Startup Lawyer’s Poker: Fee Deferrals

Nutshell: Startup-focused law firms with well-developed client bases are able and willing to bet on (the 1% of) startups by deferring their fees, but founders should understand what they’re signing up for when agreeing to those arrangements.  In many cases, fee deferrals are just clever ways for firms to “lock in” already de-risked founders and have them ignore massively marked-up price tags on legal services.  Think before you drink the kool-aid. 

It’s no secret that one of the largest expenses that early-stage startups face from their very early days is the cost of hiring competent lawyers. The reason for this is simple: “cloud” economics don’t apply to people. Deploying a SaaS startup has become way cheaper than it was 10 years ago because of all the “X as a Service” that founders can leverage instead of having to invest significant amounts of capital on in-house technology.  But, unsurprisingly, developers still aren’t cheap. Being a good developer requires years of training and unique talent, and being human requires paying for stuff.  Good developers cost real money.  Good lawyers, like good doctors, cost real money.  Anyone suggesting otherwise is attempting to defy the laws of physics.

All that being said, readers of SHL know that there is a lot that smart founders can do to avoid over-paying for legal services:

  • Are you just one or two founders working on an MVP? – Use Clerky and/or, if you need a lawyer, hire a top-tier boutique firm that specializes in early-stage tech, and be careful with generalist solo lawyers.
  • Do you need specialist lawyers for things like trademarks, patents, or other specialty counsel? – Resist the firms that VCs try to force you to use, which are usually very large firms that over-charge clients by $200-300/hr in order to fund their pyramid structures, outdated bureaucracies, and bribes sponsorships of accelerators for funneling companies through them. If you think an extra $200 for every single lawyer hour won’t have a material impact on your runway, do the math again.

If I wanted to get cash-strapped founders to completely ignore the real cost of startup legal services and get them to pay my 2-3x inflated price tags, what would be a great way to accomplish that? Answer: defer my fees until they are less strapped for cash. 

PayDay Loan Meets No-Shop Clause

For many law firms, the fully transparent bargain in a fee deferral can be summed up as follows:

  • Assuming your bill doesn’t go above $X (often something like $25-50K), you don’t have to pay us anything for at least 6-12 months, or until you raise $Y (often a range of $100K-$500K).
  • In exchange, please ignore the fact that everything we charge you will be massively marked up. And we’d also like 1% of your common stock.
  • Also, don’t think about using other law firms for anything while our fees are being deferred - we can’t afford our deferrals if every client goes and hires those lawyers that left our firm 2 years ago and now work for $250/hr less than what we’re charging you for less experienced lawyers. If you do, the bill needs to get paid. This isn’t UNICEF.  The Life Time Value (LTV) isn’t there if all you’re using us for is a fixed-fee formation package.

If a major law firm has made this kind of offer to you, it’s likely because you’ve signaled to them that this bargain is a good deal on their end. Usually, that means you’ve been accepted into a major accelerator, received interest from an investor, or have otherwise been “vetted.” You’ve been de-risked. Smart founders who are lucky to find themselves in this position should obviously ask: if I’m de-risked, is this actually a good deal for my startup?

Be Smarter About It

In startup law, successful late-stage clients cross-subsidize early-stage clients that can’t yet pay their bills. This economic reality ensures that, as long as small firms are stuck working with B-players, the firms with A-clients will always be able to win more A-clients by offering them fee deferrals that the smaller firms simply can’t match.  Startups that don’t want to be bankrupted by lawyers, yet also don’t want to be locked down by gilded handcuffs, really then have two options:

  • Find the efficient A-lawyers, and budget for their services. – Well run focused firms can be dramatically cheaper on early-stage services than traditional firms (and, frankly, better quality), particularly those small firms that regularly work with startups and have optimized their pricing structures for those kinds of companies.  Budget for their services just like you budget for anything else. The truth is you rarely need that much lawyer time before your seed round.
  • Find top-tier smaller firms that are willing to defer. – Remember, only firms with solid client bases can afford to defer their fees for good clients. Many small firms simply won’t do it, but some will.  The deferrals won’t be as large (because your LTV for them is smaller – they aren’t trying to do everything legal for you) but it doesn’t need to be, because the bills are lower.

