Flexibility in Choice of Counsel

TL;DR: A flaw in the “one firm for everything” law firm model is that companies are often pushed to specialist lawyers that they aren’t a good fit for, or simply don’t like. The boutique law firm ecosystem delivers far more flexibility for startups to work with specialist lawyers better suited for their specific cultures and needs.

Background Reading:

The core value proposition behind what we’ve been building at E/N over the past several years is this: new legal technology has removed the hegemony once held by large, all-purpose law firms over the high-end of the legal market; enabling an ecosystem of specialized boutiques to replicate the kind of full service that 500-1,000 lawyer firms provide, yet far more flexibly and efficiently.

Parsing that out requires a bit of backstory:

Scaling technology companies have always needed many different kinds of lawyers: corporate, commercial, tax, employment, litigation, patent, data privacy, etc. Historically, getting all of those lawyers to effectively share information and collaborate was virtually impossible without having all of them under the same firm. The cost of building and running a law firm was simply too high in terms of infrastructure, and cross-firm collaboration carried a lot of friction.

Unneeded Infrastructure

So in that old world, if you were building any kind of serious tech company, you effectively had to go to BigLaw. Running a BigLaw firm is extremely expensive: high-end real estate with top shelf furnishings, file rooms, libraries, in-house IT, lavish summer intern programs, layers of administrative staff, etc. When you have a BigLaw attorney $750+/hr, maybe 20-25% of that is paying for the attorney. The rest is funding all the infrastructure of the firm.

E/N’s position is that a very large portion of the tech ecosystem does not, and very likely never will, need that “infrastructure,” and therefore should not be paying for it. So we take the partners and other attorneys from those firms, cut their rates by hundreds of dollars an hour, and put them on a significantly leaner platform. The end-result is that, on average, early-stage/middle-market companies get better lawyers, at lower rates, and with much better responsiveness.

Flexibility in Specialist Selection

But while efficiency and responsiveness are a big part of E/N’s value prop, flexibility is another that is worth emphasizing, because it touches on a problem that companies often run into when choosing to work with a very large firm.

If you hire a “startup lawyer” (corporate) at a large firm, that firm’s business model is premised on cross-selling all of its specialties. So if while working with your corporate lawyer, a labor law issue, or a patent law issue, comes up, he/she is almost certainly going to refer it internally within the same firm. We’ve seen time and time again that this dynamic causes major headaches for many entrepreneurs.

Why? Because lawyers are people (not software), and law firms are service businesses (not product companies). Once you move past the template-ized aspects of very early-stage legal, the individual personalities, culture, and processes of the lawyers you work with have a very large impact on the end-product you get. You can have half a dozen patent lawyers, all with impeccable credentials and similar academic backgrounds, and yet the way that they each work and interact with clients is fundamentally different. And because lawyers are so different, there is every reason to expect that your particular company may simply “fit” better with one, and not “fit” at all with another.

So a fundamental flaw with the “one firm for everything” law firm model is that it very often pushes startups to work with lawyers that they simply don’t like, or aren’t a good fit for. Not only do entrepreneurs often hate this approach, but many startup lawyers hate it too, because they themselves would prefer their clients find appropriate specialists. When I was in BigLaw, I saw first-hand how startups often got pushed to patent lawyers (just as an example) who made absolutely no sense – from a pricing and technical background standpoint – for a particular company, but the startups nevertheless felt stuck with the lawyers they were sent to.

At E/N, we get exactly zero kick-backs / referrals fees when we connect one of our clients to an outside lawyer via our heavily curated specialist network. Sticking to the patent lawyer example, when a client needs patent assistance, we (i) first emphasize that we don’t do patents and don’t want to (we’re focused), and (ii) provide a list of options that, based on the company’s stage, culture, and type of technology, would be a good fit for them, and then we either make a referral or let the company conduct their own diligence, if they want to. 

Flexibility + Focus maximizes quality and “fit”

Many specialist lawyers (including in BigLaw) can be quite entrepreneurial, but by being part of firms that service 25+ different practice areas, they are institutionally constrained to a minimal level of focused optimization; in the exact same way that large conglomerate companies end up being mediocre at a lot, and excellent at very little.

How do startups take on companies 100x their size? By picking a specific segment / product offering and owning it.  That’s precisely what the boutique law firms in E/N’s specialist ecosystem are doing. By narrowing their focus, building targeted infrastructure and cutting out the irrelevant, they’re able to optimize for companies that need exactly what they deliver, and ignore everyone else. And by connecting with lawyers like those at E/N, they get merit-based referrals to ensure the companies they work with are a good “fit” for them.

