Law less ordinary: acting for start-up companies
13 March 2014 | By Becky Waller-Davies
6 January 2014
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Picture the scene: the usual mountain of paperwork, a multitude of late nights, billions of pounds to be made and a CEO who took the reins of a FTSE 100 company before you were born.
As exciting as it is to work on headline-making deals, the situation can also conspire to make the average trainee feel rather insignificant.
Which is why, should the opportunity to work on a smaller-scale project come up, it needs to be grabbed with both hands.
This is where start-ups come in. The clients are very different, the deals on a much smaller scale and the legal advice is less centred around niche or black-letter law and more around general advice tailored to a client who can feel more like an anxious patient than a demanding boss.
“Start-up owners’ companies are like their babies and they are normally passionate about and protective over what they have created and what they are building,” says Harbottle & Lewis corporate partner Tony Littner, who specialises in advising start-up businesses and the venture capitalists looking to invest in them, sometimes playing matchmaker between the two worlds.
“Understanding that – getting under their skin as individuals and under the bonnet of their companies – is very important.”
Littner started his career in the City, at a top ten firm, but knew that he needed to move on post-qualification.
“I enjoyed my time there but I didn’t feel as though I could fully personally relate to many of the firm’s clients, particularly the large public companies,” he recalls. “I was only a young guy and all the deals seemed too big and intangible and I never felt as if I could make a real difference.”
He knew if that if he was going to stay within the law, he needed to leave the scale of the City behind and made the leap to a firm like Harbottle precisely because it was so active within the entrepreneurial sphere.
Taylor Wessing employment partner Paul Callaghan, who has been instrumental in establishing the firm’s package for tech startups – Tech and the Beanstalk – acknowledges that it can be easier for junior lawyers to manage their relationships with smaller clients.
“If you are just dealing with big, established clients and if you are the most junior person on the team then you might feel like the relationship is not yours, but with these companies that’s not the case,” he says.
Getting start-ups started
The advice that start-ups seek is often crucial to their fledgling businesses, meaning that it is easier for trainees to make a difference to their client’s story.
“Start-ups are often a good way for trainees to cut their teeth, as the legal advice tends to be focused on more general matters,” comments Cripps Harries Hall partner Chris Langridge, who frequently works with tech start-ups. “One basic but common decision that needs a legal basis is whether they need to set up as a sole trader, a limited liability partnership or a company.”
After making the decision about what form a business will take, a client’s next concern is often protecting IP, which is particularly important to start-ups as it is their primary form of capital.
“Protecting IP, so registering trademarks and patents, is important,” Callaghan confirms. “As is taking on their first employees and understanding their obligation to staff.
“Start-ups are really good for junior associates and trainees, he continues. “Many people working in these companies are more their age than they are the partners’ age. It is fantastic training for our younger lawyers on how to network – how to develop client relationships.”
Making things clear
Getting used to developing client relationships and networks is not the only skill that advising start-ups teaches trainees.
“Working with start-ups is different to working with big established companies,” says Littner. “For a start, while the people involved are often incredibly creative and talented, they may be relatively inexperienced with legal matters.”
Therefore, possession of the oft-mentioned ‘commercial awareness’ is doubly important when it coms to fledgling businesses.
While an awareness of how a business and industry functions is necessary when advising an established company, advising a start-up requires lawyers to put these skills into overdrive.
“You need to be able to break down legal jargon and be able to communicate and explain sometimes difficult or technical concepts in an informal and user friendly, accessible manner,” Littner says.
“They often rely on you in the early stages to be a business adviser as opposed to just a lawyer. That is not to say that I always profess to understand their businesses as well as they do, but entrepreneurs tend to find it helpful to have somebody who can speak their language and offer common sense, practical and commercial advice.”
Warding off trouble
This common sense approach is often deployed after a business has run into difficulties due to the company’s lack of funds, a familiar situation among start-ups.
“If you are starting a business and have a limited budget then legal agreements are probably at the bottom of your list because a lot of them are not compulsory,” Langridge explains. “But if you get it wrong, the problems can be horrendous.”
“Often it is when people have already taken an action that they then get legal advice,” Callaghan adds. “They may have fired somebody without taking advice, or not realised what maternity rights people have, or have employed somebody from abroad without a work permit and only realised they needed one when somebody gets turned away at the airport.”
