I started out trying to save money… and learned that cheap legal costs you more than money down the road.
I’m a serial entrepreneur, most recently founding Due and then Calendar. Due is a payment solution that I started in 2015—we now have customers such as Microsoft, Wish, DocuSign, and over 260K other customers. I learned a lot of lessons growing Due to dozens of employees, but one of the most important lessons is the value of quality legal services.
I tell this story to caution other founders about skimping on lawyers and going for a transactional relationship—instead of finding a partner who truly has your back.
I started out trying to save money
When I first started Due, I was in the same position as a lot of entrepreneurs: half broke, trying to build my dream, and trying not to get bogged down by the millions of small details. I’d had success in the past with Pixloo, Adogy, and Organize, but starting Due posed a much bigger challenge.
When it came to getting the company off the ground, I had lawyer friends and acquaintances who I could have asked for help. Not wanting to impose, however, I didn’t go that route.
Instead, I Googled something along the lines of “how to start a company” and found what I now refer to as a “lawyer sweatshop.” I searched for “what kind of company to incorporate,” and settled on a Delaware C-Corp. I discovered I needed a registered agent (i.e., someone with a physical address in Delaware), so I hired one of those inexpensive lawyer sweatshops as my register company, carelessly assuming they’re all the same.
In a matter of hours, I had a Delaware C-Corp. I opened a bank account and started doing business, thinking everything was in the clear. Money started rolling in, and I was on my way….
… that is until the letters came.
Problem: Owing taxes I didn’t owe
I started receiving random letters from all sorts of government offices. The State of California sent me one saying I had to register my business in California. While I live in the San Francisco Bay Area, I thought, “I’m a Delaware corporation, and I’ve paid my California taxes, so I’m all set” and ignored it.
When they sent me a second letter, I emailed my register company. The register company said they would only respond to my question if I paid them $150. I wrote them a check… and they never replied.
Six months later, California sent me a third letter, so I contacted the register company again. They sent me another $150 bill to answer that question, even though I had already paid. I didn’t have an option, so I paid them again. When I did, they informed me that the letters said I owed California taxes. I had already paid the California taxes to which they were referring, so I assumed I was all set.
I registered my business in California and told the State I’d done so. They then informed me I owed them fees on taxes. I said, “I’ve already paid those taxes.” They said, “You still have to pay the fees. Even though I didn’t owe them any taxes, the fees on those taxes were a ludicrous amount.
As if that’s not enough, we ended up getting the same letters from Washington.
Bait and switch
It cost $150 for the company to respond to any question. And the first time I paid, they didn’t even do anything. Still, I thought I was saving money. I couldn’t afford an expensive legal team—even small amounts of money were essential lifeblood for the company. In retrospect, however, I realize I got the quality that I paid for.
The cost of cutting corners
Long-term vs. short term
If you Google “register a company,” you’ll find thousands of companies that will churn you through the registration process for a few hundred dollars. Sure, they’ll register you, but you’ll soon run into problems:
1. You don’t just want to register a company.
You want to register a company with the right organization structure in the right state. This can be confusing and have massive tax ramifications down the road. Many of these cookie-cutter registration companies make you do all the steps yourself. While that might lull you into the confidence that the process will be done correctly, it’s much more likely you’ll trip over unseen stumbling blocks. Do you choose “Corporation” or “LLC” from the drop-down menu? You’ll either have to spend hours researching, or you’re bound to make mistakes.
2. How do you respond to official communication?
During our incorporation process, the State of California sent us letters with dozens of pages and a request for payment. In one case, digesting the whole letter would have taken hours, so I just mailed in a check. Because I didn’t complete some minute aspect of check-mailing correctly, they sent the check back, uncashed, along with a fee for my mistake.
3. It’s not just incorporation
In intellectual property, we ran into the same problems. We originally hired a handful of inexpensive law firms specializing in different aspects of IP. Their work was good, too, so we thought we were saving money. As the company scaled, however, we ran into problems—our legal structure was unable to scale with us. We’re building a big company, with contracts, trademarks, patents, and acquisitions, so everything needs to be accessible in one place. At the end of the day, we had to transfer everything to one firm, and it ended up costing more to transfer than it would have cost had I just started with the right firm.
As a business owner, legal problems take too much of your focus. Your time is best spent growing the business. Despite setting up multiple companies, I can’t tell you much about any of my legal entities. My time should be spent on hiring the right employees and building a successful company. A good legal team is one I can trust. They ask the right questions and take care of the company’s needs without needing my effort because losing focus on the company is incredibly costly.A good legal team is one I can trust. They ask the right questions and take care of the company’s needs without needing my effort because losing focus on the company is incredibly costly. Click To Tweet
Each registration issue cost the company ten or twenty hours. Those hours would have been worth ten times more if they had been dedicated to the business. I’d rather have paid someone to avoid all these headaches.
I originally thought I couldn’t afford an expensive legal team. I thought going the cheap route would save money. Looking back, however, the “inexpensive” option nickel-and-dimed me and drowned me in fees. My fractured IP team was no better. A cohesive legal team that was actually on my side would have cost much less money at the end of the day. The cheap option turned out to be much more expensive.
Lesson: Getting the peace of mind
The right law firm anticipates your needs. It has your back and can grow with you long-term.
Any lawyer who specializes in startups knows the nuances your company needs, both today and down the road. It’s much less expensive to hire them at the beginning than to pay for inexpensive help that you’ll end up having to fix. Having someone on your side also means you don’t have to worry. If you can trust them, that’s one less thing to worry about.
I’m fortunate it only cost money instead of sinking my whole company. Don’t make the same mistake.
Have similar experiences and lessons learned? Share them below.