The Cost of Customization

image by Domenico Nardone via Flickr

One way to tell whether you’ve found yourself a decent tech lawyer is to count how often he/she tells you to keep things simple.  That doesn’t mean that the overall structure of whatever you’re using your lawyer for (formation, a financing, etc.) is simple in a technical sense, but normally when startup attorneys say “keep it simple” they mean something like “keep it standard.”

For example, our fixed -fee Startup Formation Package has dozens, if not hundreds, of moving parts.  It takes dozens of hours, and multiple specialists to comb through the docs and make sure that (i) they all work together (no bugs), (ii) they are actually legally enforceable based on the current state of the law, and (iii) they fit with what future investors expect to find when they diligence potential investments. It’s an on-going process because the business and legal environment is constantly changing, which is one reason why it’s dangerous to just grab docs off the web or just go with the cheapest attorney/firm.

To draft these docs anew and build in, from scratch, the kind of legal analysis that has already gone into them would easily cost $100,000 or more, but we’re able to offer the whole thing for $5K because it’s standardized.  Of course, it also comes with several hours of consultation discussing the docs and other issues.    We’ve designed the package to only have a number of variables that founders can adjust (common things like vesting, share numbers, etc.), which ensures that our clients get a coherent, enforceable set of docs at an excellent value – it’s quite popular.

That being said, sometimes circumstances call for deviation, and we’re obviously happy to modify things accordingly.  But I’ve encountered situations in which deviation is driven more by founder preference than true circumstantial need.   In that context, founders need to understand the full cost of adding extra complexity into their deal structure.  Deviating from what’s “standard” usually ends up costing a lot more than just drafting time.

Costs of Deviating from Standard Terms

  • Drafting time – the obvious one
  • Risk of Conflicting Language – once you’ve built in bespoke language, you’ve added the risk that somewhere in the docs there is language that conflicts with what you’ve added.  At the end of the day, there’s no debugging program for contracts.  No beta testing either.  Usually when conflicts are found, maybe years later, it’s too late to fix.
  • Proofing Cost – After drafting your special language, your lawyer will try his/her best to go over the other docs and find, preemptively, any obvious conflicts in the language. This, of course, costs time and money.
  • Future Drafting Cost – Most law firms, at least properly run ones, have all of their docs for all stages of a company’s growth sync with one another: defined terms, cross-references, amendment provisions, etc.  To the extent that you’ve deviated from standard terms for earlier-stage docs, this increases the cost of drafting later stage docs, because they’ll have to be customized as well.  And there’s a 99.99% chance the attorney drafting those later-stage docs won’t remember (or it might be a completely different attorney) the customization made in the earlier ones, resulting in (i) conflict risk, and/or (ii) time ($) spent understanding the early stuff.
  • Diligence Cost – When investors come around and do diligence on your company, they (and their lawyers) will have to take extra time to understand the unique arrangement that you’ve built into your docs, which wouldn’t be required if it were standard.  Guess who ends up paying for that lawyer time?

Again, life is complicated, and things can’t always be standard.  But if you find yourself asking your attorney to customize docs because of some unique arrangement that you want, make sure you understand the full cost of that customization.  It’s likely a lot more than you think.