Some pointers for early stage businesses in setting up and using the legal function

A surprisingly common scenario:

Bright new firm AceCo sets up in business.  One of the early tasks they have identified is setting up their terms and conditions.  AceCo has a bit of funding, so they decide to invest in getting one of the top firms in the country to do the drafting.

AceCo reels a bit from the fees charged by Top Law Firm.  However, they are now armed with a set of terms which they provide to prospective customers.  Somewhat to AceCo’s surprise, their customers don’t thank them effusively for such beautifully drafted terms, accepting them as written, but provide their comments.  AceCo is a bit jaded on the topic of legal fees so they conduct negotiations themselves.  Perhaps the CEO or COO does this, or maybe the Sales or Compliance team.

This means that the CEO, COO (or whoever) spends a fair amount of time of time sitting in meetings talking about contracts – which (a) they love doing and (b) they’re not trained for – which means the results aren’t really optimal and the process tends to be quite slow.  We’re all quicker at doing what we’re used to doing, day to day.

AceCo is an innovative firm which generates lots of great ideas.  AceCo’s products and offerings change, but the contracts stay the same.  As the rubber hits the road, AceCo finds out about challenges and concerns that aren’t addressed by the contract terms.  The COO pulls a few contracts out from a former life and copies some of the wording out of them to cover off some of the risks identified.

So what could AceCo do differently?

There’s absolutely no question that AceCo did the right thing focussing on getting its ts and cs set up properly.  However…

• BigLaw may or may not be the right place to start, depending on the nature and complexity of AceCo’s product.  It may be that a commercially savvy lawyer from a smaller practice can do just as good, if not better job.

o      Lawyers, like most people, get better at their jobs by doing their jobs.  Being a freshly minted lawyer at a top firm is an excellent start to that lawyer’s career, but it is the start.  AceCo may want to consider who within the law firm is doing their drafting for them.  It’s unlikely to be a partner

o      On a similar note, whilst large law firms have excellent practice support available to them, in-house lawyers can have bucketloads of on-the-job experience.  Any lawyer has been in house for any length of time has almost certainly seen what can go wrong, how it goes wrong, what clauses tend to give aggro in practice and which tend to be easily accepted.  Private practice tends to be more focussed on drafting something and handing it over

• AceCo’s lawyer’s drafting will only be as good as their instructions.  AceCo needs to spend time with their lawyer so that the lawyer understands the product, its context in the marketplace and AceCo’s key concerns.  Without this, they will simply receive a very expensive piece of boilerplate

•  The more reasonable AceCo’s contract is, the fewer elements of redline will come back.  AceCo can help itself strike the balance between a fair and acceptable contract and sufficiently protecting its business by

o      Ensuring that it uses an appropriately experienced lawyer; and

o      Spending time with their lawyer to ensure that the lawyer understands their business, its risks and pain points.  The more the lawyer is made to guess, the more they will include every protection that they can think of for their own client.

• Having made its investment in producing ts and cs, AceCo would do well to take steps to retain as much knowledge about those ts and cs as possible (i.e. so that going forward, it is able to defend the contract as drafted and even be able to accommodate changes as required).  One thing that AceCo can do here is to ensure that whoever from AceCo works with BigLaw on drafting the terms really has the bandwidth to engage with the process and understand why the terms have been put together as they have.  This way, that individual is in a position to defend those terms, or flex them where appropriate, going forward.
  

Taken all together, AceCo should carefully consider who is going to help them with their initial contract setup.  Ideally this will be someone:

• Relatively senior, who has experience of how contracts play out ‘in real life’

• Who can provide continuity going forward

• Who has good availability and will prioritise AceCo’s needs
  

The obvious candidate for this is an experienced in-house lawyer.  However, AceCo may not have sufficient confidence in its finances to commit to an FTE at this stage – and may not have work to keep them busy. 

AceCo’s employed/fractional in-house lawyer can also:

• help AceCo with any changes that need to be made to the ts and cs as time goes by; avoiding the probability of them becoming stale and out-of-date, and/or starting to post a risk to the business
  

• take the lead on contract negotiations.  As the in-house lawyer knows the contracts and why they were drafted in such-and-such a way – and knows the business and its priorities – she can step in to contract negotiations, enabling AceCo’s employees to spend their time performing the functions for which they were employed.
  

AceCo has grown a bit and is entering into a structured finance agreement

Now is a great time for AceCo to be in touch with that big law firm.  Most businesses need specialist legal advice from time to time, in situations which their in-house counsel have not encountered before, and it is entirely appropriate and efficient to obtain advice from the specialists.  AceCo’s in-house advisor may well continue to have a role to play here; both in herding the internal cats to obtain whatever inputs are required from BigLaw, and in translating the legalese into language the business (which the in-house lawyer knows very well by now) understands.