Turning a profit
However challenging a situation may be for a client, Littner believes that the main challenge for law firms advising startups is working out how to make the relationship profitable.
“With start-ups you sometimes need to take a step back and identify what the absolute key immediate legal needs are to enable them to get from A to B rather than looking all the way from A to Z right at the outset,” he explains. “By taking this approach, I have even sometimes ended up charging less initially than the client may have been willing to pay.
“However, I have found that, by looking at things holistically and taking more of a longer-term view to the client relationship, this tends to engender loyalty and stickiness.
“There are lots of clients who I have been looking after for ten years and the firm has been acting for even longer, precisely because we didn’t set out to make a quick buck.”
“We are really happy to be involved in the new tech generation: we think it is a really positive development for us, even if in the short term the fees we get are relatively low,” Taylor Wessing’s Callaghan says of its Tech and the Beanstalk clients.
“All the big tech companies started in someone’s bedroom or someone’s garage,” he continues. “We are really happy to invest in all these tiny companies in the hope that they will flourish. And if some of them fail, the entrepreneurial minds behind them may well go on and do other things.”
“It’s acorns and oak trees,” Langridge echoes. “Unfortunately a lot of startups are not successful but – especially in the tech industry – those who are tend to grow very rapidly.”
This tendency for rapid growth coupled with the increased dependency of clients often engenders a greater sense of achievement than that of the typical deal.
“There is a great personal sense of reward when I see one of my start-up clients raising their first £100k or first £1m – they tend to be very appreciative of and grateful for your help,” says Littner. “You genuinely feel a real sense of accomplishment and satisfaction, which I think is, unfortunately, quite a rarity in some areas of law.
“In effect, our role is often more akin to an in-house counsel or trusted adviser – you and the client both feel as though you are on the same team.”
Client view: Laurence Kemball-Cook, CEO and founder of PaveGen
Advised by Anthony Littner of Harbottle & Lewis
In 2008 I was working at one of the world’s largest energy companies as an industrial design engineer, I was looking at new ways to create off-grid power and we were trying to make street lights powered by solar and wind. We failed because we couldn’t make a solution that would apply to urban spaces.
Having left there, I returned to Loughborough University where I started to work on the concept for PaveGen. I exhibited at design shows and got international media attention, allowing me to start the company.
Now we trade in 14 countries and power shopping centres, train stations and offices.
No start up ever wants to spend money on lawyers. I know companies with revenues of a million or so who have never spoken to a lawyer, but Anthony has held our hand for a couple of years now.
Other firms advised us on our initial shareholders’ agreement and IP protection but Harbottle & Lewis have the ability to scale up as we grow, as they are able to advise on our corporate finance structure too, and we really like that.
Client view: Dorian Waite, MD and co-founder of Honest Burgers
Advised by Julian Matthews of Wedlake Bell
The concept started around December 2010. I met Tom and Phil, my business partners: they were doing catering in Brighton, street markets and various other things. They were great but quite good at losing money! They asked me for advice as I had been in the restaurant industry in London for a while. Two days later, Tom called me and asked if I would join them. I was consulting for Giraffe at the time but gave it up and opened a restaurant in Brixton.
We opened in June 2011, during the six-month period we started to put the company structure together. My wife is a restructuring partner at US firm Bingham McCutchen and glanced her eye over the initial legal documents for free. When we first started in Brixton Village it was pretty run down – we could have had any unit we wanted, it was so empty. We wanted to test the concept, not make money.
Over the next few months though, we realised it was going very well. We had queues every evening that we were open and eating there became a cult thing. We next opened a restaurant in Soho, which had always been where I wanted to aim for.
Exciting stuff started to happen after we opened the Soho site. We were approached by private equity houses and started to talk to corporate lawyers about taking private equity funding, which we eventually turned down. It was at that time that Julian Matthews, a partner at Wedlake Bell, approached us. He did a lot of work for free for us at first and we have retained him for a small fee every month so that he can advise us any time on an ad hoc basis.
He is very well known in the restaurant industry and is great for networking. We use him as a sounding board for things like whether we should take funding from high-net-worth individuals, crowd-fund or use bank debt.
He is more than a legal adviser – he helps us look forward and plan the business.