4 Tips For Small Company CFOs To Manage The Legal Function

Most small companies deal with a wide range of legal matters, yet few can afford to hire in-house counsel. In the absence of in-house counsel, a small company CFO collaborates with multiple outside attorneys to manage a company’s legal matters, including its corporate, employment, contractual, intellectual property, real estate, and litigation issues.

The key legal relationship for a small company CFO is with the outside corporate counsel, who is typically engaged by the CEO and/or Board of Directors. That individual will serve as the company’s primary legal resource, overseeing corporate governance issues and providing legal advice on other Board level matters. Outside corporate counsel may be from a national law firm (such as Latham Watkins) or from a regional law firm (such as Gesmer Updegrove). The breadth of practice areas in the outside counsel’s law firm impacts a CFO’s work. Solely relying on the outside corporate counsel’s firm to perform all business-as-usual legal work can be costly.

Like many small company CFOs, I have managed multiple company’s legal matters. Below are four tips to effectively manage a company’s legal matters, balancing risk mitigation with legal expense.

Tip 1 – Do not underutilize your attorneys – To save money, many small companies do not have all key contracts reviewed by an attorney. A review by an attorney is particularly important when a company is in-licensing technology or when there is a strategic transaction on the horizon. This underutilization can be costly at a future date.

For example, one company hired a boutique investment firm to raise private capital. The engagement agreement gave the investment firm the right to participate in future underwritten financings. Years later when the company was working on an underwritten transaction, it had to pay a fee to the investment firm to waive this contractual right, even though the investment firm did not have the ability to underwrite a financing.

Another company did not have the right to assign a key technology contract to a successor company. When the company was preparing for a transaction, the company had to pay a fee to obtain approval for the assignment. Absent this approval, the transaction would have fallen through.

Tip 2 – Do not unnecessarily use your attorneys – Marking up and trying to negotiate a standard contract from a large company, such as Amazon or Comcast, is a waste of resources. These large companies are not going to accept changes to their master services agreements from any small entity. In addition, if a customer asks for a warranty period extension or to increase the cap on damages, a CFO can make those changes themself.

Tip 3 – Use issue lists when negotiating contracts – When a company is negotiating a customer or vendor contract, sending marked-up agreements back and forth is inefficient and costly. Contract negotiations go more smoothly if both sides can agree on business and legal issues prior to marking up a contract. Rather than exchanging mark-ups, a CFO and outside counsel should create an issues list as the basis for negotiation. Drafting acceptable language is far easier when both parties have agreed upon the issues.

Tip 4 – Know when to use specialists –Outside corporate counsel will address corporate governance issues and provide general legal advice on important legal matters impacting a company. However, the outside counsel may not have expertise to address the myriad of legal issues that a company faces. If the outside counsel works at a large law firm, their firm will have expertise in many practice areas. However, using specialist firms will be more cost effective and may result in better legal work.

Employment Legal Work – The employment counsel is the primary resource for employment matters, including employment related agreements, employment law compliance and employment advice. Employment law varies significantly state by state.

One company had to pay a departing salesperson for commissions on unbilled sales for future years because the language in the commission plan did not properly capture the nuances of a state’s laws. The company could have avoided the payment if it sought guidance from a nationwide employment law firm (such as Littler Mendelson). A national firm can provide proper advice and counsel for all states.

Contract Legal Work – The contract counsel is the primary resource for negotiating customer and vendor contracts. Once a master contract has been prepared, a boutique contracts firm (such as Radigan Business Law) can negotiate customer and vendor contract modifications cost effectively.

Intellectual Property Legal Work – The intellectual property counsel is the primary resource for filing patent and trademark applications, performing freedom to operate analyses, and examining competitive patents. Protecting intellectual property is critically important. Companies should hire a firm that is either focused exclusively on intellectual property (such as Lando and Anastasi) or has a large IP practice (such as Wilmer Hale). A company should also engage their IP attorney to perform a freedom to operate analysis early on.

Real Estate Legal Work – The real estate counsel is the primary resource for negotiating leases with landlords and subtenants. Companies should hire a boutique real estate counsel to negotiate real estate leases (such as Langer & McLaughlin).

Litigation Legal Work – The litigation counsel is the primary resource for representing the company in litigation. The choice of litigation counsel will depend on the type of litigation. If the litigation is employment related, an employment law firm (such as Littler Mendelson) can manage the litigation. If the litigation is contract related, the corporate counsel’s firm or a boutique litigation firm (such as Hirsch Roberts Weinstein) can represent the company. If the litigation is IP related and could have a material negative effect on the company, companies should hire an experienced IP litigator from a firm with significant resources (such as Latham Watkins). In all cases, the litigation firm should have specialized expertise within the area of litigation.

To effectively manage the legal function, a small company CFO must be ready to collaborate directly with multiple attorneys.