Angela Pierce : The reason I thought you would be really good for small businesses is because I work with about a half dozen lawyers at a time, and they’re all sort of like you.
They’re smart, nerdy, corporate attorneys. I have a nerdy IP guy, the deal guys that are sort of slick, but I always use you for all of my debt and corporate things. I consider you more of a generalist for business. I talk to you when I need a deal done, and I need to know what to negotiate, or what position to take. You’re good at that. You’re good at things that aren’t necessarily black or white, and I thought that mind-set would be good for small businesses. So, tell me about your firm and what you do?
Gary McDaniel : Thank you. Norton Rose Fulbright is a global law firm with 59 offices across the world. Here in Texas, we have four offices. I’m in the San Antonio office. In our office, we have five pure corporate lawyers, five real estate lawyers, and one tax lawyer. We do anything from start-up companies to public companies. We help our clients access capital and debt, effect acquisitions, divestitures, and mergers and counsel boards of directors on corporate governance and fiduciary duties. We also focus on employee benefits, so if you want to structure your employment agreements or equity awards with key employees, we can help with that. And we do tax planning.
Angela Pierce : Besides the public company stuff, I think my company has used you for the rest of those things. You guys are very skilled. I love all the guys at your office. What type of business law do you do best? And do you enjoy those aspects the most?
Gary McDaniel : What I enjoy the most, and what I do a fair amount of, is working with start-ups. I help them draft their formation documents, raise capital, secure debt and negotiate their major customer contracts and supplier agreements.
Angela Pierce : Right, and those kind of things aren’t black and white so they need someone like you to help them take the position and know what’s important and what’s not, and where to give and take.
Gary McDaniel : Absolutely. The client knows what price they’re going to sell their products or services for, and they know and can describe the products or services they’re going to provide, but they may not be as familiar with provisions regarding indemnification, limitation of loss, and termination rights. At first, some clients don’t realize how important these provisions are, but when something goes bad… they’re the only things that are important.
Angela Pierce : [laughs] Right, and the one thing I actually outsource for customer contracts is the indemnification negotiation because the law changes a lot and certain things are gray so there are areas I think people take for granted. They may think it’s “legal jebal blah blah” but it’s not. It’s very important.
Gary McDaniel : Right, and it’s not always intuitive. I have this conversation all the time, and a good example of that is, when discussing indemnification, the client will say, “They want us to indemnify them for our negligence. That seems reasonable.” And I will say, “Not really. That’s not really market.” Most of the time, you would only indemnify someone for your gross negligence or willful misconduct. But that’s just something that not everyone would know.
Angela Pierce : You’re right. I only know because I had a lawyer teach me.
Angela Pierce : OK, so when you meet with a smaller or mid-size company, what are some of the things that you see most often that sort of shock you?
Gary McDaniel : The first thing I ask a client is what are their goals for the next three to five years. Are they trying to grow the business? Are they trying to sell the business? I think the legal issues vary depending on what the goals are for the business. If you want to sell the business within the next few years, you need to have your house in order: you need to make sure your intellectual property is protected, you have signed, up-to-date contracts with all of your clients, suppliers and partners, you have clear ownership to your assets, you have updated books and records, including Board minute books, etc. If a buyer starts to see holes while performing its due diligence on the business, they’re going to get nervous. What happens if they get nervous? Well, a couple of things. 1) They walk the deal; or 2) they heavily negotiate the acquisition agreement and the client is going to end up giving a lot more representations and warranties.
Angela Pierce : And what’s a representation and warranty for those who don’t know? Unfortunately, I know what those are. [laughs]
Gary McDaniel : Basically, when you sell a business, you’re going to make certain representations and warranties regarding your business. For example, you will likely have to make representations and warranties regarding the accuracy of the financial statements, condition of the assets, existence of any litigation, compliance with laws, environmental matters, etc.
Angela Pierce : So what happens if your representations and warranties are wrong?
Gary McDaniel : That happens. If a seller represents to the buyer that there is no existing or threatened litigation, and that turns out to be untrue and the buyer incurs losses, the buyer would sue the seller for misrepresenting the facts to them.
Angela Pierce : Yeah, and I can see how sometimes you might not even know. I’ve done so many representations and warranties and a lot of them seem like no problem, but later, when I look back I wonder if they’ve happened. I realize they are more common than most people think.
Gary McDaniel : You’re right. The whole purpose of the representations and warranties is to flush out all of the “gotchas.”
Angela Pierce : That’s good. Ok, so if you’re talking to a smaller company, when should they seek counsel? I know many small businesses that do their own thing and ride by the seat of their pants. What are the events that come up when they realize they need to involve counsel? For example, when should they have a lawyer draft a document for them?
