According to LegalZoom’s Site, they have Over 1 Million Satisfied Customers
At LegalZoom, they even “guarantee your satisfaction.”
Perhaps LegalZoom should redraft its guaranty, because we continually are pulling out the legal broom to clean up these do-it-yourself legal documents. On a regular basis, we encounter more and more companies that have used LegalZoom or similar legal document services and later realize that their corporate formation or legal structure is defective.
“You get what you pay for…”
So what is LegalZoom, really? LegalZoom is a service that provides legal documents for a fee. The LegalZoom website provides a disclaimer (albeit in fine print at the bottom of its home page) that “LegalZoom is not a law firm and is not a substitute for an attorney or law firm.” Its disclaimer further states that “LegalZoom cannot provide legal advice and can only provide self-help services at your specific direction.”Although many would think LegalZoom would function as a law firm, it is not one. You simply get what you pay for with these legal document services.
LegalZoom is not the problem in all cases – it provides legal solutions that may be adequate in certain situations. For example, some businesses may survive and even prosper with the assistance of a legal document service, because sometimes a cheaper, do-it-yourself alternative is “good enough” and gets the job done. As the customer, you need to determine whether this type of service will produce the legal documents that your company really requires. If you choose to use a self-help service, then you should not expect that qualified attorneys with the proper subject matter expertise will be available to review, revise and customize your company’s legal documents in a manner consistent with your particular legal, tax and financial circumstances.
“I stayed at a Holiday Inn Express last night.”
Even if you had a great night’s sleep and started the day with a strong cup of coffee, do you really have the time, knowledge, focus and skill set necessary to structure, organize and document the formation of your new company? (Not to mention continually maintain its structure).
Will you complete all of the tasks necessary to form your company properly? We often come across founders who have worked with a legal document service to make the initial state filing to form their company. They then receive a notebook or CD with various legal documents that remain incomplete for months and sometimes even years. You have a business to build and it is not surprising that your attention might be diverted. However, it is difficult, expensive and sometimes impossible to remedy these administrative and legal matters after the fact, especially if a legal dispute has arisen.
Does your new company have a group of founders with differing levels of involvement and equity ownership? Are stock repurchase agreements in place? Have you entered into contractual relationships to protect your company’s trade secrets and other intellectual property? For example, it is very important to address appropriate ownership and intellectual property protections in the event that a founder leaves the company.
When reviewing a do-it-yourself company, we often come across: (i) an inadequate capital structure that does not allow for future equity issuances or stock incentive plans; (ii) a lack of documentation regarding the equity ownership of the company (e.g., no stock ledger, no governance approvals, no stock certificates, etc.) with promises to founders, employees and consultants regarding their equity stakes in the company; and (iii) no attempt to protect the company’s intellectual property by, for example, signing up proprietary information and invention assignment agreements with founders, employees and consultants. In addition, the corporate records likely do not establish the proper governance relationships, with no clear indication or appointment of the corporate officers and Board of Directors.
“You can pay me now or pay me later.”
Some companies may experience good fortune and avoid any future shareholder, governance or other disputes that challenge the legal structures or commercial arrangements that they have attempted to put in place. Other companies may realize too late, however, that their do-it-yourself legal documents have problems, and it then may be a very complex and costly exercise to unwind and cleanup the prior legal matters.
For example, even at the early stages of a corporate formation, it is not a cheaper solution to unwind and fix prior do-it-yourself legal work. We often have to redraft and refile the organizational documents, because they are poorly prepared (and therefore are incomplete or unclear) or lack the basic legal terms that are required. Like the famous Fram oil filter commercial once noted, if you do not pay for the proper legal solution at the outset, then you eventually will need to engage qualified counsel down the road to get your legal matters on the right track.
It all comes down to the type of company that you want to create and build. You should consider the appropriate legal foundation that will allow your company to, as applicable, raise money, distribute equity, develop important technology, sell products and services, etc., while managing appropriately your company’s legal risk and exposure. When starting your company, you should invest the necessary time, focus and resources in the initial organization and structure of your company as you position the company to zoom ahead.
Have you had any experiences with do-it- yourself legal document services? If so, let us know! How did you get your startup on the right track afterwards?