The evolving law firm ecosystem that I’ve written about is increasingly moving up-market, working with higher-quality clients that once were too afraid to use anyone but the established law firm brands. That means those smaller, more nimble and efficient firms are increasingly able to offer their own “incentives” to attract top-tier clients, without the massive costs of shackling yourself to a single, large full service firm. 

To be honest, I’ve always viewed fee deferrals as an unfortunate, but necessary evil in the startup law space; a kind of smoke and mirrors to distract everyone from the very real problems that traditional law firms are unwilling to address. Does MEMN do fee deferrals? Yes, unlike most firms our size, we defer for a small segment of our clients.  I’ve picked enough winners and turned down enough losers to trust my instincts on deferrals.  But if you ask me about deferring my fees, my initial response is always going to be “let’s talk first about how we’ve made top-tier startup law actually affordable.”

How Founders Lose Control Of Their Startups, Apart from Ownership

Summary: There are many ways, apart from ownership %, that founders slowly lose control of their companies. Some of the more obvious ones get spelled out in term sheets, but professional players in startup ecosystems know how to use more subtle mechanisms to erode founder control.

Seasoned founders and startup lawyers know that there are really two things that matter most in negotiating a term sheet: ownership and control.  In other words, from the perspective of a founder, (1) what % of the Company will I own after the deal closes (and, more specifically, what % of exit proceeds do I get), and (2) whose permission is needed to make key decisions? Of the “control” terms, there are explicit ones, like protective provisions,  that competent founders know to focus on.  But there are more subtle aspects, like the composition of the Company’s advisors, and even who the Company’s lawyers are, that when ignored can significantly erode the ability of founders to control their companies; particularly in high-stakes situations when there’s significant internal disagreement.

The More Obvious Forms of Control

  • Voting Thresholds and Protective Covenants – These are typically spelled out in stockholder agreements and organizational documents. There are 1,000 ways to draft them, but they basically boil down to: you can’t do X without getting approval from stockholders holding Y% of the Company’s overall capitalization, or a specific % of various classes of stock.
  • The Board of Directors – Who is on the Board, and who has the ability to elect/remove people on the Board? The Board is the core governing body of the Company, which means nothing serious happens without their approval. In a 5-person board, whether founders (common stockholders) elect 3 directors or 2 dramatically alters the power dynamics of a startup.

The Often Overlooked, But Important Control Mechanisms

While voting power and board composition are definitely the most important issues, I always advise founders that maintaining control/influence over the companies they started is much more nuanced than what gets spelled out in a term sheet.

How “Independent” is Your Independent Director?

It’s very common for VC-backed boards to have an “independent” director – usually an industry expert that gets elected by both the common stock (founders) and preferred stock (investors).  However, it’s also fairly common for VCs to suggest that the “independent” director come from their own network of executives.  In judging whether their VCs recommended “independent” is the right person, founders should absolutely include the loyalty of that director to the VCs in the calculus.  He’s in their network, and knows that keeping them happy will mean more influential board appointments in the future. If a founder CEO is well-informed and connected in her startup’s own market, she likely has her own ideas for more independent directors. Put them on the table for discussion.

Board Observers – Who is at the Board Meeting?

Investors often will ask, in addition to a Board seat, for one or two board “observer” positions; meaning, at a high-level, non-voting people who can nevertheless attend board meetings and (usually) engage in discussion with the board. The presence of board observers matters and absolutely will influence discussion on board-level issues, even if they ultimately can’t vote. Don’t hand them out without understanding how they alter a founder’s influence at meetings.

Whom do your lawyers work for?

