Ryan Roberts, author of Acceleration, is a corporate attorney who represents startup companies through every phase of their growth. He’s also the founder of startuplawyer.com, which is a legal resource for startups, and Forbes named it one of the 100 best websites for entrepreneurs. In this episode, we talk about some of the most common legal problems that startups face or that they’re unaware that they’re neglecting.

Now, these issues might seem small on the surface, but they have huge ramifications including losing millions of dollars or shutting down the company and having the cofounders walk away. So if you’re an entrepreneur and you run a startup, you need to listen to this episode.

Ryan Roberts: I had a lemonade stand when I was eight years old, and it wasn’t something that I planned for a long time. It was more of an arbitrage opportunity I saw with a lot of construction workers in the neighborhood. I would ride my bike down to Circle K and would buy a drink and primarily baseball cards, and I thought, “Wow, if I actually started a lemonade stand, I could cut off Circle K and maybe gain a lot of money to buy baseball cards.”

So I started this lemonade stand, and it really took off.

I think eventually, within a couple of weeks, we were pulling in between $50 to $75 a day, which you know, when you’re eight years old is a ton of money.

“I had the largest baseball card collection in the neighborhood at the end of the summer.”

It actually got so big that someone tipped off the local news. So one day, this large TV news van pulls up, someone with a microphone starts asking me a bunch of questions, not even sure if they asked my parent’s permission, but yeah, I was on the news.

It did pretty well. Thankfully, the news story didn’t tip off the IRS—it would have been pretty ice cold to go after an eight year old kid for the lemonade stand.

Charlie Hoehn: What were you doing differently from other kids?

Ryan Roberts: A lot of it was about location. I think we had a good spot in our neighborhood so that was a little bit of luck. But I think with a lot of entrepreneurial endeavors, luck plays a bigger role, or maybe it was timing or both.

It was the right time, it was summer time, it wasn’t winter, we had a good spot, sort of towards the entrance of neighborhood. I think it just all sort of worked and ended up in this serendipitous summer of baseball cards and lemonade.

Charlie Hoehn: I would imagine that was a very formative experience for you to be not only making that much money, but also to have the news come and film you. How did all this shape who you went on to become?

Ryan Roberts: I think that was definitely the first experience of me being an entrepreneur and in fact, even to this day, I feel that I’m still an entrepreneur.

I feel like I’m an entrepreneur who just happened to go to law school.

Maybe that’s why I started my own law practice rather than join a large firm. I think that entrepreneurial side of me has been definitely consistent in almost every facet of my life and certainly in my career.

Who Needs Acceleration?

Charlie Hoehn: Awesome, that transitions us nicely into your book, Acceleration. Now, give a quick breakdown of what this book is about and who you’re trying to help?

Ryan Roberts: This book is certainly for first/second time entrepreneurs. The spark as to why I needed to write this book was one of the most common phrases or statements prospective clients when they come the door: “I’m coming to you now because we either screwed up our legal in the last time or we had issues that should have been easily appreciated going into our startup.”

They all tended to revolve around the legal aspects.

So I thought, “Well, I’ve already written a blog on these topics…”

But like any blog, they’re sort of scattered, they’re all over the place. I thought, “I really need to write a curated, updated version of my blog.”

I wrote my blog over eight to 10 years, and what I have additionally now is, after working with over a thousand clients, I’m able to give advice based upon what I’ve seen work and what I’ve seen not work.

“My book is based upon my own entrepreneurial lessons that I’ve learned.”

It’s based upon the legal aspects that face entrepreneurs, but there’s this third layer of it, which I think is very important, it’s the anecdotal experience or almost a pattern recognition of what I’ve seen a lot of entrepreneurs and startups go through.

Charlie Hoehn: This is a really densely filled book with valuable insight on this aspect of business law.

Ryan Roberts: Thank you. You spoke on one of the big things I want to do with this book, is to make it organized in a way that is essentially chronological for the most part. You start with your entity, you bring on a cofounder, how does that work?

It really is meant to be a guide that you can take and refer back on as you progress down the path in your startup.

Or, alternatively, maybe you’ve already formed your company, you already have a cofounder. Maybe you’re looking to raise some investment capital—you start at part three, and that’s great.

A lot of those questions that are answered and asked in the book are really derived off of the most common, most frequent questions that we get from entrepreneurs.

Charlie Hoehn: What problems could they potentially face if they don’t have a guide like this?