I’m not bearish on BigLaw at all; at least not the truly high end portion of it. Billion-dollar companies doing complex cross-border deals needing 10 different kinds of lawyers to collaborate on a single project very quickly are almost certainly in BigLaw’s sweet spot, and that’s not going to change any time soon. At the same time, we’re seeing a growing exodus of non-unicorns toward the more flexible, efficient, and focused boutique ecosystem that is better designed for their needs. We’re enjoying being near the center of it. 

Announcing E/N Alpha

I’m very excited to announce the launch of E/N Alpha, a flat-fee subscription program ($500/mo) that our firm has launched for high-potential very early-stage startups.

The details are available on the linked page, and should be fairly straightforward. In particular, I think it’s important to read the section describing what it’s not, because it reflects our firm’s thought-out response to what we see as a lot of failures / nonsense in the legal market where firms, for marketing purposes, pretend to deliver efficiency, when what they’ve really done is watered down their service so much to the point of no longer being useful.

Not software – Readers of SHL and E/N clients know I love legal tech and that we’re always integrating new tools into our practice, but as I wrote in Lies About Startup Legal Fees, there is simply too much BS floating around startup ecosystems that some magical automation tool or piece of AI will dramatically cut legal spend long-term for startups. Significant automation requires significant standardization and inflexibility, which in the world of high-stakes legal work for scaling tech companies negotiating with sophisticated parties, most smart Founders and executive teams are not willing to accept.

Yes, you can automate formations and a few very early things, but complexity increases exponentially beyond that (like a code base), and the value of software automation tapers off fast.

Not paralegals and junior attorneys – I have lost count of how many startups have switched to us from firms that talked a good efficiency game, when their main tactic was to force CEOs to get on the phone with paralegals and junior attorneys whose expertise ends the moment you go off script or deviate from a checklist. I love paralegals and juniors, and we have and train them. But if you think a founder wants to talk to your paralegal about structuring their seed financing, or making that key first or second hire, you don’t understand founders; at least not the smart ones.  See: The problem with chasing whales for what happens when founders end up having to deal with a firm’s B or C team.

Not “everything legal for one price” – Oh man, I came across a firm promising this the other day. “We’ll do everything legal you need for one flat monthly price.” Right. See: Standardization v. Flexibility in Startup Law, for an explanation of what really happens when a firm is forced to work under a ridiculous fixed fee. Fixed fees are great for low-stakes, routine work with a well-defined scope, or for high-volume projects that (again) are well-defined in scope, but the idea that you can map all of the legal needs of scaling emerging tech companies onto some bell curve and peg a number, like an insurance company, without dramatically impacting quality or flexibility, is some straight-up ghostbusters nonsense.

The only possible way it works is if you limit your client base to companies that basically all look and act the same, and have virtually all the same expectations and needs within a narrow range. That’s not how we work, nor how any serious law firm I know works. Analogies to healthcare’s move into fixed-fee pricing don’t hold water without accepting the “narrowly tailored client profile” point, because human biology is 1000x more “standardized” (bell curves) than the corporate structures, investor expectations, growth trajectories, legal obligations, and company values of tech companies.

Not the only way to work with us – This is simple. E/N Alpha is an option for startups looking to lock-in price certainty on a specific scope of work they are sure to need within their early years. But it is not the only way to work with us.

Fundamentally, what we want E/N Alpha to reflect is that E/N is a lean, flexible, high-end boutique law firm built from the ground up to address the many dysfunctions we’ve seen in the emerging tech / startup legal market. Entrepreneurs hire us because they know they need serious, specialized, trustworthy lawyers to address complex, high-stakes issues, and they need some way of affording that; particularly in the early days.

Everything else: tools, low-level professionals, and all the other ways a law firm can optimize itself should stay in the background. They aren’t, and shouldn’t be, the end-product.

 

Checklist for choosing a Startup Lawyer

A friend mentioned to me the other day that, as much great content as there is on Startup Law, there isn’t a simple list of things a founder team should assess in choosing their own company counsel. So here it is, leveraging past SHL posts in a distilled form.

Background Reading: Startup Lawyers – Explained.

Are they actually a “startup lawyer”?

