How Much Legal Knowledge Do You Really Need As A Startup CEO?

Years ago, I worked with this fellow named Bill. Bill and I worked on a lot of mergers together.

I learned from Bill the value of being really detail oriented when you reviewed a deal. And this thought process went all the way through to the contracts and legal documents we needed to review.

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Bill called himself “A really good jailhouse lawyer.”

I never asked Bill what he meant by being a jailhouse lawyer, but I knew instinctively what he meant.

You too need to be a good jailhouse lawyer to be a good startup CEO.

Almost from the day you start your company, you’re going to need to know the law. Think about it:

You’re going to have legal documents you need to sign to start your company. Don’t you think you should know what they mean?

You’re not signing for a car loan. You are starting a company! You need to understand what you’re signing.

I’m not saying you shouldn’t get a good lawyer because you’re absolutely going to need a really good lawyer. However, you, the Jailhouse Lawyer/CEO, need to at least have a layperson’s understanding of the law.

Your relationship with your lawyer is a critical relationship.

Let’s say you raise capital. You’re going to negotiate a deal, and that deal is going to involve much more than who gets what percentage of the company.

There are all sorts of terms and conditions wrapped around the deal. You need a good lawyer that knows the details and you need to be a jailhouse lawyer and know the details too.

These deals can get quite complex. For example, our Series B funding had venture capital investors and a strategic investor.

The VC part of the deal was straightforward, but the strategic investor (a public company in our space) piece of the deal was complex.

The strategic wanted a ROFR (A right of first refusal), and we wanted to give the strategic a ROFN (A right of first notification). ROFRs hurt the value of the company, so you don’t want to do one.

We ended up giving the strategic a one year ROFR and a ROFN. There were all sorts of terms that needed to be negotiated in the ROFN such as:

  • When would the strategic be advised there was an offer, and…

You have to be a jailhouse lawyer to get this right. You can’t just delegate the negotiation to your lawyer. You have to be in the details.

You can’t just blindly take the advice of your lawyer.

Lawyers are human. Lawyers have biases. Most importantly, lawyers need guidance from you. Let me give you an example.

I was negotiating a deal with a company that we absolutely had to get done. I sent the deal over to our contract lawyer for review.

A few days later the contract came back from our lawyer. It seemed like every third word was red-lined.

That was not what I had in mind. If I would have blindly followed the advice of our attorney, we would have never gotten the deal done.

I wanted a light touch, not a heavy touch, on this deal. In other words, we were okay some of the language not being as specific as we normally would like.

The point is you can’t just blindly follow the advice your lawyer is giving. You have to ask questions. And you have to understand that there’s a lot of grey areas.

That’s where your judgement as CEO comes in.

For more, read: What Are The Five Fatal Mistakes That Will Kill Your Business?

Written by

I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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