I’ve touched on this issue before here: Don’t Use Your Lead Investor’s Lawyers. There are hundreds of scenarios in which, in the middle of high-stakes decisions and disagreement among decision-makers on the right (or legal) course of action, founders will turn (protected by attorney-client privilege) to their lawyers for counsel – what’s legal?, what are the consequences?, what are my options?, what’s “market?” etc. etc..  Many times the “right” decision for the Company is one that won’t sit well, and even piss off, certain groups on the cap table.  You don’t want lawyers who work for those people.

Don’t just go with the lawyer that the VCs insist upon. These lawyers will work with the VC on a hundred financings and with you on only one. Where do you think their loyalties lie? Get your own lawyer, and don’t budge.- Naval Ravikant, Lawyers or Insurance Salesman?

Despite arguments from certain investors and lawyers who claim that the above is a non-issue (you can imagine why), most founders immediately recognize the problem when this reality is described to them.

Where do your advisors and executives come from?

The theme of “pay attention to loyalties” carries on into a Company’s advisors and outside executive hires.  Where did they come from? Who got them this job, or they’re last job? Are they all part of the same investor group or business network? The conversations they have with you (the founders) will not be the only ones they’ll be having. Pay attention. Careers are long, much longer than the life of a single startup.  Advisors and executives, even those with strong ethics, pay attention to who can get them their next position when their current one exits.

Nutshell: Voting control matters, but it isn’t everything. Loyalties, particularly long-term loyalties, drive human behavior. Don’t be lazy and let every influencer (director, executive, lawyer, advisor) in your company come from the network of a single investor group. Smart ecosystem players know that’s one of the best ways to gain influence over a company without putting anything on paper. Leverage peoples’ contacts, and of course contacts will overlap, but make sure you ultimately have real diversity of perspectives to turn to.  Otherwise, when it really matters, a dozen back-end conversations will end up with really only one voice whispering in your ear.  

It’s precisely when the stakes are highest that a founder needs brutal honesty from advisors and counselors. And nothing ensures honesty like transparency and true independence of viewpoints. Make sure you don’t lose it. 

 

Should Texas Founders Use SAFEs in Seed Rounds?

Nutshell: Because of the golden rule (whoever has the gold…), probably not – at least not for now.

Background Reading:

For some time now, there have been people in the general startup ecosystem who have dreamt that, some day, investment (or at least early-stage investment) in startups will become so standardized and high velocity that there will be no negotiation on anything but the core economic terms. Fill in a few numbers, click a few buttons, and boom – you’ve closed the round.  No questions about the rest of the language in the document. For the .1% of startups with so much pull that they really can dictate terms to investors (YC startups included), this is in fact the case.  But then there’s the other 99.9%, much of which lies outside of Silicon Valley.

Much has been written about how SAFEs were an ‘upgrade’ on the convertible note structure, and in many ways they are.  But anyone who works in technology knows that there’s a lot more to achieving mass adoption than being technically superior, including the “stickiness” of the current market leader (switching costs) and whether the marginal improvements on features make those costs a non-issue. And any good lawyer knows that when a client asks you whether she should use X or Y, she’s not paying you for theory. You dropped that sh** on your way out of law school.

This isn’t California

From the perspective of Texas founders and startups, which are the focus of SHL, the reality is that going with a SAFE investment structure is very rarely worth the cost of educating/convincing Texas angel investors on why they shouldn’t worry and just sign the dotted line. The entire point of the convertible note structure, which by far dominates Texas seed rounds, is to keep friction/negotiation to a minimum.  Yes, there are many reasons why equity is technically superior, but that’s not the point.  You agree on the core terms (preferably via a term sheet), draft a note, they quickly review it to make sure it looks kosher, and you close.  You worry about the rest later, when you’ve built more momentum.  Professional angels know what convertible notes are, and how they should look. They also know how to tweak them.  In Texas, many of them still do not know what a SAFE is. 

