DLA Piper LLP (US)
or many people, Los Angeles is associated with glitz, glam and great weather. However, more and more, the city is becoming known for its growing startup ecosystem.
“There was a time when LA was not known as a tech epicenter, but that has changed,” says Patrick Anding, a partner in DLA Piper’s Emerging Growth and Venture Capital practice in LA. “Entrepreneurs from all over the world are coming here to start businesses and take advantage of the ecosystem that has developed here, including the substantial influx of venture capital funds available in the LA market. There’s a fantastic talent pool, real estate is relatively affordable compared to Silicon Valley, and the community is inclusive and supportive.”
Richard Friedman, of counsel in DLA Piper’s Emerging Growth and Venture Capital practice in LA, agrees and adds that LA’s market is becoming much more diversified. “There was a time when LA was known mostly for consumer, lifestyle, media and advertising startups,” he says, “but now we’re seeing significant activity across a range of industries, such as clean energy, space, fintech and medical- and health-related technologies. This growth can be attributed in part to the top-tier universities and wealth of technical talent and creative talent our city is blessed with.”
With lawyers located in more than forty countries around the world, DLA Piper is a global business law firm with clients ranging from multinational, Global 1000 and Fortune 500 enterprises to burgeoning startups developing innovative technologies. Both Patrick and Rick advise startups and emerging companies from company formation and initial financing to an exit event.
“In addition to having offices worldwide, what sets DLA Piper apart is that we have deep experience outside of the traditional high-growth tech industry,” says Patrick. “We offer a full suite of business legal resources to help companies operating in the hospitality, gaming, entertainment and real estate industries and practically every other sector.“
Patrick and Rick shared insights on how startups can set themselves up for success from a legal perspective and what founders can do to increase their chances of attracting investors, bringing products or services to market and building valuable businesses. They say that for founders, a key step to avoid expensive pitfalls along the way is to involve legal counsel early on, particularly when beginning to sell products or services or when multiple stakeholders begin to have an interest in the organization.
“In both cases, it’s important to speak to a lawyer to ensure you have set up your business properly and have the proper documentation for these relationships,” says Patrick. Since corporations typically organize relationships between their stakeholders (founders, investors, employees, creditors, taxing authorities, regulators and customers), he adds that founders need to structure the business to manage these relationships as early as they can. “Postponing that process and forging ahead without properly documenting these relationships can be costly and time-consuming to clean up later.”
Find lawyers you trust, and get engaged with the process.
Additionally, two areas where founders should pay attention and seek the advice of experienced counsel are the company cap table and intellectual property (IP). “There are a lot of potential cap-table pitfalls, like issuing equity without vesting, committing equity informally through emails or texts, committing to issue a certain percentage of the company, failing to make the necessary tax election for unvested founder shares, failing to understand the economics of convertibles notes or safes, or simply issuing more equity than is warranted for a particular role,” says Richard. “IP protection also needs to be considered from day one, including developing an IP strategy to create a competitive advantage, ensuring proper IP agreements are in place with all founders, other service providers and partners, and making sure founders aren’t using IP owned by former employers.”
When looking for legal counsel, it’s crucial to find a lawyer who understands your business and its trajectory. This knowledge, coupled with industry insight, will influence the quality of counsel you receive. Moreover, it helps to have an open and ready-to-learn mindset, not only when running your startup but also when approaching legal decisions. “Find lawyers you trust, and get engaged with the process,” says Patrick. “It’s your business. Own it and be proactive.”
Most important tips for startups:
- Seek legal counsel early on to avoid expensive pitfalls. This is particularly important when you begin to sell products or services, or when multiple stakeholders begin to have an interest in your startup. In both cases, it’s crucial that you have set up your business properly and maintained the appropriate documentation for these relationships.
- Have an intellectual-property strategy in place from day one. Ensure you have the correct IP agreements in place with all founders as well as other service providers and partners.
- Be involved in the legal process and ask questions. While it’s important to find a lawyer that understands your business and its trajectory, it’s recommended that founders have an open and ready-to-learn mindset when approaching legal decisions.