The number of lawyers over the years who have attempted to re-brand themselves as startup lawyers – meaning corporate lawyers with a heavy specialization in early-stage technology and venture capital – has gone up significantly. Law has numerous specialties and subspecialties, much like healthcare, and you want to ensure that, if you’re building an early-stage technology company looking to raise outside capital, your main lawyer(s) has deep experience in exactly that.

See: Startups Need Specialist Lawyers. The last thing you want to end up with is a litigator, patent lawyer, or small business lawyer who thinks that, because he stayed at a Holiday Inn Express, he suddenly knows startup law.

Ask for their AngelList profile, or a list of deals they’ve closed in the last 6 months.

Do they have access to other specialist lawyers that you’ll need?

In line with the above, the first lawyer you’ll need is a startup lawyer, but once the business gets going, you’ll quickly need others, including commercial/tech transactions lawyers, tax lawyers, data/privacy lawyers, patent lawyers, trademarks, litigation, etc. They do not need to be under the same firm (and you often benefit if they aren’t), but a serious startup lawyer who represents scaled companies must have direct access to these kinds of specialists to provide responsive counsel to their clients.

A simple “yes, we have access” is not enough. Ask for names, info on how they normally engage, and do your diligence.

Is their infrastructure / cost structure right-sized for what you’re building?

Be realistic about what your company will look like over the next 5 years if things go as planned, and hire a lawyer/firm that can serve that company, without scalability problems. Are you building a narrow app for which a successful exit would be a few million dollars? A solo lawyer would probably be a good fit for you.

Do you legitimately see yourself as on a potential IPO or >$500MM exit track, and targeting a $10-20+MM Series A in a year or two? Law firms that represent “unicorns” may be a good fit for you, even if they’re much more expensive.

Are you realistically on more of a $3-10MM Series A, and $50-300MM exit path; or maybe you’re more interested in scaling on revenue alone? You’re going to get too big for a solo, fast, but “unicorn” firms are probably overkill for you. Try a boutique law firm.

See: When a Startup Lawyer can’t scale and Lies about startup legal fees.

Are they familiar and aligned with the norms / expectations of your likely investors?

In line with the idea of hiring a right-sized law firm, if you’re not on the unicorn track, you will run into problems if you hire lawyers who generally represent (and target) companies who are.

We see this often when, for example, law firms from Silicon Valley represent a tech startup raising local money in, say, Texas or Colorado. Ecosystems of different sizes often have very different norms and expectations, and you can run into cultural or even process conflicts when your lawyers simply don’t speak the same language as your investors, or other stakeholders. The largest deals in the largest tech ecosystems – SV and NYC – have much closer market norms, and smaller/mid-size deals in smaller ecosystems like Austin, Boulder, Seattle, etc. often behave similarly among themselves.

See: The problem with chasing whales.

Are they not conflicted with investors you’re likely to raise money from?

Entrepreneurs, and especially first-time entrepreneurs, lean heavily on their startup lawyer(s) for core strategic guidance in navigating negotiations / issues with their main investors. Ensure that the lawyers you hire do not have deep ties to, or dependencies on, the people who are likely to write you checks, or the lack of true independence of the advice you get can burn you in the end.

See: How to avoid “captive” company counsel. 

Finally, do they “not suck”?

After all of the above, do these folks actually answer their damn e-mails quickly enough? Do they have good technology / processes in place to make your life easier and work efficiently? Do they give real strategic advice, and not make tons of costly mistakes that you end up having to pay for in the long run?

See: Lawyers and NPS.

There are lawyers who will check all of the above boxes, and yet after you talk to their clients, you’ll find that they just suck to work with. Do your homework / research on the more objective checklist items, but in the end never forget to choose lawyers who actually care about doing all the subtle human-oriented things that result in good service.

post-script: A few questions that don’t belong on the checklist:

  • Is the lawyer in my city? – Nothing about local city law applies to startup lawyering. Think regionally, or focus on their client base resembling what you’re building.
  • Can they introduce me to investors? – See: Why I (still) don’t make investor intros.  There are far more effective ways to get connected to investors than through intros from a law firm.

Standardization v. Flexibility in Startup Law

TL;DR: Standardization reduces time and fees, but at the cost of increased inflexibility. And sometimes, flexibility matters more.

Related reading:

Imagine you’re about to have a baby. You start asking your OBGYN about the facilities, preparations, etc., and the response you get is: “don’t worry about it, it’s all standard.”

Ok…, but your family has a history of certain unique hereditary conditions. Things can go wrong. You try to prod further. “Don’t worry, everything is going to be standard procedure.”

