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Head of legal. Chief legal officer. General counsel. Chief legal advisor. Whatever you want to call it — the role is a key position for startups (and in the corporate world) as a company’s primary source of legal advice.
With any successful startup, growth brings inevitable roadblocks or problems. This is why boards, founders, and CEOs are bringing this role in-house to provide value-driven solutions and advice on complex legal issues to help the company succeed. Deemed “one of the mightiest figures in the C-suite” by The Economist, an in-house lawyer can save your business time, money, and effort.
If you’re debating whether or not it’s the right time or decision to protect your startup, we break down everything you need to know about bringing on a lawyer in-house. While no company’s path is the same and industry needs vary, we examine the basics to see if an in-house lawyer may contribute to or inhibit growth.
How an In-House Lawyer Can Improve Company Performance
The verdict? Research (and data) proves that a highly-skilled chief legal officer (CLO) or lawyer can improve company performance.
Robert Bird, Professor of Business Law at University of Connecticut and President of Academy of Legal Studies in Business, explains: “CLOs can rapidly apply legal judgment to regulatory problems facing the company and ensure that firms are fully compliant with relevant rules. A strong CLO will protect company value from being lost through government penalties and needless litigation.”
In addition to ensuring a company is compliant and protected, Bird continues: “Studies have found that elite CLOs are associated with less insider trading, accurate earnings forecasts, and fewer threats of litigation in the companies they serve.”
Below are a few key statistics on how an in-house lawyer can benefit your company.
- Lawyer-run companies face up to 74% less litigation.
- Over 40% of companies with counsel in top management are more likely to issue accurate forecasting.
- Companies with general counsel better mitigate informed trading by insiders.
If you’re considering whether now is the right time to bring on a CLO, we’ve done the research for you. Below, we dive into what exactly the role entails and how having a trusted legal advisor in-house can impact your company’s growth — and bottom line.
What Does an In-House Lawyer Do?
While every company has specific legal issues or needs, it’s likely that no two days are the same for an in-house lawyer.
The Acritas 2020 State of Corporate Law report describes the top three priorities for corporate law department leaders as: “improving functional effectiveness, increasing efficiency, and safeguarding the company.”
The responsibilities can range anywhere from privacy law to dispute resolution. On top of the day-to-day legal duties, the role of an in-house counsel or CLO has expanded to what’s now a strategic business partner that supports the organization, works to improve processes, and navigates complex challenges.
Typical responsibilities include:
- Review and advise on documents, contracts, or deals
- Advise the CEO, board, or senior management on a variety of issues
- Oversee delivery of legal services or resources
- Lead internal audit or compliance programs
- Create and lead legal strategy to protect the company
- Manage other team members in the legal department
A chief legal officer (CLO) specifically may provide counsel for the board of directors, chairman, CEO, and other senior management. Consider if your hire will have board-level authority on every high-value transaction or strategic decision.
What to Look For in an In-House Lawyer
On top of legal experience, an in-house lawyer should possess initiative, management and leadership skills, and business acumen to balance high-stake responsibilities.
Be sure to hire a person with the attributes you need. Most companies hire a generalist who is skillful and experienced in managing outside counsel as needed. If you feel you need a specialist in-house, then create a plan to make sure all legal issues get addressed properly.
Below are some of the legal services lawyers specialize in:
- Business formation and registration
- Business succession planning
- Mergers and acquisitions
- Business litigation and dispute resolution
- Property acquisition and transfers
If your lawyer isn’t able to provide all of the legal services your company needs, consider finding someone who can build (and manage) a team or has an existing network of specialists in specific areas of the law.
When Should Your Startup Hire an In-House Lawyer?
Every startup is unique so there is no one right answer. However, depending on what stage of growth your startup is at, there are criteria you can use to make a decision. If you’re debating between letting go of outside counsel or bringing it in-house, consider the following.
Alex Montagu, the founding partner at Montagu Law, explains: “The legal requirements of a company are informed by its revenues, the number of employees it has, the nature of its business, and the industry and locations in which it operates.”
Of these requirements, Montagu explains what matters the most: “The most important factor is the company’s revenues. Typically, companies that have less than $20 million in annual turnover would be better off using outside counsel rather than hiring a full-time in-house lawyer because they are unlikely to have enough legal work to justify having one on staff. What’s more, one lawyer may not have the expertise to handle the different types of legal work that the company may require.”
There are also legal issues to consider if your company plans to expand globally, including creating new entities, tax implications, employee hiring, and dispute resolution procedures.
