The Tech Law Ecosystem vs. BigLaw; Except in Silicon Valley

TLDR? Have SoundGecko read it to you. Seriously the coolest app I’ve found in a while. The synthesized British voice is the best. 

Question: Why is it that, despite being the epicenter of championing innovative business models, dynamic markets, and the disruption of bloated institutions, Silicon Valley remains dominated by a handful of very large, expensive law firms built on century-old delivery models?

The Blunt Answer: History and Bribery… err, “Sponsorships.” Those large firms have dedicated biz dev people whose job is to write checks to incubators, accelerators and other players with heavy influence on the “pipeline.”  Let’s not pretend that those checks don’t influence who gets referrals.

And those same firms deliberately seek out VCs (not just companies) as clients, who tacitly understand that, in exchange for the firms’ not pushing too hard on VC deals (when they represent companies), the VCs are supposed to act deeply concerned when they don’t see one of the good ol’ firms at the table; even if the lawyer they’re poo-pooing has impeccable credentials, experience, and “knows her sh**.” Sound incestuous? It is. See Don’t Use Your Lead Investor’s Lawyers.

It’s well known among the tech law community that no tech ecosystem –not Austin, Seattle, Boston, etc. – takes law firm “brand obsession” to levels anywhere near those of Silicon Valley, in large part for the above reasons.

History

The full answer is of course a bit more complicated. See: When the A-Lawyers Break Free: BigLaw 2.0.  Before the Cloud and SaaS, big firms truly were necessary to deliver the tier of legal counsel that top tech companies needed, and Silicon Valley’s early growth period occurred largely in that era.  Naturally at some point technology changes things, and the rules of the game shift.  I’ve staked my career on the view that this shift has occurred, and is accelerating.  I left a large, full service firm designed around the traditional “one stop law shop” model for a smaller firm that leverages technology and an ecosystem of top solo lawyers, boutique firms, and other services to replicate “full service” in a much more efficient and flexible way.

Of course, many solo lawyers and small firms have made their own bone-headed mistakes in this saga, pretending that putting on jeans, buying a Macbook, and dropping their rates makes them innovative lawyers. See Your Startups Legal Bill: The Printer & the Cartridge.  A vibrant ecosystem is very different from a collection of cottage industry practitioners who are stuck in the last decade.

A Summary of Why The Ecosystem is Emerging (Outside of Silicon Valley)

  • There have always been second and third tier small firms that (i) picked up clients top firms were not interested in, and (ii) employed lawyers who either never met the criteria of top firms, or dropped out of those firms because they were fine accepting less interesting work and lower compensation for a more easy-going life.  An alternative to going in-house, these lawyers call themselves “outsourced general counsel.”
  • Top, well-funded clients that reached scale (the kind that seek out and are willing to pay for top lawyers) inevitably required a large set of legal specialties: tax, executive comp, IP, tech transactions, trademarks, etc. to handle all of their legal needs.
  • Lacking an affordable, third-party collaboration infrastructure (like today’s Cloud/SaaS tools) to coordinate all of these different lawyers, keeping everyone (dozens of different specialties) under the same roof to share the high fixed overhead costs was essential to getting large deals done smoothly and as efficiently (for the time) as possible.
  • Hence, top paying clients gravitated to large firms that could serve them, and as long as those large firms paid the most, top lawyers (in all specialties) were willing to accept the astronomical overhead, convoluted structure, and inefficiency of their large employers.
  • But now, virtually every proprietary resource that large firms once had exclusivity on is available as a SaaS tool or outsourced service, along with very affordable and extremely effective collaboration tools.
  • Therefore, those top lawyers, once locked into large firms, are realizing that as long as they can wrestle away top clients from BigLaw, they no longer have to put up with taking home only a small percentage of their billings.  They can drop their rates significantly, take advantage of their small footprint to optimize for their practice area, and take home at least as much, and often much more, as they did in large firms.  A win-win for lawyer and client – but a loss for “The Beast.”
  • End-Result: A growing ecosystem of significantly smaller, more flexible law firms and solo lawyers that (i) are at the top of their field, well compensated, and have much better quality of life, and (ii) by collaborating with one another, replicate BigLaw’s “full service,” without its soul-sucking bureaucracy.