Ryan Roberts: I think that one of the common misunderstandings that a lot of first time entrepreneurs have is that they face the most potential risk or issues from external forces. I think what I’ve seen in a lot of probably other lawyers have seen who work with startups/entrepreneurs is that you’re more likely to be harmed by internal issues, internal forces than a large company like Google starting a competing product.

A lot of the times startups fail because the internal organization structure just wasn’t set up in a way that could help the company if they had an issue, which I think are inevitable, to handle that and move on and get to the point where they could launch their product or service.

Internal Struggles

Charlie Hoehn: Give a couple of examples of the types of issues that you’re talking about. Maybe give a story of somebody who came to you with an issue like that?

Ryan Roberts: I think probably, the most common issue that presents itself internally is cofounder issues. Starting a startup is an extremely stressful time period. You have people who are taking a big risk, right? Statistics for successful startups aren’t in your favor.

It really is this first marriage of people, and it’s difficult for them sometimes to ride the roller coaster together if they’re not on the same page.

Maybe they’re at a different place in their life. Maybe at home, they have different requirements that are needed. Maybe one has a family, maybe one cofounder doesn’t have a family. So it’s stressful enough to be in a startup by yourself, but when other people are involved, clashes can happen.

It’s not because you’ve partnered up with a bad person—it’s just a natural byproduct off the stresses of trying to launch something that maybe isn’t there in the market yet.

It can only culminate into chaos, and if the documents aren’t handled correctly, what ends up happening is both people quit.

Charlie Hoehn: Can you give an example of a time that you’ve seen that happen?

Ryan Roberts: I don’t think the issue is trying to come up with an example, I think it happens once a week. You know, we work with so many startups and with the low success rates, there’s a lot of things that happen between cofounders.

Maybe this paints even a greater picture—I’ve often wondered whether it should be appropriate to draft what I’ll call a cofounder departure agreement as part of an incorporation package. Because it happened so often that we actually have more or just as many forms and agreements for a cofounder departure than we do incorporations in the first place because they are that common.

There’s not really one client I would say that sticks out. Now, when they do stick out is when they’re actually doing well.

Charlie Hoehn: Right. That’s sort of what I mean is painting the picture of the promise of what could have been if only they’d had these documents correctly.

Ryan Roberts: It’s difficult because you can’t spend a lot of time and do personality profiles of people who are working there. But sometimes, you know from the beginning that it’s probably not going to work. If they have different levels of commitment, it’s probably the biggest red flag, right? Like one cofounder’s all in, they’ve quit their job, they’re working on the startup all day long.

Then you have the other cofounder who is still working, still getting the nice W2, still has healthcare.

It’s only natural that eventually, the person who is all in is going to feel a little bit of resentment to that person, and maybe rightfully so. But that’s when the fractures in the cofounder relationship start to occur.

“It’s not always cofounder on cofounder.”

It could be cofounder versus their first employee, startup versus their first adviser. That is sort of how we try to walk through the book and say, “Hey these are the things that we see startups encounter the most and present the most risk.”

Because if you’ve started a startup, you already are a risk-loving person, right? You have accepted the challenge. I think a lot of attention isn’t paid to the internal risk, so I think this book really tries to highlight that for the entrepreneur.

What Entrepreneurs Miss

Charlie Hoehn: Correct me if I am wrong, but it sounds like the likelihood of that happening is pretty high because many entrepreneurs neglect this part of the equation.

Ryan Roberts: And it may not even be because there is an internal issue between the co-founders. A lot of entrepreneurs are creatives. There are other ideas and things they want to pursue.

So the overall timing between the two or more cofounders who want to work on that one idea may just not roll over to be the same period of time. So they’ll have just a different mindset on what they want to do at that time.

Charlie Hoehn: What are some of the other big issues?

Ryan Roberts: I like them to know that they should never sacrifice the long term for a short term gain—meaning, of course you want to close on a short term deal. It feels like a huge victory for your start up.

“You have to have an eye on the future.”

There are going to be some things that you just can’t agree to, and unfortunately, it could be better just not to do the deal as well.

I think the big negative connotation people will have about lawyers or using lawyers is they can tend to be deal killers. Lawyers are risk averse, right? But I would say as far as the risk scale, venture lawyers like myself are probably the most risk loving or realize that you are already risking so much just keep going forward.

But there can be some things that as an entrepreneur that you can agree to and can have ramifications going forward. Whether it is crazy compensation terms for an advisor in your startup, whether it is non-delusion rights for an investor. There are just certain terms that can really throw a wrench in your machine and may not rear its head for six months, a year.

