Doing this one thing can save you millions in taxes

The Crucial Role of Attorneys in Startups: Lessons from a Seasoned Entrepreneur

In this episode, Joe reflects on his entrepreneurial journey, emphasizing the importance of hiring specialized legal counsel when starting a business. He discusses his experiences with different types of business structures and the significant financial benefits he achieved through proper legal advice, such as qualifying for QSBS (Qualified Small Business Stock) by structuring his software company as a C corporation. Joe advises new entrepreneurs to consult industry-specific attorneys to lay a strong foundation for their business and shares insights on effectively forming and maintaining legal relationships.

00:00 Introduction: Lessons from Starting a Company 00:16 The Importance of Hiring the Right Attorney 00:42 Choosing the Right Business Structure 00:58 Benefits of a C Corporation 02:11 The Role of Attorneys in Business Growth 02:23 Specialized Attorneys for Different Needs 02:45 Utilizing Attorneys as a Resource 03:31 The Value of Legal Advice in Partnerships 04:05 Finding the Right Attorney for Your Business Go hire an Attorney

Episode Transcript

(00:00):
Looking back, having gone through a whole journey of starting a company, two companies, taking them through to an exit, I'm sure there's a gajillion lessons that you've learned from that.

(00:11):
But what's one thing that people should know if they're starting a company do this thing, hire an attorney.
I had listened to a bunch of episodes of this Week In Startups, and I started to realize that the attorneys that I had been talking to weren't familiar with different structures of incorporation.
Up to that point I thought everyone just created an LLC and you could do a S Corp election to save some taxes on FICA and Medicare.

(00:38):
But what I realized is that the Silicon Valley companies were doing things differently.
So I wanted to reach out to an attorney that was in Silicon Valley dealing with those companies to see how are you structuring things? It turned out that he had recommended, 'cause I had a software company, and this is wildly different for the type of business you're getting into.
He said we should create a C corporation.

(00:58):
Any attorney or accountant in this area that I talked to would say, do not do that By doing that, I was able to qualify for something called QSBS Qualified Small Business Stock.
You have to have your stock for five years.
If you hold it for five years and you sell it up to $10 million per share class is tax free on the federal and state level.

(01:21):
So there's other things that you have to be mindful of.
It's a C corporation, and this isn't accounting advice, but it is very real.
You should look it up It saved me a ton of money.
After I sold my businesses, I held my stock for five years in 18 days.
So just over that threshold, and it was incredible advice I would've never got, had I not hired an attorney up front for a few hundred dollars in a consulting gig that turned into me using him to create incorporation documents.

(01:54):
So finding an attorney that is an expert in the field you're going into and not just settling for an attorney that just cranks out LLCs all day is really good advice.
I'm not saying that the C corporation is good for everyone, but for me in that instance, it was really beneficial.
Did that change how you think about attorneys or using attorneys as a asset of a business? A hundred percent.

(02:18):
And just like people in business or employees that you have.
What got you here won't get you there.
I have different sets of attorneys for different things.
I have a set of attorneys that focus on trademarks, patents, things like that.
I have another set that focus on liquor laws and anything to do with distribution contracts.
And I have another set that focus on business law essentially, and you have to really navigate that.

(02:43):
It took me a long time to get there.
But you'll also find to start, you don't need to overdo it, but do your diligence.
And even if you have a question about something, I remember when I had a question like, Hey, how do I do X, I would go to the attorney and say, can I buy an hour's worth of your time? Talk through this.
And I would do that.
And that was well after that incorporation of the company.

(03:06):
So think about it as a purchased resource rather than a financial obligation.
I think a lot of people maybe in terms of starting a company thinking like, oh, I gotta have insurance.
Nobody likes to think more about it than I need it.
I need an attorney for this.
And you're talking about it as somebody that helped create a foundation for the business so that you could grow in a different way.

(03:28):
Yeah.
It's well worth it upfront.
Even if you are thinking about a partnership, like everyone goes into a partnership with someone, Hey, let's do 50 50 partners.
What can go wrong? Having an exit plan when you first start is really good.
Even if you don't foresee that coming, you're gonna.
Have the expectations right up front.

(03:48):
I see people that continuously make the same mistake over and over again.
They'll get in a bad partnership and then get out of it and it's really tough, and then start a new one and fall into that same pattern.
you gotta think about that stuff.
And I think an attorney can help bring that out early on.
Without significant cost.
Do you have advice in terms of how to make sure that the relationship you're developing with an attorney is the right fit? Yeah, I think you just have to talk to a few of 'em.

(04:15):
I found one that was specifically dealing with startups in the software industry in Silicon Valley, and that gave me the confidence that I was talking to the person that knew those waters.
They've dealt with companies with names that I had recognized.
And that's really good.
And asking a fellow entrepreneur in that same field that's maybe much more accelerated than where you're at, who they use and.

(04:39):
what advice they have is really important.