer needs today, as they are too busy with lawsuits and other forms of litigation. Most consumers today do not have the time, ability, or energy to prepare their own legal documents. LegalezeUSA prepares legal documents needed by the consumers correctly, timely, and at a price that the average consumer can readily afford.

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