In Startup Law, Big Can Be Beautiful

A question that’s often discussed among the startup community is whether the part of the legal profession that serves tech startups and ‘emerging’ companies is ill-suited for full-service law firms, and whether solo practitioners and smaller firms are “disrupters” of such firms.  To clarify, a “full service” firm is one with attorneys that practice all of the legal specialties a company is likely to require in the course of its business: corporate, tax, employment, IP, litigation, etc.

Some solos and boutiques are outspoken in their opinion that a tech entrepreneur will waste her money hiring an attorney at a full-service firm, even one with deep startup experience.  Many, however, overstate their case.

The general argument against full-service startup law practices goes something like this:

  • lots of offices, lobbies, and bureaucracy that are completely unrelated to what you as an entrepreneur need
  • the attorneys bill very high rates to support all of this overhead
  • you’ll be small potatoes, and likely get stuck with a junior associate
  • so cut out the fat and go with an efficient, lean solo practitioner or boutique firm.

This argument resonates very well with tech entrepreneurs, because it’s precisely what startups themselves try to do with other industries – dis-intermediate, get rid of waste, do more with less.  Of course!  A startup law firm should run just like the startups it serves.

Whoa there, tiger.  I would argue that, as tempting as this line of reasoning is, it’s the wrong analogy.  The practice of law, even startup corporate law, is not like running a startup.  A more helpful analogy would be something like healthcare.  Here’s why:

1.  There’s No A/B Testing For Contracts

Tech entrepreneurs focus (wisely) on experimentation and iteration. Keep testing, keep modifying, until you find a product-market fit to scale on. In law, unfortunately, once a contract is signed, it’s signed. A year later, fixing a mistake can be extremely expensive, or even impossible.  Take the wrong pill, and you might not get to pivot.  If you think your company is worth anything, “minimally viable lawyering” is the last thing you want.

2. Startup Law is Integrated, Not Isolated

In the same way that cardiology or neurology don’t exist in little bubbles separate from other medical specialties, startup law doesn’t exist in it’s own isolated bubble.  Tax law, securities law, state corporate governance laws, employment law, intellectual property law, etc. all weave into the contracts and decisions that a startup company will have to execute as it grows.  Having specialists in those fields to quickly and efficiently consult is extremely valuable.

The other day a client of ours wanted to make a slight modification to certain options his company had previously issued.  To myself and the corporate partner serving the client, it seemed innocuous, but we ran it by “our tax guys” just in case. Turns out it would’ve obliterated ISO status for those options, resulting in serious tax liability for those optionholders. Whoops.  Don’t ask a general practitioner to perform heart surgery.

The best healthcare comes from integrated systems where knowledge among specialties is shared in an optimal manner.  The legal field isn’t much different.

3. Experience and Repetition = Efficiency

In a law firm, a transaction or contract is bespoke only once.  More people (a larger firm) means more experience, more transactions, and more templates to build off of the next time someone asks for a weird investment structure or employment provision.  Smart law firms know how to use technology to leverage this fact and push themselves far along the field’s experience curves, so that work becomes better and faster, and therefore cheaper, as time goes on. Focusing on billable rates, many of which are variable, is misleading.  As one notable VC blogger wrote: it’s the hours, not the rate, that matter the most.

4. Institutional Knowledge

Much like in healthcare, thoughtful legal practices are molding their processes and technology to, in certain ways, remove the all-knowing sage attorney as the sole link between the client and the firm.  Walk into a cutting-edge healthcare system, and an enormous amount of your health background, along with a lot of that institution’s own knowledge, will be stored in their IT.  If your doctor isn’t available or appropriate, you can see another, or a nurse practitioner, or a physician’s assistant, all of whom can tap into the institution’s experience to provide you excellent service.

The legal analogy should be pretty clear.  The “you get partners all the time” argument from a boutique practice may sound good, but just as a pulmonologist shouldn’t be taking your temperature when you have a cold, some tasks can and should be segmented.  If a young associate is tapped into the proper institutional knowledge, and is doing tasks appropriate for his skill level, what’s the problem? You’ll get better, faster service because of it.

Anyone who’s studied the history of technology will know that one major source of disruption is the use of technology to simplify tasks so that lower-skilled (read: cheaper, more accessible) people can do them.  That’s called “innovation,” admittedly a difficult-to-pronounce term for many attorneys.

5. Pricing Flexibility

Well-established, brand-name law firms in the startup space operate on a “pipeline” model.  Like venture capitalists, their “home run” clients generate the vast majority of their profits, which hopefully (if they have a good client base) more than make up for the losses on small startups.  For that reason, it’s large firms that are at the forefront of providing efficient early-stage legal services.  For clients they see as high-potential, they’re far more willing to defer fees, discount, or even accept equity, in lieu of immediate payment.  Smaller firms generally lack the capacity (specialties, number of attorneys) to service “home run” clients, which prevents them from providing this kind of cross-subsidization.  Living more hand-to-mouth, they’re more likely to expect up-front or immediate payment of their fees, which can be problematic for cash-strapped founders.

To sum things up, the “Big is Bad, Small is Good” view of startup law can be dangerously misleading.  There are lots of great things that can be said about smaller practices, particularly those that specialize in a market niche.  But terrible (and excellent) startup law comes in all sizes.  There are large firms that really will just throw you wholesale to a clueless junior associate, and there are small firms that simply lack the institutional knowledge and breadth to properly serve clients.  Be aware of what you’re getting for your money, and don’t fall for false analogies that can get you and your company into trouble.