Scaling through chaos shouldn't mean compromising on legal

By Ross McNairn, co-founder and CEO of Wordsmith

Scaling a startup is a chaotic, difficult experience. People and product dominate a founder’s attention, often to the detriment of the small print. By that I mean legal, a complex area with an overstated reputation among startups for being a cost sinkhole falls right into this category. Yet lack of legal oversight could have catastrophic results, especially as companies scale and deliver products and services faster than ever before. Just look at the CrowdStrike outage and the potential liability implications for the firm: it should stand as a lesson for all fast-scaling startups and founders that proper legal counsel is a must to safeguard your business.

Startups today are growing at an incredibly rapid pace. Between 2013 and 2020, it took high-performing startups just 6.1 years to reach 1,000 headcount, compared to 9.4 years between 2000 and 2012, as shown by data from Index Venture’s Scaling Through Chaos resource. AI is accelerating this too, and the result is greater complexity and a higher risk of something going wrong as each looks to become a first mover and lock out competitors.

In my experience, many hyperscalers will not bring in any legal counsel in the first two and a half years, while Scaling Through Chaos found that the majority of startups wait until reaching a 125-250 headcount before making a senior legal hire. If a new business were to experience a failure at even a fraction of the scale of CrowdStrike’s, this could have wide-reaching implications for its future viability. Take, for example, if a startup didn’t have adequate counsel and agreed to sign contracts that expose them to unlimited liability when things go wrong, they might have to foot the bill for enormous, business-threatening damages. Startups' propensity to move quickly at the start, and the broad reach such businesses can have as a result of scaling fast, increase the risk of such scenarios emerging. 

With this complexity, legal teams are needed more than ever to protect businesses. But legal teams have traditionally been cost-intensive and consequently grow within companies at a much slower pace than other departments, accounting for 1:125 of the overall headcount in a typical startup, according to data from Scaling Through Chaos. Just as startups are breaking the mould to deliver new ideas and services faster than ever, these conventions must also be upended.

How are founders upending legal conventions?

Much of the startup attitude to legal is inherited wisdom. But great change is brewing in the industry that challenges when, how and at what cost these teams can be utilised. 

The cost of legal services is set to go down greatly. One reason for this is the availability and proliferation of fractional services, which allows startups to get the advice of very good lawyers early into their growth for a slice of the price and delaying the cost of a full-time equivalent. This can encourage startups to take legal advice much earlier in growth, as well as keep costs down further into their journey. 

The second reason is that AI legal applications are beginning to mature and this will have real-world implications for how legal functions. Historically, legal was viewed as an administrative function, but the space is starting to look more like security. Today, mistakes in data protection or liability clauses in contracts can kill a company, just as a gap in cybersecurity could. Regulation and the accompanying compliance work are only expanding; with this, legal tech tools will be key to enabling nimble teams. General Counsels are increasingly looking like CISOs (chief information security officers), and legal operations will start to move more into the internal product management space. 

Legal goes from blocker to enabler, powered by AI 

AI tools will help legal minds adjust their posture and take a pragmatic, commercial view when working with startups. Their role will shift from focusing on risk management – which can significantly slow down startups when not executed properly – to enablement. Their focus will be on accelerating business, removing bottlenecks and delays, and increasing self-service while offering key metrics to the executive team to enhance productivity.

The General Counsel of the future is not going to blindly embark on a crusade to shut down every risk in the organization. Rather, they are going to build the levers and visibility to let the executive team make better and more conscious decisions about risk management. According to Scaling Through Chaos, founders spend about 50% of their time on hiring – that’s a lot of hours dedicated to bringing the right GC on board that understands the promise of AI. Understanding where to direct those gains will sort the world-class GCs from the bureaucrats with a bazooka.

With legal operations evolving into internal product management, this critical function can become a lever for growth. Striking the right balance will unlock more efficient, better and cheaper legal functions, allowing startups to give legal teams the support and focus that is needed for the business to mitigate risk, move quickly and grow faster than ever before.