Are all people “standard”? Well, are all companies?

Standardization has its place, and certainly has its benefits. Those benefits include:

  • Lower Costs (at least upfront);
  • Faster execution, often enabled by technology;
  • Easier review.

In short, standardization makes things cheaper and faster. As great as that is, for any high stakes situation, a half-intelligent person will step back and ask: are speed and low cost really my top priorities here?

The purpose of this post is to discuss why the general push toward standardizing all financing (and other) documentation for startups, while clearly lowering up-front legal fees, is not always as “founder friendly” as the automation companies, investors, and other parties who also benefit from standardization, would have you believe. Nothing is free.

As I’ve written before a few times: “don’t ask your lawyers about this” sounds sketchy, and potentially raises red flags. If you want a novice team to simply move on and not ask questions, a real chess player will say “let’s save some legal fees.”

We’re negotiating over millions of dollars with potentially tens or hundreds of millions in long-term implications, but great, let’s save a few thousand in legal fees now by “streamlining” things. Right.

Who chooses the “standard”?

By far one of the most over-used phrases I hear in financing negotiations is “this is standard.” Says who? Do you have data? When you personally close dozens of financings a year across state lines, and have visibility into hundreds, like our lawyers do, it is very amusing when someone who makes maybe a handful of investments a year starts trying to lecture you on what’s “standard.”

The other day I heard a VC say that not having an independent director on the Board post-Series A is “standard,” and virtually everyone else in the room could smell the manure.

If you are looking to adopt market “standards,” make sure they are actually standards. Work with advisors with broad market experience to verify claims, and triangulate advice from multiple, independent advisors. Don’t let anyone simply dictate to you what the “standard” is. 

Serial players benefit from standardization. It’s not about saving companies legal fees.

Investors have portfolio incentives; meaning that they have their bets spread around a dozen or two dozen companies, sometimes much more if they’re a “spray and pray” kind of fund. For investors who look for unicorns, they expect most of their investments to fail, and just need 1 or 2 grand slams to make their returns. Unicorn investors demand very high growth, because even if such an approach can increase the number of failures, it will also maximize overall returns across the portfolio by turning up the juice on the 1 or 2 unicorns.

Entrepreneurs and their employees, on the other hand, have “one shot” incentives. Their net worth is concentrated in one company, and therefore the specific details, and risks, applied to their specific company matter a lot more to them.

The emphasis on very fast, very cheap financings benefits, above all else, large investors with broad portfolios who are looking to minimize their costs on any particular bet. It is not something developed out of beneficence toward companies; who often stand to gain more from adopting structures better suited to their specific circumstances. 

Standardization necessitates inflexibility, and when you’re fully invested for the long-haul in one specific company, flexibility may matter much more to you than simply moving as fast and cheaply as possible.

So who is standardization really for? The people who work in volume.

Lies about fixed legal fees.

One of the worst lies spread throughout some startup law circles is that fixed fees somehow “align” incentives between clients (companies) and lawyers. The argument is that, if lawyers bill by the hour, they will simply bill endlessly without reason. Thus, fixing their fees “solves the problem.”

Except it doesn’t.

Assuming all lawyers are principle-less economic actors who will do whatever maximizes their profits (cynical, but the general argument here is cynical), fixing legal fees does not align incentives between a client and the lawyer; it reverses them.

If Mr. Jerk Lawyer will run up the bill unjustifiably when the economics are hourly, he will, once you fix his fees, reverse course and do the absolute bare minimum necessary to complete the work; pocketing the difference. Why put in that extra hour or two to discuss a few nuances with potentially very material implications to the team, if it just hurts my fixed fee ROI? “This is fine and standard” is a much easier answer. Trust me, the minimum professional standards to avoid malpractice are very low. Close the deal, and move on to the next one.

Oh, but wait, the fixed fee proponent would retort: the fixed fee lawyer will still do a great job because he’s concerned about reputation. Response: (i) isn’t the hourly billing lawyer also concerned about reputation? (ii) you often don’t find out whether the lawyering you got was “good” or “bad” until years later. The difference between great counsel and bad counsel is in nuanced, long-term details not visible at closing. A-players and C-players can both close deals. I’ll let you guess which ones more often agree to fixed fees. 

