There's a concept that's very popular in the programmer community: "technical debt". Over time, new code that's not properly documented, or not properly architected, can slowly weigh down the project. Ultimately, technical debt can weigh down the entire business, stalling features and preventing bugs from being fixed. As the term implies, the idea of technical debt is that it's a debt that must one day be paid for. Companies have a similar problem with legal debt.

What's Legal Debt?

Startups move fast and need to keep legal expenses low (because they have limited resources). And all sizes of company suffer from a common impression that the longer a document is, the better it is from a legal point of view. Many lawyers use very long template documents, which they usually didn't write in the first place. This may be the cheapest and best option for many clients, and it may even look more "legal" than a properly drafted version, but over time legal debt accrues.

Long agreements are difficult to read later, when it comes to figuring out whether a contract has been completed or what needs to be done to appoint a new board member. It's not uncommon for companies to have hundreds of pages of corporate documentation after a few investment rounds, all of which need to be consulted to figure out whether an action is allowed or how it should be done. This is legal debt in that there's an additional cost each time a step needs to be taken because a lawyer (or skilled reader) needs to check the already agreed to legal documents. The use of overly long templates and the widespread lack of documentation in law creates additional future costs that are often not accounted for.

Fixing Legal Debt

It can be very challenging to fix legal debt because contracts can't be modified or because shareholders won't agree to changing the rules that govern their ownership of the company.

The best way to fix legal debt is to prevent it from happening in the first place. This can be said of many things, but it's especially true for legal debt because it's the kind of debt that lawyers know about but clients are often not aware of. Avoiding legal debt requires extra work, and it requires legal counsel to be more attentive.

Shorter legal agreements is one way to reduce legal debt. This can often result in better agreements because it means writing specific agreements for the specific facts, rather than applying a past precedent to a new problem. Shorter legal documents may require new templates, or may require more drafting to be done. Both of these can be be more costly in the short term, so there's a balance to be struck between keeping costs down now and avoiding legal debt later. This may also create new costs if lawyers omit important clauses. It's a false economy to draft a simpler agreement that misses key risks.

Clients can help avoid legal debt by pushing back against partners who insist on long, complicated, and sometimes downright poorly-drafted agreements. Concise agreements that cover the negotiated subject matter may better reflect the parties' intentions. They can also save legal review time on both sides, which speeds up deal execution.

Legal debt can also be avoided by not prematurely entering into shareholders' agreements or other charter-like documents for a company.

There's no easy solution to legal debt. Like technical debt, it piles up for good reasons. But it's important to recognize it for what it is, and seek to reduce it where that can reasonably be done.