Company Example: FinTech Startup with $5 Million in Annual Turnover
Imagine a well-funded start-up in the FinTech space that has $5 million in annual turnover. The company is headquartered in New York but intends to grow internationally and provide its services in the U.S., Europe, and other countries in Asian regions.
The company will need a specialist in:
- Corporate law to help with corporate work in relation to taking new investments.
- Intellectual property law to register its trademarks in the countries in which it intends to operate and to advise on how to protect and safeguard its technology.
- Employment law to advise on labor law and its employment policies.
- Privacy lawyer to ensure compliance with GDPR and other privacy laws.
- Transactional law to put in place and negotiate its contracts (with customers, vendors, and other parties).
- Real estate law to negotiate any lease-related issues.
A single lawyer may not have the expertise to handle all of these assignments. At $4 million in revenue, the chances are that none of these tasks will have the requisite volume to justify a full-time in-house lawyer. Therefore, at this stage, the company would be better off using an outside law firm, rather than hiring a full-time counsel.
However, a typical mistake that companies (like the above example) make is that they choose a mid-size or even a large law firm to handle all of their legal needs. While this may appear convenient, it can be more costly than using smaller, more competitive boutique firms that specialize in these areas.
In-House vs. Outside Legal Counsel
An in-house lawyer can add value to a fast-moving startup. They are trained to think in a certain way, to analyze problems, digest dense details, and come up with creative solutions.
This training is invaluable for startups that may move quickly and make decisions on the fly. However, there are costs and potential drawbacks (as with any business decision) to consider when debating between in-house and outside counsel.
Benefits of In-House Counsel
Robert Bird explains, “A CLO is a dedicated attorney with a single client – the company – and will typically be more familiar with your business than an outside attorney with many different clients. A company with a CLO is a company armed to meet the complex legal challenges of twenty-first-century business.”
Having a dedicated lawyer in-house means they’re part of the team, hands-on, and proactive to provide a more urgent response than outside counsel would. As your trusted advisor, in-house counsel has interests that better align with your company’s objectives. For sensitive or risky matters, they aim to protect and guide the company in the right direction — while owning the outcomes with greater responsibility.
Drawbacks of In-House Counsel
According to the Acritas 2020 State of Corporate Law report, “in-house lawyers are sometimes – unfairly – viewed as inhibitors of business growth. Their natural and necessary risk aversion can put them at odds with colleagues seeking growth at any cost or who prioritize customer service over corporate protection.”
Internal conflict due to risk aversion is a common theme for business owners too. Aside from employee growth opportunities, on the surface, a lawyer’s risk aversion may impact the number of new business opportunities or deals a company makes.
John Ross, the CEO of Test Prep Insight, explains: “If our counsel has hindered us in any way, it’s through vetoing deals that we otherwise would have made because he felt them to be too risky.”
Because the trust exists there, Ross says “…while they may directly seem like missed opportunities on the surface, there is no telling what a failed deal would have truly cost us.”
Lastly, an in-house counsel is typically hired as a generalist with a wide-ranging set of practice areas. If your company has specific needs (like intellectual property), you may end up having to expand your team or bring on a specialist to help.
What is Risk Aversion?
Well-known in finance and investing, risk aversion is important to keep in mind when it comes to legal decisions that impact your business growth and profitability.
CFI defines risk averse as someone who: “has the characteristic or trait of preferring avoiding loss over making a gain.” Risk aversion typically depends on the level of investment and whether or not it would cause financial distress for a company. In-house legal or counsel are known to be risk-averse when evaluating contracts, deals, and opportunities.
Risk aversion to the point that it blocks a business opportunity, partnership, or landing a new deal may bring resistance from the team. But having a lawyer available ensures someone is there to keep an eye on risk and suggest modifications.
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How to Balance Risk Aversion
When trying to scale your startup or reach high growth goals, below are some tips on how to balance growth with a “no-person”.
Consider before you bring on a general counsel if they are willing to be flexible. Your attorney shouldn’t immediately come back with a “no” to every idea because of the possible risk factor. They should be flexible, empathetic, and patient. The goal is to address problems by coming up with a solution to mitigate risk, but also takes into account the final decision maker and what’s best for the business.
Build a trusting relationship with your counsel that shares the same vision as you — to keep the company protected with an understanding of your product and where you would like it to go.
Hiring your first in-house lawyer can be challenging — especially as a first-time entrepreneur. Once you decide that it’s time to hire, determine your company’s near and long-term legal needs and consider the role for your first in-house counsel, you can start looking for the right candidate with these tips.
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