Austin’s “Cut the BS” Culture: The Ecosystem Grows

In my opinion and based on observations from interacting with players in various ecosystems, Austin’s legal market is at the forefront of this emerging lawyer ecosystem.  Here the quality of attorneys outside of BigLaw – multi-specialty small firms, single-specialty boutiques, and even solos  – is extremely high and increasing, because the client base here isn’t anywhere near as brand-obsessed as in Silicon Valley.  We still have our own cronyism, but our strong “be authentic” cultural bent helps keep it in check.

At MEMN, we connect clients on a regular basis with experienced, top-tier corporate, tax, trademark, litigation, executive comp., patent, etc. attorneys outside of BigLaw, all with better credentials than the lawyers BigLaw throws to startups, and at rates often below inexperienced junior lawyers at large firms.  And, as far as I know, none of us took a pay-cut in leaving BigLaw.  I am fully convinced that this ecosystem will continue to gain traction, and we have every intention of pushing that traction outside of the Texas market, including connecting with firms in other markets doing the same.

How BigLaw Will Respond

Of course BigLaw is responding, but it’s important to keep in mind that “BigLaw” is a set of many different players, each with their own perspectives on the old model.  The big winners of the traditional law firm model were (i) the many layers of in-house administration and management needed to coordinate dozens of specialties and hundreds of different kinds of lawyers, and (ii) the power rain-makers sitting atop the pyramid extracting a significant amount of billings from lawyers doing the work, including all the specialists. These constituencies will absolutely do everything they can to protect the old model.

The main marketing message that will emerge from these groups will be one of “integration.”  They will argue that keeping everyone under a single structure provides benefits that make up for the overhead and inertia. In other words, they’ll try to portray themselves as the “Apple” of law.  Expensive and huge, but “worth it.” I love my iPhone 6.

Without getting stuck on this topic because this post is long enough, anyone who thinks about it will be skeptical of an analogy between software-hardware integration and the ‘integration’ of lawyers in dozens of different specialties, especially as technology continues to erode the friction in cross-firm collaboration.  A better analogy would be something like the Mayo Clinic, but of course that would mean that BigLaw must accept that only the absolutely most complex transactions (think billion-dollar, multi-national mergers) truly require its “integration” – and The Ecosystem would be more than happy to unburden BigLaw (which would then not be nearly so big) of the other 99.9% of the market.

While management and top rain-makers will work to protect The Beast, the rest of the BigLaw pyramid will, over time, come to realize that The Ecosystem is more of a liberator than a competitive threat.  Finally, a way to practice your specialty much more effectively, do interesting work, get paid well for your talent, and not have the significant majority sucked up to pay for “stuff” that doesn’t enhance your work.  Much like how technology has created an explosion of interesting, well-paying work outside of large organizations in many “knowledge worker” industries, The Ecosystem is simply an extension of that process to law.

A Message to BigLawyers

Ask yourself: if you’re billing $600/hr at a large firm and have developed strong relationships with clients, what will those clients say if you tell them you can do the exact same work for them, but charge $400/hr instead – the only real change being the signature block on your e-mails? Certainly The Beast, including the deal lawyer who ‘controls’ the relationship, will do everything it can to push the work to another $600/hr attorney in the firm. But what will the Client say?

Viewed this way, BigLaw today can be accurately described as a mechanism by which rain-makers who (lower-case c) “control” client relationships force the “labor” lawyers to stay in one large firm, accepting only a small percentage of the value they produce in exchange for “deal flow.” And by having the talent pool controlled in this way, clients who need top lawyers have to pay the higher rates to feed The Beast and the rainmakers.  The Ecosystem, and the fact that no one really controls clients (who won’t be forced to pay $600/hr when they can find the same lawyer for $400), throws a wrench in this structure.

A Message to Lawyers Building The Ecosystem

  • Collaborate;
  • Optimize;
  • Don’t fall back on generalism, but resist artisanal lawyering;
  • And absolutely do not underestimate ever the importance of branding and marketing.

