Risky business, please: appetite for legal risk in startups

Bill Gates said, “to win big, you sometimes have to take big risks.” He was right. Startups need to embrace risk, but they must ensure their legal team aligns with their risk appetite, says Dan Adams, Founder of legal advice for startups specialist, Arbor Law.

When Bill Gates and Paul Allen founded Microsoft in 1975, the company was a classic startup. It was small, innovative and willing to take significant risks. One of the most notable early risks was their decision to develop an operating system for IBM's first personal computer.

At that time, personal computers were a nascent market, and IBM was the dominant force in computing. The success of this venture was far from guaranteed, and failure could have meant the end of Microsoft.

For any startup, accepting risks like this during the early stages of the company is a necessity. If a deal with an investor or a client isn't closed, the company might not survive the next twelve months. While fundamental legal bases must be covered, it's vital to avoid getting bogged down in endless negotiations over minor contract details. Spending too much time on inconsequential points could result in losing a customer or delaying critical progress.

Gates and Allen recognised the potential upside of their gamble. They negotiated a deal with IBM that allowed Microsoft to retain the rights to the operating system, which became MS-DOS. This crucial decision positioned Microsoft at the forefront of the personal computing revolution and laid the foundation for its future dominance.

The lawyer's dilemma

Lawyers, typically risk-averse and paid by the hour, often lack appreciation for the dynamic risk appetite of startups. A law firm might want to spend weeks covering every detail of a potential new business contract, but this disconnect can lead to prolonged negotiations costing thousands of pounds or, worse still, losing the deal.

Startup founders might also be unaware of their own legal risk tolerance, leading to unnecessary legal expenses and delays. Sometimes, it's better to accept a contract with a few warnings and push back on only the most crucial issues. That way, the deal is less likely to pass you by.

Key considerations for startups

For startups, understanding what legal risks to prioritise is essential. Intellectual property (IP) ownership, for example, is a critical area; startups must ensure that what they create remains theirs. What if IBM had retained the rights to Microsoft’s operating system?

In contracts with suppliers, on the other hand, ensuring that exit clauses are clear and there are no long-term traps can prevent costly entanglements. Additionally, liability caps are crucial when dealing with high-risk services.

The level of acceptable legal risk varies by industry and company maturity. In highly regulated sectors like banking, the legal risk should be minimal. Conversely, startups must embrace higher risk levels to facilitate growth and innovation. Start-ups don't need their lawyers spending time on insignificant issues; they should focus on the big ones.

Working with a law firm that recognises the necessity of higher legal risk in the early stages and adapting as the company grows is pivotal for success. The journey of Microsoft from a start-up to a global leader illustrates the importance of taking calculated risks. For startups, Bill Gates’ mantra is not just inspirational; it's a strategic imperative – just make sure your lawyers know it, too.