signals presents: Legal hacks for early stage startups by BMH BRÄUTIGAM
signals presents companies, people and partners from the signals innovation ecosystem. In this edition, the law firm BMH BRÄUTIGAM provides legal tips for early stage founders.
1) Who is BMH BRÄUTIGAM and what makes you different?
We are a Berlin based boutique law firm with a strong focus on venture capital and related areas of law. Our VC team comprises 10 professionals and we are still growing. We share the same drive as our startup clients, provide fast and tangible advice and are fun to work with.
2) What is the one question you are most often asked by early stage startups?
Do I need a lawyer for this? Not every question that a startup deals with requires professional legal support. Especially with regard to small startup budgets, it is essential to know where legal advice by professionals is crucial and which matters can be bootstrapped. A general rule of thumb is that legal advice is required when the issue affects dilution (e.g. VSOP programs) or IP rights (e.g. licensing agreements).
3) When it comes to legal matters, what does a founder need to consider when launching a tech startup in Germany?
Legal awareness is not the most important ingredient at an early stage, but adds to a successful startup. For example: Picking the right corporate and tax setup from the beginning is important. Also, choosing the right legal form for your business, potentially implementing a holding structure and introducing co-founder and employee participation schemes at the right time are all important and contributes to the long-term success of a startup. However, when launching your startup, it is not of utmost importance and can be adjusted according to the needs and development of your business.
4) What are the most common legal pitfalls to avoid when raising the first funding?
Miscalculating dilution effects and subjecting the startup’s management to over-engineered corporate governance are both common and very dangerous. In practice, this means that the cap table needs to be 100% bullet proof and rules of procedure need to be carefully reviewed to not constitute unnecessary restraints for the management. The most crucial pitfall is probably a bad vesting and lock-up mechanism because this can ultimately lead to the loss of all founder shares.
5) Many early stage startups lack funding in the beginning. They attract first employees and advisors by incentivising them with company shares. What should startups consider when incentivising employees and advisors with company shares?
Maintaining control in the company and keeping the circle of shareholders small is key. This is why instruments such as virtual options are most commonly used by startups for employees and external advisors. Real shares should be limited to investors, founders and very few key employees. Also, there are tax implications to consider when structuring an employee participation program under German Law. When done wrong, employees might be subject to pay tax before they’ve cashed out (dry income). Choosing the right incentive instrument at the right time is crucial.
6) Most early stage startups don’t have a (large) budget for legal advice. Is there a cost-efficient way to receive legal advice?
Yes, there is! Specialised venture law firms like BMH usually offer competitive flat fees for a range of standardised services which spare the startup’s legal budget. Besides that, startups should use the existing network of accelerators and business angels to gain access to legal information and reach out to legal mentoring programs.
7) What should early stage startups consider when choosing a legal partner?
Startups mainly depend on venture capital financing. It is therefore crucial that the legal partner is an expert in the field of venture capital and venture related areas of law, such as tax and IP. Besides that, working together should be smooth and fun, so quick responsiveness and a “personal feel” is more than helpful.
8) What one piece of advice would you give someone starting a company?
Legal and tax are not to be neglected, although not the main aspect of a successful business. Concept, people, drive and network are certainly most essential.
9) Any resources (tools, blogs, books…) you can recommend to early stage founders?
Gründerszene is a good industry magazine with relevant insights on relevant legal aspects. There is a lot of US-based venture capital literature which is not always relevant or applicable to the German VC market and often leads to misunderstandings. The book, DealTerms.vc, is also a great source of literature with a comprehensive and practical explanation of typical venture capital deal terms. It is also always helpful to exchange views with other founders and learn from experienced entrepreneurs. Especially for startups “on the move” to Berlin, Berlin Partner is an excellent point of advice.
Join us on 28.11.2019 at signals Open Studios for our next Founders Academy Compact where BMH Bräutigam provides legal hacks and tips for early stage companies.