Start talking to each other and sharing work.  Being solo has many inefficiencies, and for many specialties the “optimal” structure will likely be more focused firms that effectively leverage their institutional knowledge with targeted, efficient tools and processes.

Take advantage of your small footprint to experiment and iterate on process, technology, pricing, etc. that was never possible under a large firm – you are a startup.  Resist the urge to price yourself as a generalist who does boring, cheap work, but also don’t design your firm in a way that is so “high-touch, high-end” that it can’t scale.  If you’ve hit on something that works, scale it and liberate more BigLawyers.

And absolutely never, ever pretend that all it takes to succeed is to simply “be a good lawyer.”  Clients care about brand and prestige, including the deal lawyers who connect you to clients. No one can find you if you don’t know the slightest thing about marketing yourself. Learn.

The Ecosystem will be built by the most entrepreneurial of BigLaw, including those who are confident enough in their personal brand to break free from The Beast. Once a path has been laid, the more timid will follow.

And a Message to the Gatekeepers

So you say that you’re all about disruption and transparent markets, yet you continue to hand out referrals to firms that write you checks and send attractive blondes offering steak dinners.  I’m not mad at you.  I know how the game works.  Upstanding doctors fall prey all the time to Big Pharma’s biz dev tactics, so I totally understand your inability to resist being a hypocritical little sh**.

Thankfully, every ecosystem (Austin included) has enough gatekeepers who believe in true meritocracy.  The Ecosystem is growing and will continue to grow. Companies will find a much more vibrant, dynamic legal market.  Top lawyers will find interesting, well-paying work in non-soul-sucking settings, and the most innovative will be rewarded with scale.  I’m not pretending to be Mother Theresa and absolutely have an economic dog in this fight.  But knowing all the benefits that accrue both to startups and to lawyers (my people) from it, supporting The Ecosystem is absolutely part of my mission.

Taking Non-Accredited Money – Survival.

Imagine you’re walking through a desert. You haven’t had water for days, it’s 100 degrees, and you know if you don’t get a drink soon your time here is done.  Then you come across a mucky pool of stagnant water that is almost certainly infested with some kind of bacteria. What do you do? Pass on it, for fear of getting sick? Sh** no. You get yourself a drink.  Rule #1: survive.  

This is the decision many startups face when questioning whether they should accept money from “non-accredited investors.”  It also highlights how ridiculous it is for startup lawyers to tell founders that non-accredited money is never worth taking.  They clearly haven’t stepped down from their mahogany pedestal and planted their feet on the same ground as their clients.  Being the product of low-income immigrants myself, and seeing how many successful startups rely on pre-angel funding (a lot), the “if you don’t have rich friends and family, don’t bother” mindset really rubs me the wrong way.

I’m not going to get into the background of what accredited v. non-accredited investors are, or why you shouldn’t take their money.  Most likely you’ve already heard it repeated in 5 different ways.  Professional investors don’t like them, there are onerous disclosure obligations, they can prevent you from raising larger amounts of money, etc. etc. Let’s just take it as a given. Taking non-accredited money is a bad idea. We all know it is. But you know what’s a worse idea? Shutting down when there’s life-giving capital on the table.

Texas is not California.

Unlike startups raised in the land of milk and honey (Silicon Valley), where many angels really will fund an idea, a true MVP, or something with no revenue, in Texas (including Austin) it generally takes a lot of work and some traction (with zeros) to get to a point where angels will even consider writing you a check.  And while it’s true that bootstrapping should definitely be considered, it simply isn’t feasible for a lot of business models; unless you’ve got some deep pockets.  For that reason, the “friends and family” round – $25K, $50K, $100K, whatever, just enough to build something angels actually find attractive – is often the difference between startups that scale, and those that never get off the ground. And statistically speaking, most people’s friends and family are non-accredited.

How do I safely take non-accredited money?

