When Should a Startup Hire Its First Lawyer?

Most founders think they don't need a lawyer until something goes wrong. By then, the damage is done -- and fixing it costs five times more than preventing it would have.

The honest answer to "when should I hire a lawyer?" is earlier than you think. But that doesn't mean day one. There are specific inflection points where legal help goes from nice-to-have to essential.

Before You Incorporate

This is the most common mistake I see. Two founders shake hands, start building, maybe even start selling -- all before they've formed an entity or signed an operating agreement.

Here's what can go wrong:

• Without an entity, both founders are personally liable for everything the "company" does
• Without an operating agreement, there's no clear answer to who owns what
• If one founder contributed money and the other contributed code, their ownership split is undefined
• If the partnership falls apart, there's no exit mechanism

The fix: Before you spend a dollar or write a line of code with a co-founder, get an operating agreement in place. This doesn't have to be expensive, but it needs to be done right.

When You're Signing Your First Real Contract

Your first enterprise customer sends over their MSA. It's 14 pages long, full of indemnification clauses and liability provisions. You want the deal. You're tempted to just sign it.

Don't.

This is exactly when you need a lawyer. Not to kill the deal, but to make sure you're not giving away something that could sink your company later. Common traps in customer contracts:

• Unlimited liability exposure
• IP assignment clauses that could transfer ownership of your product
• Non-compete provisions that limit your ability to serve other customers
• Auto-renewal terms that lock you into unfavorable pricing

A contract review takes a few hours. The disputes that come from a bad contract take months or years.

When You're Raising Money

Whether it's a friends-and-family round, a SAFE note, or a priced equity round, securities law applies. And securities law has real teeth -- personal liability teeth.

You need counsel to:

• Make sure your offering qualifies for a securities exemption (typically Reg D)
• Draft or review the investment documents
• Ensure your cap table is clean and accurate
• Handle state blue sky filings if required

Trying to DIY a fundraise is one of the highest-risk things a founder can do. The cost of getting it wrong isn't a fine -- it's rescission rights for every investor, which means they can demand their money back at any time.

When You're Hiring Employees

The jump from contractors to employees triggers a cascade of legal obligations:

• Employment agreements (with proper IP assignment and non-disclosure provisions)
• Worker classification compliance (misclassifying employees as contractors has serious penalties)
• Employee handbook and policies
• Benefits compliance (if applicable)
• State-specific requirements (Connecticut has its own wage and hour laws, paid leave requirements, and more)

This is also when you should think about equity compensation -- stock options or restricted stock for employees. Getting the 409A valuation, option plan, and grant agreements right from the start saves enormous headaches later.

When You're Handling Sensitive Data

If your product touches personal data, health data, financial data, or children's data, you have compliance obligations that exist whether or not you're aware of them.

• CCPA/CPRA applies if you're collecting data from California residents (and you probably are)
• GDPR applies if any of your users are in the EU
• HIPAA applies if you're touching health data in any capacity
• SOC 2 compliance is increasingly required by enterprise customers

A data privacy attorney can help you build a compliant foundation -- privacy policies, DPAs, data processing documentation -- before a breach or a customer audit forces you to do it in crisis mode.

The Bottom Line

You don't need a lawyer on retainer from day one. But you do need one at these five inflection points. The cost of proactive legal work at each stage is a fraction of what it costs to clean up problems after they've compounded.

If you're at any of these stages and you're not sure where you stand legally, it's worth a conversation. I work with startups at every stage and I'll tell you honestly what you need now and what can wait.

Schedule a free consultation to discuss how this applies to your business.