And, in truth, many Texas angels and seed VCs who do in fact know what a SAFE is simply aren’t willing to sign one. The core benefit of SAFEs to startups is that they don’t mature, and hence founders without cash can’t be forced to pay them back or liquidate.  To many California investors, this isn’t a big deal, because they’ve always viewed maturity as a gun with no bullets.  But Texas investors don’t see it that way.  Many find comfort in knowing that, before their equity position is solidified, they have a sharp object to point at founders in case things go haywire. I’ve seen a few TX founders who rounded up one or two seasoned angels willing to sign SAFEs, only to have to re-do their seed docs when #3 or #4 showed up and required a convertible note to close. It’s not worth the hassle, unless you have your entire seed round fully subscribed and OK with SAFEs

Just Tweak Your Notes

The smarter route to dealing with the TX funding environment is to simply build mechanics into your notes that give a lot of the same benefits as SAFEs. A summary:

  • Use a very low interest rate, like 1-2%. – TX angels tend to favor higher interest rates (seeing 4-8%) than west and east coast seed investors. But if you can get a very low rate, it’s more like a SAFE.
  • Use a very long maturity period, like 36 months. – 18-24 months seems to have become more acceptable in TX, which is usually more than enough time to close an equity round, or at least get enough traction that your debt-holders will keep the weapons in their pockets.  But if you can get 36 months, go for it.
  • Have the Notes automatically convert at maturity –  This gets you as close to a SAFE as possible, and we’ve seen many angels accept it. If you run out of time and hit maturity, either the angels extend, or the Notes convert, often into common stock at either a pre-determined valuation (like the valuation cap, or a discount on the cap), or at a valuation determined at the conversion time.

How successful you’ll be at getting the above is just a matter of bargaining power and the composition of your investor base. Austin investors, who think more (but not completely) like California investors, tend to be more OK with these kinds of terms.  In Houston, Dallas, or San Antonio, you’ll likely get a bit more pushback.  But that pushback will almost certainly be less than what you’d get from handing someone a SAFE.

Closing Summary: There isn’t, and likely will never be, a national standard for seed investment documentation.  Every ecosystem has its nuances, and working with people who know those nuances will save you a lot of headaches. In Texas, the convertible note, however suboptimal, reigns supreme. Respect that reality, and work within it to get what you want.

The Many Flavors of Seed Investor “Pro-Rata” Rights

Nutshell: Taking seed investment from institutional investors is supposed to be akin to getting engaged; they’ve made a credible commitment to you, but your options are still open to walk if a better Series A partner shows up.  However, if you don’t read an investor’s “pro rata” terms carefully, you’ll find that you’re no longer the bachelor (or bacholerette) you thought you were.

Guiding Principles:

  1. Large seed round investors have an incentive to gain as much control over the composition of your Series A round as they can get – to maintain (or increase) their ownership % of the cap table, and to reduce competition from new outside investors, who might be better for your company.
  2. Founders’ interests, however, are completely the opposite – get large, influential seed investors on the cap table, but minimize their ability to control who leads the Series A.  The greater the flexibility in taking Series A term sheets, the more competition, the higher the valuation for the company.

The Main Issue

No one covers the entire issue of why prorata rights are important to seed investors better than Mark Suster: What all Entrepreneurs Need to Know About Prorata Rights. Because of the economics of seed investing, the ability of seed investors to secure follow-on positions in their “winners” is critical to their portfolio returns.  Also, institutional VCs will typically only write seed checks if they have a reasonable shot at securing a substantial position (15-20%+) in a Series A round.  For these reasons, seed investors will often require, as a condition to their investment, the right to make follow-on investments in future rounds.  These are usually called “pro rata” rights because, on a basic level, the investor gets the right to purchase her “pro rata percentage” of future rounds.  But the point of this post is that how “pro rata” is defined can have substantial consequences in future financings.

