Taking risks the smart way
Life is full of risks. Building a startup is full of risks. You cannot eliminate risk, but you can manage it. Solving legal problems is all about managing the risks involved. You need to:
- understand the risk (am I driving through a pedestrian zone at 100km/h, or am I walking across a red light?);
- understand the cost of mitigating the risk (do I really need to drive that fast?); and
- balance the two.
|
Risk / Cost |
High cost to mitigate |
Low cost to mitigate |
| High risk | Typically mitigate the risk | Always mitigate the risk |
| Low risk | Take the risk | Typically mitigate the risk |
Step 1: Understand and quantify the risks
The most dangerous risks are the ones you are not aware of. Especially if you are new to the business world, it is essential to familiarise yourself with the real risks to your business by speaking with as many other founders, VCs, and experts as possible. A few important guidelines:
- Only the paranoid survive: As management legend Andy Grove put it, you must have an almost paranoid obsession with understanding risk. Only then will you be able to anticipate and mitigate the risks that matter, and ignore the countless negligible risks that only distract from your business.
- Quantify the risk: Always ask yourself before you make a decision: What is the worst thing that could happen? What is the probability of that happening?
- Keep it simple and avoid complexity: Every layer of complexity introduces additional sources of risk and complicates risk assessment. Stick to industry best practices such as the LEXR Standard and avoid reinventing the wheel.
- Consultants and lawyers will often exaggerate a risk: A privacy lawyer makes a living off your fear of hefty privacy fines, so make sure you validate the real risks with peers and independent third parties before hiring expensive consultants.
Step 2: Understand and quantify the costs of mitigation
The cost of mitigating a legal risk typically depends on two factors:
- Complexity: The more complex the legal issue, the higher the associated costs.
- Frequency: The more frequently a legal problem arises, the lower the cost – even a very complex matter such as a standard employee participation plan is fairly inexpensive to set up if are not reinventing the wheel and stick to what others have done before you.
Again, talk to experts and service providers to understand the approximate cost of mitigating legal risks (e.g., implementing a privacy policy).
Below, we have summarised the different levels of complexity of legal problems and how to approach them:
|
Legal complexity |
Approaches |
| High |
|
| Medium |
|
| Low |
|
Strategic legal (‘Get me an expert’): The rare ‘bet-the-company’ questions where there is no room for error.
- Examples: High-stakes business disputes, government investigations, patent applications.
- How to solve it: Because strategic legal issues tend to be expensive to resolve, the approach is twofold: First, avoid legal issues if possible (in particular, business disputes and regulatory inquiries are often just a symptom of neglected day-to-day legal operations). Where it is unavoidable (such as patent applications), talk to experts early on. The experience of an expert in dealing with these issues can make or break your company.
- How we solve it at LEXR: We have experts in most areas of law on our team, and where we don’t have the expertise, we tap into our network of lawyers and help you ask the right questions to keep costs down.
Legal projects (‘Solved by others before’): There are legal tasks that your company may face only once or a few times, but that many other companies have solved before you.
- Examples: Financing rounds, setting up an ESOP, becoming GDPR compliant.
- How to solve it: Don’t reinvent the wheel. Stick to what has worked for others. Rely on best practices and established standards.
- How we solve it at LEXR: With our flat-fee legal solutions, we have distilled the experience of hundreds of cases into a best-practice standard that we tailor to your specific needs.
Legal operations (‘Daily business’): These are the day-to-day legal processes and questions your business faces.
- Examples: Reviewing sales agreements, appointing a new board member, hiring a new employee.
- How to solve it: Automate and standardize. Solid processes and good templates are key to keeping day-to-day legal work from becoming a major problem. Invest in a solid setup and train the people on the front line(sales, procurement, HR).
- How we solve it at LEXR: We can manage this for you on a subscription basis or help you set up your processes internally.
Step 3: Take action with the risk balance
The hard part is quantifying the risk and the costs to mitigate it. Once you have the answer, the action plan is usually obvious. Here are a few examples:
- Should we have a privacy policy on the website?
-
- Risk: While the risk of an actual fine is low, not having a privacy policy gives a very unprofessional impression to your customers and investors.
-
- Cost of mitigation: A privacy policy is not rocket science, and since this is such a common problem, there are many very inexpensive ways to create at least a basic privacy policy.
-
- Solution: Mitigate the risk.
- Should we review our subscription agreement for coffee capsules?
-
- Risk: Given the very low cost and likely standard terms, the risk is negligible.
-
- Cost of mitigation: Such a contract can be quite complex from a legal perspective and reviewing it can quickly exceed the total cost of your annual subscription.
-
- Solution: Take the risk and sign the agreement without legal review.
Check our Master Checklist (LEXR Standard Master Checklist) to get a good idea of what risks you really need to be concerned about.