As a startup that knows professional venture capital will be essential to scaling, taking non-accredited money is not “safe” in an absolute sense.  No matter how you structure it, having non-accreds on your cap table/balance sheet will raise questions and diligence from future investors.  The real question should then be, given that whatever consequence is better than shutting down, how do I raise non-accredited money as safely as possible.  Here are some principles for taking non-accredited money, while minimizing the chances that it’ll prevent professional funding:

  • Get help.  Work with an experienced startup lawyer to ensure that you comply with relevant regulations as closely as possibleand within budget, for the financing.  A misstep from a legal standpoint could create an unfixable problem down the road.
  • Limit the group.  Take money only from people you consider true friends and family who can afford to lose all of the money they give you, and who understand that losing the money is a real possibility. This means people who care about you, want you to succeed, and absolutely do not view this money as a lottery ticket to becoming rich. This is not crowdfunding.
  • Lenders; Not Investors.  View the non-accredited friends and family as lenders, not investors.  Make it crystal clear to everyone that their money is a loan, not an investment.  It will not convert into stock, and hence if you hit it big, they will not get a piece of all the upside.  Post-IPO, you can offer free rides in your Bentley and shower them with benjamins. Just don’t offer them stock today. If the company succeeds, the money will be paid back. Offer them a very high interest rate, and work with your lawyer to structure a non-convertible promissory note.  Anyone who will write you a check for $5,000, knowing that it is extremely high risk, and that there’s no chance of a 100x upside, must truly be in it just to help you succeed.

Important sidenote: If you have people who are willing to back you in the above way, you are rich – in a way that many people aren’t. Other people leverage their affluence. Leverage yours.

  • Long Maturity; Subordinated.  Set the repayment terms of the non-convertible note so that the debt does not become “due” until the Company has raised a significant amount of money, maybe $2 million+, and that the debt will be subordinated to all future debt issued to professional angel (accredited) investors.
    • The goal here is to allay any fear from angel investors that their money will be used to repay your non-accreds, instead of funding growth.  The money is not payable until a true VC round, and their debt is always senior to the non-accred debt.

Does following the above principles mean that having non-accredited money in your company won’t blow up a possible financing? No, it doesn’t.  But, in my opinion, it will significantly de-risk things for you.  When VCs or angels ask about your non-accreds, you can make it clear to them that (i) everyone knows that they are being paid back, will never be equity holders, and are subordinated to all other investors, and (ii) they are a highly vetted group of true friends/family who will be cooperative with whatever helps the founders succeed. Once they are paid back, they are a non-issue.

To be clear, I am not promoting the funding of startups with non-accredited money in a broad sense.  I tell founders the exact same things other experienced startup lawyers do: it’s a bad idea, it creates more disclosure obligations, and some investors might not touch you.  If you can avoid it, do so. But being alive yet uncomfortable is always preferable to being dead.  And my observation is that, at least in Texas, a F&F round is often a prerequisite for progressing far enough to where angels find you investable. Drink the mucky water, and live to fight another day.

 

Your Startup’s Legal Bill: The Printer & The Cartridge

A client of mine recently used an analogy to explain why he dropped another small, local law firm for MEMN: their printer is cheap, but their cartridges are really expensive.  That statement explains perfectly why many founders, because of their lack of understanding of basic law firm economics, can get really screwed by firms touting their low hourly rates as evidence of their “efficiency.” The core problem is this:

  • In the short term, your legal bill is a two-part equation: hourly rate * time spent. Naturally, that means that a lawyer billing $225/hr can generate a substantially larger bill than a lawyer billing $375/hr if the “cheaper” lawyer takes 3x the time to do the same task as the more “expensive” one.
  • In the long-term, “time spent” is itself a two-part equation: time spent to initially complete the task + time spent fixing mistakes (if the mistake is even fixable).  This should come to no surprise to a CEO who’s spent time interviewing and hiring developers. One developer wants a $60K salary, and the other wants $100k. Is the $60k one a bargain, or overpriced sh**?

The above two points should help make the analogy between printers and lawyers clearer:  a printer can seem like a great deal because the manufacturer locked you in with a low cost of adoption, but you should really pay attention to how much the cartridges cost, and how many you’ll have to use – and whether it flat out sucks. Because that’s where the real expenses are. It’s the exact same thing with lawyers: an exceptionally low hourly rate can seem like a great deal, but how many hours will this ‘bargain’ rate be multiplied by? And what exactly are you getting for that rate?