Gary McDaniel : A few key things that you need a lawyer to assist with are raising capital, securing debt, hiring a key employee, and giving equity away. For example, we all hire employees and hope they are going to stay with the company forever, but the reality is they don’t stay forever and when they leave after six months or a year or two years, and you’ve given them 1% of your company, you will likely want to buy that equity back. Also, when you’re trying to get a loan from a bank, you’re going to want a lawyer’s assistance. All banks have a standard form, and it’s favorable to the banks.
Angela Pierce : Shocker, right?
Gary McDaniel : Right, and a lot of people will just sign it. And they end up giving away a lot in doing that. Obviously, if you decide to sell your company, you would want to hire a lawyer. You should also have a lawyer look at key customer contracts.
Angela Pierce : What about when you’re starting a new business model? Someone asked me this once. I saw how each of his deals was a little different, and I told him he really needed a standard agreement or something to hand to a customer and have the basic rights or basic agreement on how they’re going to work together. I call them master services agreements. Is there a deviation on that or is that typical?
Gary McDaniel : That’s typical. You’re exactly right. You would need an attorney to help you with the first one and get the basic structure, and then you can tweak the price and the services, but the main provisions are there such as the termination provisions, the limitation on loss, and the indemnification provisions.
Angela Pierce : Yeah, and I think smaller companies don’t really do that. They just get a deal and a purchase order.
Gary McDaniel : Yeah, lawyers are perceived to be expensive. And some are expensive.
Angela Pierce : That brings up a good question. I know you’re really expensive because you’re with a top tier law firm. Sorry about that. (Side note: Sorry, he is really expensive but he is really good, by the way. He’s super good.) So, what’s the range? If I’m Joe Blow and I need a lawyer, what’s the range I could expect?
Gary McDaniel : Well, you would be surprised. When we are working with start-ups, we’re aware of the fact that they don’t have a lot of money, and they don’t want to give what they do have to their lawyers. They want to invest it in the business and develop their products. So, we will make special arrangements with our start-ups.
Angela Pierce : And that can work out for the both of you. If they end up growing and make a huge deal, you’re their guy.
Gary McDaniel : Right, and that’s where we would make our money. We are typically fine carrying the small client to their first qualified financing, and that’s when we bill at full rates. Generally speaking, we have a start-up program whereby we will form the entity, draft the founder agreements, draft a stock option plan, draft a form of employment agreement, and draft a form of master services agreement, all for a fixed fee.
Angela Pierce : That’s good for me to know too. I didn’t know that, and I get asked that a lot.
Gary McDaniel : We typically do that for $5,000.
Angela Pierce : That’s pretty good.
Gary McDaniel : The best part of it is we don’t require you to pay us that $5,000 until your first qualified financing – so the first time you raise money.
Angela Pierce : That’s brilliant because what I’ve seen most often is that people are ready to go, and they have investors, but that’s sort of the cart before the horse. You need all of those other things done in order to close.
Gary McDaniel : Right. I have one I’m working with right now. I just haven’t figured out when I’m going to do it, but…
Angela Pierce : Right? In between sleep or during my oatmeal in the morning, I might find time to build that document.
Gary McDaniel : Right.
Angela Pierce : I wish I were married to a lawyer sometimes. I mean, not really. They’re boring. No offense. Obviously, you’re not boring, but I kind of wish I were because then I could just always have him around to draft my documents for me. As it is now, what I do is take old versions of crap I have from somewhere else. It’s probably terrible, but that’s what small businesses do.
Gary McDaniel : Well, lawyers do that all the time. We don’t ever create anything from scratch. [laughs]
Angela Pierce : Right, the difference is when you take something you’ve done before, you know if it’s still relevant. [laughs] Ok, so next question. Since lawyers are so different, what types of questions should a company ask to see if they line up with their style?
Gary McDaniel : So, being a lawyer for almost fifteen years, I would ask what experience they have. I don’t want to know what you did ten years ago. Maybe ask about the last two years. If you’re trying to raise money, ask the lawyer how many companies they have raised money for in the last two years. Dig deep into their expertise. You don’t want a lawyer that has a little experience in a bunch of areas. Instead, you want to find the lawyer that has special skills and experience in the area of law you need help with.
Angela Pierce : You know, the company I work for hasn’t hired in-house counsel yet. People often ask if we are going to and I say no because I’d rather have a contract administrator and then outsource my legal experts. I’d rather have you do my debt than an in-house counsel that doesn’t ever do debt.
