Why Startups Need a General Counsel

It’s hard to imagine most start-ups embarking on a capital raise without an experienced Chief Financial Officer or other key personnel responsible for the venture’s success, but many of these same companies often view a general counsel as an unnecessary extravagance. However, relying on traditional outside law firms usually is not a cost-effective substitute, since their organizational and billing structures can make them prohibitively expensive and less accessible to young, growing companies. The default approach for many entrepreneurs tends to be a patchwork of “self-help” options, including internet subscription services, “fill in the blank” form databases, and Google or ChatGPT, which can leave their companies vulnerable to a number of legal risks. 

As a former trial lawyer representing large public pension funds in bringing shareholder rights claims, I know firsthand how dangerous this practice can be. The truth is that, like a trusted family doctor, a good general counsel plays a critical role early on by spotting issues and exposures that lay people lack the training or expertise to recognize, and addressing them in an efficient, cost-effective manner. GCs can also help companies limit their expenses when retaining an outside law firm becomes necessary, by using their knowledge and breadth of experience to pick the right legal specialists, provide effective supervision, appropriately limit the scope of work, and translate arcane legal analysis into “real world” advice for the management team.

The question, therefore, should not be how much a good GC will cost your company, but how much will they save your company.  While the answer will ultimately depend on a number of factors, including the industry and the company’s specific compensation structure, startups can certainly optimize their return on the decision to hire a GC by ensuring they choose someone with the following attributes:

1. Corporate governance experience: Regardless of whether you’re in pharmaceuticals or fast food, (or something in-between), the key to risk mitigation always comes down to good corporate governance. An effective GC understands the significance of variations in business corporation laws from state to state, and will prepare policies and practices that comply with these codes without unduly restricting your business activities. They will also handle the “routine” tasks of corporate record-keeping that are anything but routine, and all too often turn into “red flags” in litigation when not carefully prepared.
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2. Familiarity with securities laws and capital markets: Conducting a capital raise for even an early stage company involves significantly more than negotiating the Valuation Cap and Discount Rate to fill in the blank on your boilerplate SAFE Note. Any fundraising from outsiders must comply with the federal securities laws, and possibly state blue sky laws, which govern your solicitation efforts before you sell a single note or share of stock. Hiring a GC who has a deep familiarity with securities laws and the workings of the capital markets will not only mitigate your risk, but also save your company significant time and money in dealing with outside legal and financial advisors.
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3. Litigation know-how: While it’s not necessary for a good general counsel to have extensive trial experience, (though, given my trial experience, I’m obviously biased), it is critical that they have a good understanding of both the substantive and procedural aspects of litigation, which is essential to evaluating the risk posed and the costs of prosecution/defense, both of which are indispensable in devising a realistic litigation and resolution strategy. A deep understanding of the litigation process is also critical to selecting and effectively supervising trial counsel, as well as negotiating a retention agreement that is cost-effective and discourages unnecessary work and billing.
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4. Basic understanding of D&O insurance: A good GC will not only mitigate your risk, but use that risk mitigation to negotiate favorable premiums from your Directors’ & Officers’ Insurance carrier. In my experience, carriers often provide inordinately high quotes for D&O coverage based on flawed assumptions. Hiring a GC capable of challenging those assumptions with industry-wide data and hard-earned personal experience can translate to thousands of dollars in savings and/or better coverage. (I have also found it to be an enormous amount of fun!)
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5. Business acumen: Good GCs really are the family doctors of the corporate world and, like any good family doctor, they understand the bigger picture – including the industry ecosystem and a company’s strategic and operational goals. Far from the cliché of being the “DEPARTMENT OF NO,” effective GCs are valued advisors who can help devise and implement creative options to achieve mission-critical goals. They also appreciate the challenges of collaborating with other teams and ensuring alignment between legal and business functions. 

Consider a Fractional GC
While every company could likely benefit from a GC, not every company requires (or can afford) a full-time lawyer on staff. In many circumstances, fractional GCs – an outside attorney with in-house experience - can fill this role more affordably based on their ability to serve multiple clients. Likewise, a part-time GC may be open to “flat rate” engagements that will enable you to seek advice without worrying about the meter running every time you pick up the phone.

It is undeniable that most companies will encounter complex issues requiring sophisticated legal and risk mitigation advice throughout their growth. Retaining a highly qualified GC early on is not only affordable for most start-ups and small companies raising capital in the public markets, but is also one of the most effective measures by which entrepreneurs can mitigate risk and maximize their chances for success. If you would like to discuss the possibility of engaging a fractional GC for your company, please contact Robert Gans at rgans@scalefirm.com.

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Robert Gans is a highly experienced public company general counsel who brings a unique perspective to his clients, having spent much of his early career prosecuting securities fraud, accountants’ liability, and corporate fiduciary actions on behalf of large, sophisticated investors. Leveraging this breadth of experience, Bob advises companies of all sizes, including startups, on a wide range of legal issues and risk management strategies, including corporate governance, commercial and strategic transactions, M&A, compliance and other matters.