The “Hourly Rate” Issue

As mentioned above, it is absolutely the case that a lawyer billing $400/hr can produce a dramatically lower legal bill than a lawyer billing $225/hr; meaning that, under the right circumstances, you should be willing to pay more if the value is truly there.  But are there circumstances in which a lower rate does not mean lower quality? Yes, as I discussed in “When the A-Lawyers Break Free: BigLaw 2.0” a lot of clients are shocked to find out that when an attorney at a large firm bills them $575/hr, only maybe 20% (if she’s lucky) of that rate actually makes it to the lawyer (the talent). The rest goes to pay for all the background infrastructure necessary to support a firm full of dozens of different practice groups, offices, summer intern programs, etc.

Thanks to new technology and business models now viable because of that technology, a new breed of law firm is emerging that (unlike their predecessors who attracted attorneys by offering jeans, MacBooks, and a more relaxed atmosphere at the cost of lower compensation) can compensate their attorneys on par with and in many cases better than larger firms.  And those small, focused firms have dramatically lower overhead costs than larger firms. The end result is that, even with significantly lower hourly rates, the attorneys are still highly compensated.  Again, in law as in the world of developers, you get the talent you pay for.

Nutshell: make sure your hourly rate pays for legal talent, not an outdated delivery model.

The “Time Spent” Issue: The Problem with Generalists and Solo Lawyers

Moving to the second part of the equation: what allows a lawyer or law firm to do something more quickly, and with fewer mistakes, than another firm?  The first and most obvious answer is of course: better lawyers (and paralegals). No shocker there. Better, more experienced doctors work more efficiently and with fewer mistakes than crappier ones.  But there’s actually more nuance here than meets the eye.

Focus

You’ve developed a strange rash on your arm, and you need someone to help you treat it. Who do you suppose will be able to get it done more efficiently and effectively – a cardiologist or a dermatologist? It seems like a stupid question, but many people don’t understand the concept of legal specialization.  Focused repetition leads to specialized domain knowledge, which leads to higher quality and efficiency.

There are an endless number of business lawyers, corporate lawyers, even IP lawyers, running around touting themselves as startup lawyers. The reality is that they’ve spent 95% of their careers doing absolutely nothing related to the venture-backed startup space, but because they either stayed at a holiday inn express or because they know someone connected to startups, they’ve started to dabble in the area. How complicated could it really be? I’ll keep my answer short: get ready to be schooled.

Process and Technology

Being a generalist forces you to reinvent the wheel when specialists have already-developed forms, processes, and technology in place to minimize time burn.  A new client of MEMN recently said a prior firm charged $1700 to draft a form contract for hiring developers (which, btw, was garbage).  The startup lawyers who just read that are laughing because they know that a client who asks them for that kind of document gets billed literally 5% of that, if anything at all.

Process and technology are at the core of why the hourly rate of a law firm or lawyer says very little about what you’ll end up paying.  I’ve seen solo lawyers and boutique firms talk about “overhead” as if it’s something to be absolutely kept to a minimum at all costs.  The problem, of course, is that if you don’t invest in technology, knowledge management resources, etc., it is 100% certain that you are going to be incredibly slow and inefficient compared to those firms who do, even if those firms have higher hourly rates.  This is the core problem with solo lawyers.  Yes, their hourly rate is low, but they practice like it’s 1995. And that’s expensive.

While we’ve done everything we can at MEMN to cut out fat and bloat, I have zero qualms about investing in technology that will enhance quality and efficiency. That’s not “overhead.” It’s called running a 21st-century business.  We also have an amazing espresso machine. Treat your talent well.

Conclusion: When you hire talent for your own startup, you don’t immediately go with the person asking for the lowest hourly rate. If you do, you’re a moron. Remember that lawyers and law firms are like printers (and developers).  What looks cheap could end up being the most expensive mistake of your life.

When the A-Lawyers Break Free: BigLaw 2.0

Nutshell: The world of transactional tech law used to be divided into A-Player lawyers earning the gold at large firms and everyone else making a decent living at second-tier small firms. SaaS killed that world, and small can now mean better, faster, and more lucrative; which means A-Lawyers are breaking free.