When I suggest people to do certain things, I tell them, “It only matters if you plan to do well. If you don’t plan to do well, sure—don’t have your agreements with your cofounders. Just sign a deal, find a contract off the internet and move on. But if you plan to do well, you really actually end up de-risking your startup, even a little bit when you really pay attention to these things and work them things through.”

Working with the Startup Lawyer

Charlie Hoehn: I am curious does a particular client come to mind who you helped, who your company was able to get their documents in order or structure some of this properly so it helped them to avoid risk? Does a particular client or story come to mind?

Ryan Roberts: Yeah, I think there is actually one client. I believe I talk about it in the book. The first time that they hired me, they wanted to review a potential investment contract and they were being requested to give half of their company for about $50,000 and you can make an argument that maybe the company was only worth that much. It would have been essentially a death blow to the startup now going forward.

The founders wouldn’t have had control, ongoing financing may have been tough because true sophisticated investors want the startup founders to have adequate incentive going forward. To really give up that much equity that fast really could have materially harmed the startup chances going forward.

We were able to help advise and ultimately convince the main founder not to take the deal, which if you could imagine, if you’d been working in your startup for six months, nine months without salary and the first sign of money you’re having to tell them no, and that was really difficult. The founder really had some heartburn with that.

But it ended up being an amazing decision for that founder.

About a year and half later, they had a term sheet from a really well-known VC. Instead of giving up 50%, I believe they gave up about 20%. Instead of getting $50,000, they received about $1.5 million. It worked out for them in that regard, and I think it kind of goes to the idea that when you hire a lawyer, you can’t think of the attorney as just a document repository. There can’t be the misconception that all attorneys have forms and all we do is just fill in the names and the dates and the amounts.

I find that the clients that ask their advisors or me, “Hey, what do you think? What do you think about this deal?” they end up doing the best.

It doesn’t mean they have to listen to everything right? I always tell my clients, “I have the easy part of the job. I get to sit here and give you objective advice. You have the hard decision, the hard part. You have to make the actual decision on what to do.”

When you look at your first lawyer as an advisor, that’s how you should be looking at really at anybody. But I think your venture lawyer as an advisor tends to be overlooked. I’ve had clients who have sold companies before for multi, multi, multimillion dollars, and they’re still asking.

It is not about because you haven’t been successful or because you’re uneducated about business you should ask advice. I think it’s just a good hallmark.

It is a good characteristic for any entrepreneur to do that.

Charlie Hoehn: I guess too, no one wants to end up in the emergency room. If you can’t avoid the emergency room by having some check ins with your doctor, that’s the easier way to go. So why not do that?

Ryan Roberts: Right, and that brings up another point. A lot of times clients, just through scarcity of funds and resources, don’t run things by their attorney. I understand that.

I have been in a startup before, and we’ve had limited budgets on legal. There are some times where attorneys can’t fix what you’ve done, or you’ve put your company at such a disadvantage no matter the power or stature of your attorney or law firm, they’re at a severe leverage disadvantage. I have had to tell this to clients that, “Geez, if you just would have spent half an hour with me, it probably could have saved your company a million dollars on this deal.”

I try not to poise it as, “I told you so,” but I just believe whenever you’re a company and you’re dealing with anything related to the equity or the intellectual property of your startup, it sort of behooves you at least to spend a little amount of time just making sure that the deal looks good and not just signing something that you think looks standard.

Connect with Ryan Roberts

Charlie Hoehn: So Ryan, where can they go to get in touch with your company to potentially work with you and run deals by you guys?

Ryan Roberts: I think the best way people can contact me is probably though my blog, startuplawyer.com. Email is [email protected]. My Twitter handle @startuplawyer.

Charlie Hoehn: My final question for you is give our listeners a challenge. What is the one thing they can do this week that will have a positive impact on their life or on their business?

Ryan Roberts: We live in a world where we desire everything to be binary, right? The world is complex, we don’t have a lot of time. So it is easy to want to know simple yes-no rules.

So from what I see, there is definitely an exception to every rule, and in order to know that, you really have to know the background and rationale for certain decisions.

I guess my advice or my hope would be that entrepreneurs really try to understand the reasons why behind not just the decisions they are making but why certain terms are in their legal documents, and those are definitely the types of things that we try to hit on in my book, the why.

That’s the most important part and knowledge I think an entrepreneur can have.