Food entrepreneurs operate on slim margins and slimmer budgets. Every penny counts, and legal help is expensive. Plus, who wants to deal with lawyers, anyway? Legal is one of those things that just keeps getting pushed to the back burner, again, and again....and again.
Well, until something bad happens (maybe you got a cease and desist trademark letter, or someone says they got sick eating your food) and then you need that legal counsel RIGHT NOW.
Dealing with legal can feel yucky, but there are some good rules of thumb
People hate dealing with things that they don't quite feel confident handling and feel uncomfortable dealing with people that they don't necessarily like or trust (i.e., lawyers). This is just human nature. I'm pretty sure most food entrepreneurs view dealing with lawyers the same way I view picking a health insurance plan. No matter how hard I try, I'm not ever really sure I understand the rules of the game, what I'm paying for, why it costs so much, and what I might actually get out of it at the end of the day. All I know is that it's taking a bunch of my money, and if I don't spend that money I could get REALLY screwed. That's not a good feeling.
I'm not sure where to turn for help with my health insurance questions, but I can help you gain clarity as far as figuring out when and how to invest in legal help for your food startup.
Four rules of thumb for legal investment decisions
You should invest in legal help if your business issue falls in one of the following four categories:
- Protecting A Big Investment
- Make or Break Relationship
- Use, Rinse, Repeat
- You Got Sued
What follows are some additional details and some examples that fall into each category.
1. Protecting a Big Investment
If you have put a significant amount of time or a large chunk of cash into your business, it makes sense to put in a little bit more to protect that big investment.
For example, as I've written about here and here, it makes a ton sense to protect what is probably your biggest investment and budget line-item -- marketing. This includes graphic design, logos, website design and copy, packaging, trade show booths, farmers market stalls, broker fees, slotting fees, hours spent sampling, wrapping your food truck...the list goes on and on. You'll easily spend tens of thousands of dollars on these items in the short term alone. The whole point of marketing is to get customers to recognize your brand and buy your product. If you don't own your brand, you don't really own anything, and you might be flushing thousands of dollars down the drain.
Trademark, trademark, trademark
The solution here is clear: Trademark your brand name. I say this over and over to clients, and I will hammer this home until the end of time because I truly, 100 percent believe it is one of the best possible uses of limited startup dollars. It can save you heartache and regret. And lots of money. I was just hanging out at a food event recently when a food business owner (and now client) told me something to the effect of, "If only I had listened to you a year ago when we sat down for coffee and you told me to trademark my in-development food brand name, I wouldn't be dealing with this messy trademark issue. And I wouldn't be thinking about changing my business name."
Don't let this happen to you. Please try to trademark your brand name, and do it yesterday. Also, if you already have a recognized brand name and no trademark, don't throw good money after bad. Find out if you have a shot at trademarking your existing brand. If you don't, and you might need to change your name, it's better to do it sooner rather than later. Remember, if you are dreaming of one day selling your food business for big bucks (or even moderate bucks), you need to own your brand. You can't sell what you don't own.
Another example of a comparatively small legal investment that can save you money and heartache down the road is a founder agreement. If you're going it alone, that's fine, but if you have one or more co-founders you should get an agreement in writing that covers what happens when one of the founders leaves the business. The beginning of business is roses and sunshine and high hopes. But life happens, businesses fail, co-founders lose interest or stop pulling their weight. This happens every day.
One simple way to address this common scenario is to put a vesting schedule in place. For example, with two 50/50 founders on a four year vesting schedule, each founder could permanently receive 25 percent of their equity (12.5% of the whole business) each year. If both stay in the business for all four years, they each end up owning their entire 50 percent share of the business. But if one founder leaves after a year, that founder takes only 12.5 percent of the total business equity with them and leaves the remaining 37.5 percent for a new business partner or investors.
In contrast, without the vesting schedule, the founder would walk away with a full 50 percent of the business, a potentially business-killing event.
There are lots of nuances that can be added to a founder agreement, but getting at least something simple in writing can help your business survive a founder exit.