No one who operates in the startup space needs to be told that bigger does not always mean better.  In fact, the opposite is often the case. Being large often makes you slower, more bureaucratic, and inefficient. Just try getting a piece of new technology adopted at a major law firm, or getting a secretary to learn that technology.  I’ve been there.

Big Was Better

If bigger leads to better performance, there must be something about the nature of the product or service in question that requires a large organization.  In law, that “something” was historically (i) expensive, proprietary resources to properly service clients (barriers to entry), (ii) the need for collaboration among multiple specialties, and (iii) high amounts of friction in effecting that collaboration.

Before the days of SaaS and Secure Cloud Storage/Collaboration, top-tier transactional law required at a minimum (i) a law library, (ii) internal word processing, (iii) teams of administrative support and attorneys, and (iv) dozens of legal specialties under the same roof.  Without that, you would be slow and inefficient.  In that world, choosing a small firm usually meant, as a fact, that you were dropping down a tier in quality.

And then things changed. Your “library” is now a subscription SaaS service. Word processing you can outsource by the hour. Same thing for admin support.  People working remotely often collaborate more easily than people working within the same law office, if they use the right tools. When BigLawyers step back from their billing timer and realize this, two very important thoughts come to mind:

  • Why are you all here? – Why do we (all kinds of different lawyers working in different areas that require different processes) need to still work under the same structure? I’m tired of having to justify to a bunch of litigators or IP lawyers that some software that I NEED for MY practice needs to be put into the budget. Why can’t I come to work in jeans if my clients don’t care? Why do I even have to come in to work today? All I do is stay in my office anyway.
  • Where the f*** do all my billings go? I bill $600 an hour. I take home like 20% of that. Wait, you mean all of this obsolete, bloated, bureaucratic infrastructure is the reason 80% of what my clients pay disappears? They hired me, not your brand. Why am I here?

Focus Always Wins

Every variable that once made the large, full service law firm necessary and optimal has been turned on its head by the web, SaaS, and the cloud. Now, a corporate lawyer at a small firm can staff a deal just as quickly, if not more quickly, utilizing a network of smaller, more focused, more efficient and (yes) better lawyers and law firms. It doesn’t take a Harvard MBA to understand why a top trademark lawyer operating out of a trademark boutique that does nothing but trademarks is going to be vastly superior at (guess what?) trademarks than a lawyer who works alongside dozens of other types of lawyers. Focus trumps being a generalist; and that applies equally to lawyers and law firms. 

But the reality of how SaaS has changed the landscape isn’t exactly news, at least not to people who follow these topics. Why then has it still seemed as if large firms have a lock on the best lawyers?

Money

In every profession, the best expect to be paid according to their talent. This is not rocket science, nor is it surprising. A-Lawyers have stayed in BigLaw for one very simple reason: it paid the most. Notice the past tense.  When big really did mean better, the better clients went big, and that means big paid more.

But it was only a matter of time that enough top lawyers started asking themselves “where the f*** do my billings go?” and realized that BigLaw’s overhead and bloat leaves an enormous amount of room to cut out fat, charge less, and still take home WAY more.  Yes, my friends slaving away in BigLaw trying to hit your 2000-2150 billables quota so you can earn that nice little bonus amounting to 3% of your billings, the cat’s out of the bag. Many of us at small firms earn more than you do. A lot more. And we do it with better technology, a more flexible schedule, and often working from wherever we want. All while our clients pay a lot less. Who, long-term, do you think is going to win at attracting talent?

You know what’s better than profits-per-partner? Profits in your wallet.

Networked Law: BigLaw 2.0

Examples of specialists we (corporate lawyers at a small firm) use to staff deals (i) a former silicon valley BigLaw tech transactions partner (head of his group) now operating a solo practice, (ii) a T100 in Texas trademark lawyer operating out of a trademark boutique, (iii) one of the country’s leading open source specialists operating a solo practice, and (iv) a veteran venture capital paralegal working virtually from Palo Alto. Everyone bills 40-60% less on an hourly basis than they would at a major law firm, which doesn’t even account for their ability to optimize pricing, process, technology, and staffing for their practice area. And, yes, everyone takes home more than they would in BigLaw.

