[grellas]

I have represented founders as a startup lawyer in Silicon Valley since 1984. I have done a short write-up on this issue focusing on the risks from a company standpoint of relying on early-stage verbal agreements (http://www.grellas.com/faq_business_startup_009.html).

From your standpoint, without proper documentation: (1) your biggest risk is getting ripped off for your labor; (2) you would have leverage in that any IP you would develop would belong to you and not to the company until you assigned it by formal documentation; (3) if you did get ripped off, you could bring a legal claim either for breach of a verbal agreement or for fraud; (4) such claims are difficult and expensive to bring and thus not practical in most cases; (5) a lawsuit almost always leaves you worse off than does almost any other alternative; (6) therefore, get some reasonable understanding up front of what you can expect to get from your efforts and use at least informal means to document it.

You may or may not learn from this experience, depending on whether the other founders bring you into their inner circle.

Finally, I have seen this pattern work just fine very often in spite of the legal risks. In most of the good cases, though, the founders know each other and have a relationship. The cases where most of the problems arise are ones in which the founders do not previously know each other (what might be called opportunistic teaming). From your description, and from the length of time they want you to do work without documentation, I would say your case falls in the higher-risk category. Your legal downside would very likely be limited to losing your labor while getting cheated of any promised equity. The company has the greater legal downside from failing to document, mostly relating to its IP.

[log0]

Hi grellas.

I have a question I hope you may help answer. Roughly how many percentile in the number of startup cases do have formal legal documentation?

[grellas]

A high percentage when founders believe they have something valuable to protect. In early formative stages, probably only a small minority.

It is all cost/benefit, though. What does it cost to use lawyers? What is at stake? In my experience, it is the rare case where founders will sink large resources into something (significant labor, etc.) without some legal documentation.

Some do LegalZoom, but this has its own problems (failure to use restricted stock and to capture IP being the most important). I have written about this elsewhere.

My general guideline: if a startup has real prospects, it is usually worth investing in legal resources as soon as practicable, even if it means doing a deferred-fee deal with the lawyers. The initial setup itself is usually not that expensive. At the very least, you should go as a team to a qualified lawyer for an initial meeting to get advice about the process - then you will have a basis to make a more informed decision.

[log0]

Thank you Grellas. It is really insightful and informative advice, and immensingly helpful for me to think more.

I will incorporate your suggestions and guideline into my decision. Thank you!