Food Business Insurance
This is an obvious example, and I've written more about it here. Having someone get sick from eating your food product is probably every food entrepreneur's worst nightmare. There are lots of lawyers out there that sue food companies on behalf of food poisoning victims. Get a solid food business insurance tailored to the particular intricacies of your operation.
Sometimes, A Lawsuit, Or At Least The Threat Of One
If someone (maybe a former employee, or a competing business) is doing something or has done something that truly threatens the continued existence of your operation, it might make sense to sue. MIGHT MAKE SENSE. Might. It's not that often that this makes sense, given how much it could cost to pay your lawyer by the hour, court costs, expert witness fees, hours of your time spent producing documents or being deposed that you could have spent building your business, etc.
That said, if your business is truly threatened, call a lawyer. Or two or three lawyers, to get additional opinions and find someone you feel comfortable working with. Sometimes getting a lawyer involved can help settle a situation. On the flip side, sometimes it can escalate the matter. In any event, it can be worth it to at least talk to a lawyer and get an assessment of your case, the potential cost, and what you could get out of lawsuit (assuming you get a favorable settlement, or much less likely, go all the way to trial and win).
2. Make or Break Relationship
The second category where it makes sense to invest in legal help is when you are considering entering into a business deal that, if it went south, could severely impact your business. Examples include a new co-packer relationship, a new co-founder or key executive employee, or an investment agreement. At the very least, you should have a lawyer review any agreement before you sign it. Even better, get a lawyer to draft or tailor an agreement for you, and possibly help you negotiate with your potential new business partner. Don't mess around, especially with investors and securities laws.
If you have already signed a contract, and it's already gone south, it's worth contacting a lawyer to help you figure out what to do next. Often times, there are specific procedures and conditions you have to meet to get out of a contract (if you can get out at all). Don't try to do it yourself. I've seen food entrepreneurs try, and they usually end up paying through the nose to extricate themselves from the bad situation. Get strategic advice before you make a move. You might still have to pay to get out of the contract, but you can try to minimize the damage.
3. Use, Rinse, Repeat
There are some legal documents that your business will use over and over, and that can minimize your risk exposure and protect you from making unnecessary mistakes that cost you time and money.
You Got Sued
This last category seems pretty self-explanatory, but sometimes people who get sued try to ignore it or go it alone. Don't do it. I worked for the federal courts for two and a half years after law school, and I saw many people try to go it alone (this is often called being a pro se litigant). It never went well. You can't prevent people from suing you, but you can get help and prevent making a bad situation worse.
You also might want to get some legal advice if someone is threatening to sue you. Find out whether they have good grounds to sue you, whether you have a strong defense, or whether you should try to pay them up front to make the problem go away so you can focus on your business.
Top 10 Takeaways For Investing In Legal Help
- Dealing with lawyers and legal issues can feel uncomfortable. Do it anyway. You'll feel better.
- Trademark your brand name, ASAP. Protect your marketing dollars and sweat equity.
- Get a founders agreement if you have co-founders, and do it before your business is worth anything.
- Get food business insurance. Do it NOW, if you haven't already. Make sure the policy matches your business operations. If you already have insurance, take another look at the policy. Does it still cover you? Your business has probably grown and changed. Go have a talk with your insurance agent. More tips here.
- Only consider suing someone if your business is truly threatened, and you have a good chance of recovering more than you'll spend. This is rare.
- If you're considering a big business move (co-packing, investment, new co-founder or key employee getting a slice of your company), get a lawyer to review the contract and help you negotiate if necessary.
- Don't break a contract without getting strategic legal advice first. You'll probably pay more in the end.
- It's worth it to invest in tailored legal documents that you use over and over in your business and that can protect you on a daily basis.
- If you get sued, take it seriously. Don't go it alone. Get legal help.
- Be safe, rather than sorry. If you're worried about something, or can't see your next step clearly, see if a lawyer will spend an hour consulting with you. Sometimes you can get a free consult; it can't hurt to ask. Often, though, you get what you pay for. Paying for one hour of focused attorney time can reap big rewards if it helps you break through a business barrier and gain clarity with a strategic path forward.