You know what that’s called? D-i-s-r-u-p-t-i-o-n.  I don’t use that word lightly. This is not a piece of software that large firms can ultimately pay a consultant to help them adopt, but a fundamental restructuring of how top-tier transactional law operates.

The Future

Small firms are not just for the mickey mouse club anymore. The A-Lawyers are asking “Why are you all here?” and “Where the f*** do all my billings go?” and are doing something about it. Focused, faster, efficient, networked, and now with much bigger paychecks. Small law has been around for a while. But BigLaw 2.0 is just beginning to ramp up. As more A-Lawyers set themselves free, most of BigLaw will have to face the reality that all the branding in the world can’t save a bloated, overpriced, and now completely unnecessary delivery model.

p.s. We’re hiring.

Contracts are for the Divorce; Not the Honeymoon.

Principles:

  1. Small holes have a way of widening when you push a few zeros through them; and
  2. When a contract is being negotiated, founders are focused on the marriage. Their lawyer is (or should be) focused on the divorce.

Founders, for personality reasons, often pride themselves on being “closers” and able to accept levels of risk that others aren’t willing to tolerate.  They’re “upside” people. That’s generally a great thing, but seasoned negotiators know how to play off that tendency to their advantage.  This happens all the time:

Background: A draft’s been delivered and negotiated back and forth a bit. Then, right before signing, the other side’s counsel drops in a provision that they say should be uncontroversial – and casually includes a signed signature page, ready to close.

Company Counsel: (speaking to Founder) This provision is problematic.  It could lead to X, Y, or Z. I’ve seen it happen before.

Founder: (speaking to lawyer) Ugh, seriously? I just want to close this deal.

:: after discussion, Founder calls Investor to discuss ::

Investor: Your lawyer is being paranoid. There’s no way we’d do that. We’re all aligned here.

Founder: Yeah, you’re right. Damn lawyers.

:: Docs get signed ::

When the Company becomes more valuable, X, Y, or Z ends up happening.

Founder: F***ing S****!@#

Paranoid? No, Experienced. 

Why do good startup lawyers see red flags where founders just see corner cases holding up deals? The answer is simple, and it’s not risk-tolerance. It’s volume.  This is often the founders’  first VC deal, or at least they’ve never dealt with a fall-out with investors or business partners.  This likely isn’t even the lawyer’s 50th rodeo. The lawyer knows that contracts are drafted during the honeymoon, but enforced during the divorce. And holes in contracts have a way of getting bigger when there’s 7+ figures ($) waiting to be pushed through them.

Granted, there are a lot of lawyers who, because of the billable hour (or their own personality issues), do in fact make mountains out of molehills.  See ‘When it’s time for your startup lawyer to shut up.‘   But that doesn’t mean that a good lawyer will simply gloss over all issues to keep the business parties happy. Founders need to be prepared when experienced negotiators push the “let’s just get this closed, we’re all aligned here” button to discredit a lawyer’s advice. It’s an old-school tactic.

Good Cop, Bad Cop.

So my advice to founders stuck in this scenario is to go with another oldie-but-goodie: good cop, bad cop. In other words, ask, but blame your lawyer.  It goes something like this:

Investor: Your lawyer is being paranoid. There’s no way we’d do that. We’re all aligned here. (replay)

Founder: Yeah, you’re right. He is paranoid.  I know you’d never do X, Y, or Z. Lawyers are such a pain in the ass. But can we just make the change so that we don’t have to discuss things with him again?  We’re ready to close if you are.

Sidenote: I’ve found joint lawyer bashing to be an essential part of the founder-investor bonding experienceDon’t miss out.

Deal lawyers don’t mind being the bad cop at all. They’re used to it. It works.  Well, only if they’re actually your lawyer. See ‘Don’t Use Your Lead Investor’s Lawyers.’ You preserve your image as a closer, but still avoid the landmine pointed out by your “damn lawyer.”

If you don’t trust your lawyer, you should get a new one. And if you say you trust him, you should pay attention when he says that there is a serious problem in a contract.  We’re not all risk-averse pedants. We’ve just seen enough divorces to know what “we’re all aligned here” really means.