When it’s time for your startup lawyer to shut up.

Hypothetical scenario at doctor’s office:

Me: Doc, I’m here for my annual kidney checkup. (note to reader: I donated a kidney)

Doc: Sure, Jose, I’ll take care of that for you. But while you’re here, let’s cover a few other things just to be thorough. How have you been feeling emotionally? Any signs of depression? And what about your sleep habits? Getting 8 hours a day? Your back looks a little arched. We should check for a spinal problem.

Me: I came here for a kidney checkup.

Doc: Your hair seems to be thinning out prematurely. That could be a sign of a hormone imbalance. Your skin also seems a bit pale. Are you getting enough sun? We’ll check you for a Vitamin D deficiency. And how about your sex life?

Me: Please shut up.

Overlawyered.

The billable hour is to startup law what fee-for-service is for most of healthcare. In some contexts it’s necessary, but it often creates incentives for overtreatment; or in the case of law, overlawyering.  There are lawyers who properly see early-stage transactional law through the eyes of their clients: a mechanism to get a deal done, while ensuring that the contract drafting, negotiation and diligence performed are appropriate for the context. And then there are lawyers who, notwithstanding the needs of their clients, try to achieve some kind of legal nirvana on everyone else’s time and dime.

You want to spend hours ruminating on arbitration provisions, or ensuring that the registration rights language in your docs is air tight? Awesome. Go work for Wachtell and get the hell out of early-stage work. This here’s startup law, son, and this deal needs to close.

Perfection v. Materiality

Now, this definitely doesn’t mean that closing the deal is all that matters, and that legal counsel’s role is purely mechanical.  Experienced entrepreneurs understand the transactional insurance mechanism that good lawyering provides.  The point here is that a high quality startup lawyer isn’t the one who drafts perfect contracts, understands every nuance of securities law, and can spot every minute issue while diligencing the deal.  The best startup lawyers build a deep understanding of what’s material to their clients and their business, and aren’t afraid to close the deal knowing that there may be issues in the docs that would make a law review editor cringe. Good enough? Close the deal. These people have a business to run.

An ounce of prevention.

Business Judgment and Experience Matter

This is also not an argument for going with the cheapest lawyer you can find. Remember, the hourly rate is only half the equation. If anything, I’ve found that boutiques (lower hourly rates) are more likely to run the clock in the name of (air quotes) “higher quality”, knowing they can get away with it and that it drives their BigLaw counterparts nuts. BigLaw attorneys (higher rates), without thought-out processes in place, are incentivized to do the opposite: cut corners and close the deal sometimes too quickly.  This is a topic for a later post.

It is, however, an argument for caring very strongly about the business judgment of your attorney, and steering clear of those whose sense of materiality seems wildly disconnected from your own.  You won’t always see eye-to-eye, and that’s a good thing.  Having been to the rodeo many times before, a good lawyer can see risks that you’d miss.  But if you’re paying attention, you’ll notice fairly quickly when mountains are being made of molehills.

A focus on early-stage work is also crucial.  A lawyer with a history of billion-dollar deals or public company work will likely waste everyone’s time far more than a true early-stage lawyer who understands what’s worth negotiating, what’s standard, and when it’s time to shut up and close the deal.

Set Deadlines

This should go without saying: always set an expected closing date.  It doesn’t need to be insanely aggressive, but if your lawyer isn’t capping her fees, at least cap her time. If it needs to be extended, that’s fine, but a sense of urgency can go a long way toward focusing everyone’s eyes on the material.

Read the redlines; Require explanations

Don’t just let your lawyers go through rounds of redlines without business guidance. After the first round or two, get on the phone and start asking questions about comments that are being made. How is this material? What is the likelihood that this is going to actually become a problem? If it becomes a problem, how much would it cost? Is the language clear enough to prevent litigation if there’s a misunderstanding? You’ll pick up very quickly on whether (a) real business needs are driving these comments, or (b) your attorney’s aesthetic sensibilities are.  If the latter, it’s time for him to shut up.

Startup Law is not for law review editors with OCD. It’s for closers. Anyone who thinks otherwise is likely overshooting the needs of early-stage entrepreneurs/investors, and wasting a lot of time and money in the process.

1 Comment When it’s time for your startup lawyer to shut up.

  1. Kathryn Caterina

    I completely agree with this principle, except that:
    (1) Frequently with startups, due to lack of previous legal guidance, the diligence process reveals actual mountains that the client perceives as molehills (i.e., board of directors not properly elected, previous stock or options not properly issued, etc.). Even though they come in for a kidney checkup, maybe their back IS broken and time needs to be spent to fix it. This happens with surprising frequency.
    (2) About setting deadlines: An entrepreneur who has never been through the legal process before will probably misunderstand how long it takes and set a deadline that is unintentionally overly aggressive, which creates a real risk of cutting corners. The “sense of urgency” you describe does result in increased efficiency, but in my experience, a deadline set by an inexperienced entrepreneur with the intention of creating a “sense of urgency” will actually require break-neck speed. The best scenario is when a lawyer can effectively communicate a reasonable but challenging deadline that still meets the business needs (not necessarily “wants”) of the client and allows the work to be done right. This is not always possible, and when it’s not, sacrifices will be made.
    Good post!

    Reply

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