[Dave Heal's] Observations & Reports

Why is Mark Suster recommending LegalZoom for startups?

Mark Suster, a prominent venture capitalist with GRP out of Los Angeles, runs a fantastic blog and hosts an equally great weekly segment on venture capital as part of Jason Calacanis’s “This Week In” series. Mark’s also been an entrepreneur and his posts are densely packed with excellent advice and cautionary tales for founders of companies at all stages.

Mark’s one of the few interviewers in this growing genre of long, tech-focused programs (Andrew Warner of Mixergy is also worth checking out, but he has a much different style) who also participates in the interviews as an equal with the VCs and entrepreneurs on the other side of the table. His interview with Mike Yavonditte of Hashable was so good I’ve now watched it twice, and the session with Chamillionaire (whose name I will admit to mispronouncing in my head for the past few years–the “ch” sounds like a “k”) was a revelation.

Anyways, in the interest of shortening the ass-kissing windup here a bit, I’ll just say that I’m a huge Mark Suster fan. Which is why I found it boggling that during one of the sponsor breaks in the show–Mark pauses the show briefly to deliver an earnest radioman-style pitch for a product or company that he believes in and often uses–he was pitching for Legal Zoom and recommending that startups use them for their incorporation and patent/trademark filings.

I’d really be interested in hearing from Mark whether he knows any entrepreneurs that have satisfactorily used LegalZoom for their incorporation (with or without a lawyer’s help). But my understanding is that LegalZoom files the forms directly with the Secretary of State and that you can’t have them sent to you for double-checking by a lawyer or anybody else.

Their super deluxe incorporation package comes with a CD with “over 40 business documents,” but I would be very surprised if those documents covered everything that a tech start-up needs (stock purchase agreements, technology assignment, etc.) or gave any guidance on alternative protective provisions. These kinds of concerns may not be important for Joe Briefcase, the aspiring slumlord who’s forming a company for liability shielding purposes, but making the right incorporation choices is incredibly important for startups. Problematically, LegalZoom, although it offers up a phone number for advice, needs to be careful not to hold itself out as a provider of legal services in order to avoid getting yelled at by state bar associations. And moreover, LegalZoom is arguably doing just that simply by choosing the template forms and crafting the questionnaire that auto-populates the documents. They’ve been the target of a few nastygrams from state bars demanding that they stop providing legal services under the guise of not providing legal services.

I can’t imagine the risk of creating a hash of your pet startup’s incorporation documents is worth the cost savings. If your financials are really that dire, I bet you’d be better off just talking with the folks at your local Secretary of State and saving yourself the $300+ bucks. In the end, incorporation of a company is a serious step that is usually the result of a bunch of people wanting to do something quite complicated, whether that’s obtain funding, issue stock, create & manage intellectual property, hiring employees or contractors or any of the above. And I can say this without conflict of interest as a law-talking man who’s not actually an attorney: this should all be done in consultation with a good lawyer. Don’t try and save yourself a grand or two because you think it’ll be fun and cheap to incorporate using a website that features that guy who represented OJ.

And when it comes to patents and trademarks, what happens when the application is rejected or a reply is necessary? Most patent applications aren’t accepted as filed, so there’s almost always more work to be done. Not having much familiarity with patent prosecution, I can’t be sure, but my guess is that amending a patent application or responding to rejected claims often requires the kind of intricate legal argumentation that is probably best handled by a competent, debt-ridden attorney. I suppose the response might be that you can deal with an attorney at that point in the game and gee look you’ve maybe saved yourself some money. But my guess is it’s pretty easy to bungle one of these applications if you don’t know what you’re doing, so why chance it?

In the end, I’d love to hear from entrepreneurs, tech or otherwise, that successfully used LegalZoom for any of their important documentation. But even a few anecdotes probably won’t be enough to convince me that the risk outweighs the cost savings. Maybe there are some VCs out there that routinely advise startups to do this and haven’t had a deal blow up in their face, but I’d be willing to bet a cheeseburger or two that no reputable VC actually does this.

The point of this post, incidentally, is not to call Mark out. But he mentions each show that the sponsors are frequently trusted companies with products that he has experience with (although I suspect this might not be one of those cases). And the endorsement I saw didn’t take the form of a generic product blurb, but instead he specifically mentioned trademark & patent filings (and incorporation, if I remember correctly), which struck me as strange. I’m not here to bang my fist on the table and demand answers, but I am curious whether he really thinks startups using these online services is a good idea.

EDIT: Some good resources. HT: @jakewalker

  1. http://www.docstoc.com/documents/legal/
  2. http://www.orrick.com/practices/corporate/emergingCompanies/startup/index.asp
  3. http://www.orrick.com/practices/corporate/emergingCompanies/startup/forms_corporate_formation.asp
  4. http://www.businessinsider.com/legal-documents-for-your-startup-2009 -8