Gary McDaniel : Right. If you’re doing one deal every year or two, chances are you don’t know what market terms are for the transaction. You’re probably not going to end up with the best deal you could have had if you would have sought out a lawyer with special skills and experience in that area.
Angela Pierce : That’s right, and you’ve done that before. I always think I’ve done a lot of deals, but every time I work with you, you always tell me things I didn’t know. So then I just do whatever you say.
Angela Pierce : Ok, so this question dovetails off my last. I have an opinion on this topic, but I’d like to get yours because you’ve seen more companies. When do you see companies hire someone dedicated to the legal part of their company, and not necessarily a lawyer?
Gary McDaniel : I’ve seen it in a couple of different ways. My personal view is that if your annual legal spend on outside lawyers is three to four times the cost of employing an in-house attorney, then maybe it’s time to employee an attorney. Additionally, if your company is in a highly regulated industry then you may want to make sure you have someone on staff who knows the applicable regulations. It doesn’t always have to be a lawyer. He or she just needs to be up to speed on the applicable regulations to make sure you stay out of trouble. Those are the two things that come to mind.
Angela Pierce : Ok, great. I’ve actually been in both of those situations. That’s interesting. [laughs] Ok, say I’m a business owner who walks in and just wants your advice; what are the main tips you would give?
Gary McDaniel : First of all, you need to make sure that all of your employees have signed a proprietary inventions assignment agreement. That means if you’re paying someone to develop intellectual property, you need to make sure the company is the owner of that intellectual property. You don’t want that employee to have a claim to ownership after he or she leaves. It’s a simple document.
Angela Pierce : I actually have a form of that agreement. I’ll put it on the website.
Gary McDaniel : We had a situation where we had a potential employee come in to interview with the CEO, and this potential employee was giving the CEO a bunch of ideas. Six months later, that potential employee who was never even hired made a claim that the company launched a product very similar to what they were discussing in the interview.
Angela Pierce : Oh wow. That makes me scared. That is a very good point. That is not just for tech companies. That could affect any business process you’re doing. You need to make sure you own all of those. Any other nuggets of wisdom, Gary?
Gary McDaniel : You need to make sure you keep your board books together. That’s where you can get holes. [laughs] You’re shaking your head like that’s not important.
Angela Pierce : No, that’s definitely not important. I’m too busy for that. [laughs] So, explain what board books are for those who don’t know.
Gary McDaniel : So, anytime the company is considering a major corporate transaction, whether they’re hiring an executive officer, getting a bank loan, buying a major asset or business, you want to make sure you have minutes that talk about why you’re entering into the transaction.
Angela Pierce : I am pretty maniacal about minutes. When we approve something, for my own peace of mind, I make sure we have documented that everyone has agreed to it. Actually, I will put that on the website as well. I’ll give a form of Board Minutes.
Gary McDaniel : If you ever decide to sell the company, it’s going to be one of the first things the buyer asks for.
Angela Pierce : Ok, I love that. So here is the other question I get a lot. They ask what kind of company they are supposed to be, a corporation, a sole proprietor, an LLC, etc. What’s your rule of thumb for business structure?
Gary McDaniel : The two main entities we form are LLCs and corporations. They’re both very different. LLCs are treated as “pass through” entities. The owner is the only one taxed. Additionally, LLCs have a more flexible management structure than a corporation. You can appoint a board of managers that is not only responsible for overseeing the day-to-day operations of the LLC, but they also approve all major corporate decisions. So you can take most of the voting power away from the owners and give it to the managers.
Angela Pierce : Yeah, and let me just reiterate, you can have three people who are the founders of the company, the LLC. They may have taken in lots of investors who come in and those guys have investment interests and they’re owners of the LLC but they don’t have any management rights. They’re not managers of the LLC.
Gary McDaniel : That’s right. Typically, you will give the board of managers not only the right to oversee the day-to-day operations of the company, but they will also make a lot of other decisions. For example, the board of managers would approve any bank loans, hire and terminate executive officers, approve the annual operating budget, approve buying the assets of another company and approve the ultimate sale of the company.
Angela Pierce : So what are the typical types of companies with an LLC?
Gary McDaniel : Start-ups. I am seeing more and more start-ups form LLCs for the tax advantages they offer over a corporation. However, if the founders are going to secure venture capital, then they should consider forming a corporation. While investors are becoming more and more comfortable with investing in LLCs, some venture capital firms will only invest in a Delaware corporation.
Angela Pierce : So most corporations are in Delaware.
Gary McDaniel : Correct.
Angela Pierce : OK, so talk more about corporations and how they are different.