While seed investors’ requiring some form of pro-rata is understandable (I’ve found California seed investors demand it much more often than Texas investors), Founders need to be aware that the more follow-on investment rights they grant in their seed, the less flexibility they have in bringing in large, potentially better VCs in the Series A round.  That “bigger fish” that wasn’t around for your seed round will expect at least 15-20% of the Company in the A round, or it won’t “move their needle.”  Getting that VC to this threshold becomes very hard if you’ve already promised your existing investors a huge portion of the A-round.

Being too relaxed about your seed investors’ follow-on investment rights will either (i) force you to give away a very large percentage of your company in the Series A (to “feed” everyone), and/or (ii) give your existing investors the ability to block a term sheet from that outside investor you really want. 

The Flavors

Pro Rata of Fully Diluted - The Classic Engagement.

By far the most common (and company favorable) definition of “pro rata” in seed rounds is pro rata of the Company’s fully diluted capitalization.  This means that the denominator by which the particular investor’s ownership is divided (to determine their pro rata %) is the entire capitalization of the Company, including outstanding shares, options, warrants, and shares reserved but unissued under the Company’s equity plan.  So, for example, if Investor X paid $50K for 100,000 shares, and the total fully diluted capitalization is 5,750,000 shares, then his pro rata percentage is about 1.74% (100K/5.75MM).  If you do a new $1 million round, Investor X has the right to purchase 1.74% of that round.

But a very important wrinkle is that, if the seed round in which the rights were granted is a convertible note round (it almost always is), the investor’s ownership percentage isn’t set yet; so there’s no easy way to calculate the formula.  The note needs to be converted (or at least assumed converted) to arrive at a %.  Without getting too much in the weeds, there are a lot of variables here that can influence what % the investor eventually gets:

  • Does the pro rata right only kick in once the note is converted? If so, then the Company can raise more note rounds (without having to offer pro-rata to existing investors), and those notes will convert alongside Investor X’s note, shrinking his pro-rata %.
  • Do we assume conversion before it actually happens? If so, do we assume it as of the date of issuance (fixed pro-rata), or the date in which the pro-rata right is being calculated (variable, potentially diluted by new rounds)?

The devil is in the details, and the details heavily influence what % an investor is ultimately entitled to.

Pro Rata of the Existing Round - The “You’re Really Married” Version.

On the other end of the spectrum is a significantly less common definition of “pro rata” that nevertheless pops up on occasion in seed rounds: pro rata based on the existing round.  Here, the denominator for the formula is not the fully diluted capitalization, but the round in which Investor X invested – a substantially smaller denominator, and hence a much larger percentage. Example: if Investor X made a $50K investment in a $500K seed round, her “pro rata” under this formula is 10% ($50K/$500K).

Did you see what happened? A tiny variation in the pro-rata language increased Investor X’s pro rata % nearly 6-fold.  And if you’re really paying attention, you’ll realize that, if everyone in your $500K seed round got these pro-rata rights, you’ve just given your seed investors first dibs on your entire Series A. While it’s not as crazy to give your Series B investors first dibs on your entire Series C, since they’re likely deep-pocketed VCs whom you already have a long-term commitment to, giving your seed investors that kind of control of your Series A is dangerous.  It’s the startup equivalent of getting married when you’re 16, before you’ve had a chance to mature and find “the one.”  Be careful.

Other Follow-on Rights

We sometimes encounter other variations of follow-on investment rights that aren’t quite pro-rata rights, but they’re worth mentioning because investors are requesting them for the same reasons.  Warrants granting the right to purchase a fixed $ amount in the Series A are sometimes requested.  I’ve also seen side letters stating flat out that Investor X gets first dibs on Y% of the Series A.  Obviously, like any provision, it ends up being about leverage and the type of investor you’re negotiating with.

The guiding principle for founders should always be to minimize, as much as possible, their seed investors’ follow-on investment rights.  By all means keep them interested and informed, and ensure they are offered the opportunity to lead your Series A.  That’s why they bet on you in the first place.  But the opportunity to lead the Series A is very different from the right to lead the A. If someone demands the latter, it’s time to get serious, because you just got a marriage proposal.

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

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 “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 historically 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.