Don’t Skip Legal

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Hey Shifters!

I apologize in advance because I know legal isn't the sexiest topic. It's something founders cannot mess up, making it worth discussing.

I recently chatted with Sandro Tuzzo, the founder of Vispo.ai (not a sponsored mention), who's building an AI tool to help founders handle essential legal work because lawyers are so expensive. This conversation got me thinking about how easy it is for founders to ignore legal matters:

1. Dozens of online tools automate some of the work

2. Legal work is costly (our current legal counsel bills at $600+/hour for partners, $300-400/hour for paralegals)

3. Nobody starts a company because they're excited about legal work; it’s easy to avoid

I think of lawyers the same way I feel about therapists. Yes, they're expensive, and yes, finding one can be difficult, but you don't want to be looking for a lawyer when you need one.

Let me share what I've learned about navigating legal as a founder – including what you can handle with AI, what requires an honest lawyer, and mistakes that could kill your company.

Mistakes to Avoid

As you’re in the early days of building, here are the mistakes you must avoid at all costs.

1. Not Having a Lawyer at All

A couple of years ago, Chezie was sued by a prominent DEI strategist who claimed we were using his framework without permission. The moment I got that email, I forwarded it to our lawyer, even though I knew it’d cost hundreds of legal fees for the review. The alternative was to do it myself, but I got the sense that doing that could put us in an even worse position.

These situations happen more often than you'd think, and certain things need to be done right the first time:

• Incorporation documents

• Fundraising paperwork

• Cap table management

• Dispute resolution

Having a lawyer isn't just about handling crises but preventing them. When that lawsuit landed in our inbox, I wasn't scrambling to find legal representation or trying to understand complex IP law. I had someone I trusted who could handle it immediately.

2. Missing Your 83(b) Election

I once saw someone online refer to missing your 83(b) election as the "Chernobyl of startups.” It’s a tax mistake that can be catastrophically expensive.

When founders get equity that vests over time, the IRS considers each vesting event as taxable income. The amount of tax you owe is based on the fair market value of the shares at the time they vest. If your company's value increases significantly, you could owe massive taxes on paper gains before seeing a dime in real money.

An 83(b) election lets you pay all your taxes upfront based on the value when the shares are granted (usually when the company is worth very little). You have exactly 30 days after receiving your shares to file this election – miss it, and there's no fixing.

We messed this up at Chezie. Fortunately, since I founded the company with my sister, we could work around it with a handshake agreement about returning shares if either of us left before our vesting period ended. The solution was to immediately vest all our shares, eliminating future vesting events that would trigger taxes.

3. Not Owning Your IP

I'm a huge advocate for working with contractors – they're an affordable way to grow your team on your terms.

However, the downside to working with contractors is the ownership of intellectual property (IP) is much murkier. Full-time employees typically have employment agreements stating that their work belongs to the company, but it’s easy to miss those agreements with contractors.

Case in point: when Chezie started, we were a job review platform called Dyversifi, built on Webflow. I hired a contractor to help design a filter feature to let users find reviews from people with similar identities. Things got messy with that contractor, and we eventually needed Upwork's dispute resolution team to step in.

We got lucky. While the contractor never made any claims about owning the work they did for us, we would have had very little legal ground to stand on if he had since we hadn't had them sign any IP agreements. That filter feature was a core part of our product then, and losing ownership of it could have been rough.

Today, every contractor who works with Chezie signs an explicit agreement drafted by our legal team, stating that Chezie owns any work they create for us. This might seem overkill for early-stage projects, but think about it this way: if your company succeeds, people will come out of the woodwork claiming ownership of your IP. Having clear documentation from day one is your best defense.

When (and When Not) to Use AI for Legal Work

Legal fees add up quickly. When lawyers charge $600+ per hour, trying AI solutions for everything is tempting. I know I do.

That said, there’s a right way to use AI for legal work.

Where AI Can Help

I actively use AI to reduce our legal costs, particularly around contract management. When customers redline our sales agreements, instead of spending hours reviewing each change, I upload both versions (our template and the redlined version) to ChatGPT. It breaks down the changes in plain English and flags significant modifications.

For example:

• If a customer removes our partnership announcement rights, it is no big deal; AI can spot that, and I can quickly approve.

• If they try to remove our termination notice clause, AI will flag it as high-risk, and I can push back with AI-suggested alternative language.

This saves hours of legal review time while ensuring we don't miss significant changes. It also means I don’t have to forward every contract to our lawyer.

Where You Need a Human Lawyer

Some things you absolutely shouldn't trust to AI or templates:

• Incorporation documents (I think it’s okay to use a platform like Gust or Stripe Atlas, but have your lawyer review the documents once you start working with one)

• EVERYTHING having to do with fundraising

• Cap table management

• Securities compliance

• Dispute resolution

• Employment agreements

• IP protection

It’s All About Balance

The key is using AI to reduce costs on routine legal work while investing in human lawyers for critical matters. At Chezie, we work with Mission Law, which offers a $600/month subscription covering basic startup legal needs (employee onboarding/offboarding, advisor agreements, etc.) for startups who’ve raised less than $1M.

Depending on the risk level, we use AI tools and traditional legal counsel for everything else.

The Bottom Line

I get it. When you're building a company, legal work distracts from what matters - building products, talking to customers, and growing your business. It's expensive, time-consuming, and tedious.

But good legal counsel should be considered an essential cost of doing business - right up there with your AWS bill or Gmail subscription.

The cost of good legal work is predictable. The cost of legal mistakes isn't.

See you next week,

Toby