Legal strategy for startups is no longer something founders can push to “after the next round.”
In California’s high-stakes startup ecosystem, a growing number of advisers say that what sinks young companies isn’t usually product failure, but legal mistakes around people, payroll and compliance that quietly build into six- or seven-figure threats.
Key Points
That’s the message from Lara Shortz, Los Angeles office managing partner at law firm Michelman Robinson, who works with emerging companies on employment, labor and executive disputes. In a recent playbook for founders, she argues that the smartest leaders practice “legal triage”: they identify the riskiest blind spots early, fix them efficiently and invest scarce capital where it truly protects their runway.
Her core point is blunt: creativity and grit may launch a startup, but without a disciplined legal strategy for startups, growth can quickly become a liability instead of an asset.
Why legal strategy for startups can’t wait for the next funding round
Founders in the early stages often treat legal and compliance spending as discretionary. With limited capital, the instinct is to pour every dollar into engineering, customer acquisition and market expansion.
Shortz says that mindset overlooks where the largest losses typically occur. The biggest hits rarely come from product disputes; they come from the people and processes behind the product.
In California, seemingly small employment errors—such as misclassifying workers, mishandling overtime, or relying on informal payroll practices—can trigger class actions or PAGA claims that rapidly escalate into six‑ or seven‑figure exposure.
According to Shortz, a lean but focused legal strategy for startups should start with these core employment risks. Basic steps like reviewing offer letters, confirming exempt status for salaried staff and setting up compliant payroll systems require modest upfront investment, but can prevent catastrophic liabilities later.
The goal is not to eliminate all risk, she notes, but to understand which risks are mission‑critical and address them with intent. Compliance, in her view, is part of the product’s foundation: invisible to customers, but essential to keeping the company intact.
Targeting real risk: people, payroll and processes
A practical legal strategy for startups begins with mapping where risk is truly concentrated. For most young companies, that means focusing on workers first.
Shortz points to three recurring trouble spots:
- Classification and pay practices. Mislabeling employees as independent contractors or exempt staff can lead to back pay, penalties and group claims.
- Payroll and record‑keeping. Gaps in time‑tracking, meal and rest break policies, and wage statements are fertile ground for litigation in California.
- Policies that never caught up with growth. Startups often scale headcount while relying on outdated or improvised handbooks and HR processes.
In a disciplined legal strategy for startups, founders treat these issues as part of the operational build, not as “future legal problems.” Shortz says even basic reviews and standardized documentation can dramatically lower exposure while keeping costs manageable.
Building the right team under a strong legal strategy for startups
Many startups launch with teams built around loyalty: friends, family and early colleagues who step in to fill multiple roles. That trust can be an asset, but it can also make it harder to adjust the team as the company matures.
Shortz warns that keeping early employees in roles they have outgrown can stall growth and intensify risk. A thoughtful legal strategy for startups includes clear guardrails around hiring, promotion and separation.
Key tools include:
- Clear offer letters and updated handbooks that set expectations on duties, compensation, at‑will status and workplace standards.
- Employment agreements that spell out roles, reporting lines and termination terms.
- Structured leadership transitions with proper notice, documentation and, where appropriate, severance to reduce the likelihood of disputes.
In California, where noncompete clauses are banned and new notice rules apply to existing employees, Shortz advises companies to refresh confidentiality and invention assignment agreements regularly.
Strong trade secret practices—combined with narrowly tailored non‑solicitation clauses—remain lawful and effective. Within a modern legal strategy for startups, these measures help protect intellectual capital even when key people move on.
Compliance as a growth tool, not just paperwork
Founders are builders by instinct. Faced with a choice between launching a feature or updating a handbook, many choose the feature. But Shortz argues that a durable legal strategy for startups treats compliance as protection, not bureaucracy.
California’s rules on pay transparency, contractor classification, expense reimbursement and local ordinances are in constant motion. Each change can create hidden traps for companies that rely on outdated policies.
Rather than adding layers of manual oversight, Shortz recommends that startups integrate compliance into everyday workflows using cost‑effective tools:
- Automated payroll systems configured to current state and local rules
- HRIS platforms that standardize onboarding, record‑keeping and time‑off tracking
- Digital onboarding processes that ensure every worker signs the right agreements
In her view, these investments are less about checking boxes and more about cost control. A sound legal strategy for startups spends on prevention, because funding settlements and penalties later is almost always more expensive than building good systems from the start.
Scaling carefully: how legal strategy for startups shapes hiring and layoffs
Rapid scaling can be a point of pride for founders, but it can also be one of the most legally sensitive phases of growth. Shortz cautions that hurried hiring waves—or sudden layoffs—often test whether a legal strategy for startups is truly in place.
Increases or reductions in headcount can trigger obligations under California or federal WARN Acts, which govern large layoffs and facility closures. Missteps can lead to wage claims, penalties and reputational damage.
When a startup expands into new states or cities, each jurisdiction adds its own web of wage, leave and reporting laws. A centralized policy that works in one market may violate requirements in another.
Shortz says founders should coordinate closely with counsel before entering new regions or making major staffing changes. A measured legal strategy for startups looks at growth through the lens of infrastructure:
- Are payroll and HR systems configured for each location?
- Do local leave and overtime rules align with current policies?
- Are layoffs, if necessary, documented and communicated in ways that minimize legal risk?
In her experience, companies that grow with structure tend to outperform those that sprint ahead under pressure from investors. Speed without guardrails, she notes, is often the most expensive path.
A practical playbook for founder‑led companies
To make a legal strategy for startups tangible, Shortz lays out several recurring themes she believes apply across most young companies:
- Prioritize structure early. Incorporation, equity plans and core employment agreements should be vetted before major hires or fundraising milestones, not after.
- Document with purpose. Contracts, handbooks and policies form the operating system of the company; they are not mere paperwork.
- Monitor people metrics. Tracking turnover, pay equity, worker classification and remote‑work compliance can reveal emerging risks before they become crises.
- Refresh as you scale. Each funding round or new market entry should trigger a review of HR systems and key contracts.
- Audit periodically. Regular compliance checkups are, in her view, among the highest‑return uses of legal spend for founders.
These steps, collectively, define a living legal strategy for startups rather than a one‑time checklist.
Law as a strategic lever for founders
Shortz’s broader message is that legal planning should not be treated as a brake on innovation. Instead, she frames a thoughtful legal strategy for startups as a competitive advantage.
Companies that invest early in sound structures, clear documentation and compliant people practices are better positioned to raise capital, attract senior talent and withstand regulatory scrutiny. They also tend to avoid the sudden, draining disputes that can derail a young business just as it begins to scale.
For founders, especially in California’s complex environment, the takeaway is clear: legal work is not a cost to be minimized at all costs. It is part of the foundation that allows creativity, product development and market expansion to compound over time.
Startups that view law as a strategic lever—not a last‑minute hurdle—are more likely to build the kind of resilient, scalable companies investors want to back and employees want to join. And in that framework, a disciplined legal strategy for startups becomes as essential to growth as the product roadmap itself.