Gary McDaniel : The big difference is double taxation. If the corporation goes out and sells services, it’s going to report tax on that revenue. Then, when it makes distributions of excess cash to the stockholders, the stockholders are typically going to pay tax on those distributions. That’s double taxation. The other thing is that it’s fairly standard how the operations of a corporation are managed. The board of directors oversee the day-to-day operations, but the major corporate actions usually have to be approved by the shareholders. You just don’t have the flexibility to dice up what corporate actions you want the board to take and what you want the shareholders to take. One exception to the double taxation is if the corporation files to be an S corporation.
Angela Pierce : I think that’s a good delineation. If you want a lot of flexibility and decision-making, but more complexity, which may make it harder in raising money, then maybe LLC is better. And the tax thing is always advantageous, especially if you think the first year of operations you’re going to lose money.
Gary McDaniel : Over the last three to five years, we’ve seen more and more investors getting comfortable with the LLC structure because they are understanding the benefits of it.
Angela Pierce : That’s right, and I’ve seen companies I’ve been in, more than once, have to convert their entire corporate structure for a new investor which is a nightmare and very costly.
Gary McDaniel : Yeah, a lot of times you will start out as an LLC and eventually, before you go public, you will have to convert to a C-corp.
Angela Pierce : I also have this on videos on my website. That’s important. If you want to go public, you have to be a C-corp. Next question. Are there any mistakes you see often that you’ve had to clean up, or mistakes you would advise people to avoid?
Gary McDaniel : A common mistake I see is that an owner will want to sell his or her company or he or she will want to enter into some other major corporate transaction, like a credit facility, and the owner will agree to a term sheet before getting a lawyer involved. A term sheet is basically the road map for the transaction. It sets out all of the material terms of the deal. Most are non-binding, but once you’ve signed and agreed to the terms, trying to change something can be challenging and you can quickly lose credibility with the other party if you start renegotiating the terms in the term sheet.
Angela Pierce : You’re right, and you know I’ve done that.
Gary McDaniel : Yeah.
Angela Pierce : That was an extremely costly mistake. Ok, so here’s the part of the interview where we talk about your life. I ask everyone this. If you could do anything, what would you do? And also, how does that dream job fit with what you do now?
Gary McDaniel : Well, I really like being a lawyer.
Angela Pierce : You won’t get fired for answering, I promise.
Gary McDaniel : If I could do something else, I’d be a veterinarian.
Angela Pierce : Seriously? I didn’t know you were an animal lover. What’s your favorite animal?
Gary McDaniel : Small animals like dogs and cats. I have one dog and one cat. But if I were a veterinarian here in San Antonio, I would probably do a mix between small animals and large animals.
Angela Pierce : We have a potbelly pig at our house, so you’ll have to come over and help me clip his tusks and his toes. He’s about 150 pounds so I’m not putting him in the truck, and it’s like $200 to have a vet come over.
Gary McDaniel : Unfortunately, I cannot help you with that.
Angela Pierce : Because you’re a lawyer. That’s so interesting. I’ve learned something new about you after all this time. That makes sense now. All those times you were so sensitive and sweet when I needed it during my debt negotiations, you were seeing me like a hamster in a wheel.
Gary McDaniel : Yep.
Angela Pierce : So when you retire, you’re going to vet school?
Gary McDaniel : Nope, no more school.
Angela Pierce : That’s how I feel. I went to graduate school, and of course, my mother asked if I was going back for my PhD. I said, “Mother, no. I’m done.”
Gary McDaniel : Done.
Angela Pierce : I might teach it when I’m old and gray because I like helping others, but that’s all the school I’m getting into… and maybe an acting class. I like acting.
Gary McDaniel : That’s right, you do.
Angela Pierce : Any last words?
Gary McDaniel : I would just encourage any small business that thinks they need a lawyer not to be scared to get one because they’re afraid it’s going to cost them a lot of money. I think they would be surprised if they called a lawyer up and tried to work a deal with them. There are a lot of us out there doing this, and we’re all trying to get more clients every day. If you have a great business or a great idea, I think you’re going to find out that they will work with you and come to a financial arrangement that both parties can be happy with.
Gary McDaniel is a Partner in the San Antonio office of Norton Rose Fulbright LLP. His practice is focused on advising both publicly and privately held companies in mergers and acquisitions, venture capital, offerings of securities and other corporate matters. Gary has represented clients in a broad range of industries including energy, energy services, refinery and petrochemicals, information technology, healthcare and financial services. Gary is a Certified Public Accountant and, prior to obtaining his law degree, practiced in the energy division of an international public accounting firm. He graduated cum laude from South Texas College of Law and has a Bachelors in Accounting from Texas Tech University.