While I’ve devoted the majority of this blog to providing free resources on startup law and finance to startup entrepreneurs, I occasionally take the time to write about the economics of law firms and why entrepreneurs would be wise to understand it at a high-level. This post will start out with a historical summary of positions I’ve taken on the subject, with links to applicable posts, and then branch into my decision to move my own practice and clients to a new type of firm – not BigLaw, but not quite traditional BoutiqueLaw.
- The Economic Deflation of Startup Law – Early stage startup law, much to the benefit of entrepreneurs and top-tier lawyers, has become increasingly automated and commoditized. The end result is a form of “freemium” law practice, where (i) entrepreneurs can obtain quality representation for very little money, and (ii) quality lawyers can, thanks to automation, engage entrepreneurs early on without having to discount fees, defer, or any of the other old-school ways of obscuring the cost of legal services. Low-quality or narrowly focused “cottage” lawyers will struggle because their bread-and-butter work will have little to no margin, while higher-tier lawyers will thrive on their pipeline of later-stage, funded clients, which cross-subsidize early-stage work.
- In Startup Law, Big Can Be Beautiful - Breadth and scalability are absolutely essential to the proper representation of a startup, and large firms have historically been where to get that.
- Integrated Startup Law – Specialists Matter – Technology startups do not need and should not want unscalable, narrow “small business” legal representation. By their nature, they will need a broad set of legal specialties – Tax, Labor, IP, Regulatory, etc. – along the course of their business cycle, and failing to choose a firm at the beginning that can efficiently coordinate all those specialists will become a big problem. The analogy to healthcare is important. Also see – The Cost of “Staging” Your Startup Lawyers.
- The Ad-Hoc Law Firm – The ability of networks of small law firms to coordinate efficiently will allow for (i) the replication of BigLaw’s breadth and experience, without its overhead and inflexibility, and (ii) the scalability that boutique firms alone can’t provide.
Nutshell Summary: BigLaw offers experience and breadth, but is largely over-priced and inflexible. Boutiques are cheaper, but often narrow and incapable of truly scaling, and their work is being commoditized.
So in my own career, I started out at a big firm with a group of fantastic lawyers whom any startup would be well-served by, but I increasingly butted heads against the firm’s (separating the lawyers from the institution is important) policies, including (i) IT policies with respect to new technology that needed to be adopted, (ii) billing policies around how to charge startup clients, and (iii) personnel that simply didn’t want to do things differently and weren’t incentivized to care anyway.
Your Boutique Can’t Scale
I watched the market, and had some overtures from boutiques in the area, but every time I came away underwhelmed:
- Lower Pay, Lower Lawyers - Often the boutiques had very low rates, but their lawyers made a lot less income. True innovation is about doing more for less while earning more – it should be win-win economically on both the client and the lawyer’s end. That’s why the most disruptive startups aren’t in it to make less money, they’re in it to make more money, but on a model that makes the end-price lower by cutting out fat, not bone. If your firm is built on paying lawyers less – guess what? You’re just going to attract lower-quality, less ambitious lawyers. Surprise, surprise. Anyone can lower their price tag.
- Where are the partners? - Many firms were effectively run by senior “associates” (attorneys from big firms who never built the experience or client base to become partners) who started their own firms and donned the partner label. Early-stage clients might not care about this because their interactions are usually with associates anyway, but they should if they intend to become later-stage clients. A lack of true partner experience within a firm can mean (i) your late-stage startup is effectively funding on-the-job training, and (ii) that training can lead to mistakes. A scalable firm needs true partners that have played the end-game and won, otherwise top clients will have to leave.
- Where are the specialists? – No one had a good answer for how to efficiently provide full service legal representation to clients. Asking them to engage a dozen firms on a piece-meal basis and manage a dozen different bills is not the right answer.
- Luddites – If you think a lot of law firms haven’t joined the 20th century with respect to technology, check out some boutique law firms. A lower rate is often used as an excuse for being inefficient and taking longer to do something. Smart clients realize that their legal bill is a two-part equation: rate * time spent. And if their lawyer is taking forever to do basic stuff, the lower rate is a mirage. Startup law is for technologists, not cottage industry practitioners.
So why did I move my practice to a smaller firm (Miller Egan)? Addressing the above issues in order:
- The compensation structure is designed to attract top talent lawyers, not people who are looking for semi-retirement.
- The firm is built and run by partners who were partners at the country’s leading law firms, but got fed up with the bureaucracy and inflexibility. This means the firm can truly handle, and investors know they can handle, scaled, late-stage clients.
- The firm has a well-developed network and process for coordinating specialist counsel for clients when needed, so clients can get the full service representation they’d receive at a big firm, but under a far more efficient model.
- Technology? I’m CTO. #Howyalikedemapples
The above post should be read as a clear message to both traditional BigLaw and traditional BoutiqueLaw. Big can be important, and boutique can be cheap, but small and scalable may eventually eat your lunch. And let me tell you, that lunch is delicious.