There is a place for fixing legal fees when the work being done really is commoditized, and not of high strategic significance to a company in the long-term.  But anyone who thinks that fixed fees are some kind of magical solution to long-term lawyer-client relationships is, to put it bluntly, full of sh**. In attempting to solve one problem, they create other ones. So let’s all please stop pretending that when investors insist that you cap your legal fees when negotiating against them that they’re doing it to save you money. It’s a way to get your lawyers to stop talking to you. 

Our view is that clients definitely deserve some level of predictability in their fees, and we provide that by crunching data across our broad client base, and providing clients budget ranges based on that hard data. We also keep clients regularly updated on accrued billings, to avoid surprises. I promise to deliver transparency and data-driven predictability within reason, but I need, and smart clients want me to have, the flexibility to address unforeseen issues that, in my judgment, are material enough to fix, even if I could get away with ignoring them without anyone noticing for years.

Reputation plays a huge role in keeping legal fees reasonable. You’ll go much further diligencing a set of lawyers, asking their clients whether they feel they keep their bills honest, instead of adopting some nonsense idea that fixing/capping fees will magically produce the outcome you really want.

Standardization and Flexibility need to be balanced.

All good startup lawyers adopt some level of standardization, as they should. There is a lot of room for creating uniform practices that save time and money, without damaging quality and flexibility. But any attempts to pretend that complex, high-stakes law can be “productized” should raise serious skepticism, at least from entrepreneurs who view their company as something more than just another cookie-cutter number in someone else’s portfolio.

If I refuse to fix all of my legal fees, it’s because the reality of serious startup law does not fall along some neat bell curve; not when you represent a diverse client base, with diverse goals beyond simply getting as big as possible as fast as possible. There is far more qualitative nuance to strategic lawyering than there is even in healthcare, where the goals are much cleaner, quality is more easily evaluated, and the base structure of each “client” (biology) is more uniform. Business goals are subjective, and the right outcome for one client may look totally different for another, requiring totally divergent, and unpredictable, levels of work. That requires flexibility, both in process and pricing.

Where the final outcome really matters, speed and low cost are not the top priorities. Leave room for flexibility and real strategic guidance, or you’ll move very fast and very cheaply right into a brick wall.

When a Startup Lawyer can’t scale.

TL;DR: If you’re building a scalable business, your main lawyer(s) need scalable infrastructure to ensure projects/deals can get handled correctly, promptly, and cost-effectively. Hire a startup lawyer who can’t scale, and when you need them most, they’ll be unavailable.

Background reading:

When I talk to seasoned founders about what they really want out of their company counsel, their responses largely boil down to 3 things: quality, responsiveness, and cost-effectiveness. Any good, single lawyer can at some point in time deliver all 3 of those, but not consistently, and not at scale. To do that it takes what I call, broadly, “infrastructure.” If you hire a lawyer who doesn’t have infrastructure — no matter how good they may be — you can expect a world of pain at the very moment that you need him/her most.

Law firm infrastructure includes:

  • Paralegals / Professional staff (like word processing) to handle necessary tasks that you don’t want a lawyer billing hundreds of dollars an hour for (like signature collection, option grants, state filings, etc.);
  • Technology and institutional knowledge, like automated templates, form libraries, etc. to streamline standardized processes to ensure lawyer time is spent on higher-value work;
  • Junior attorneys and appropriate training/compensation infrastructure for them, to keep work moving that is too complex for paralegals/staff, but not cost-effective for Partners to manage;
  • Other partners/senior attorneys to keep work moving when the main partner isn’t available (on another deal, on vacation, sick, etc.);
  • Access to niche specialists (IP, Tax, Employment, Commercial, etc.) to ensure answers on complex issues get the right subject matter expertise, though they don’t need to be within the same firm;
  • Experienced M&A (Mergers & Acquisitions) attorneys who specialize in high-stakes exit transactions, which require different expertise from venture capital/angel financing experts.

The clearest symptom of a startup lawyer who can’t scale is slowness, and as anyone with experience in the startup game knows, time kills deals. To a lawyer who’s seen hundreds of deals, your $500,000 seed financing may seem like just another small deal.  But to you it’ll feel like life and death, and you can’t wait days for your lawyer to get on it because he’s on vacation, out sick, or stuck in another deal without the right support infrastructure to ensure yours gets handled as well. 

I’ve known lawyers who dramatically underestimate how time consuming and expensive it can be to build and maintain legal infrastructure. They think they’ll just wait until they get busy enough and “just find someone.” It always blows up in their faces. Hiring specialized, highly qualified staff and attorneys is hard in any specialty area. Building a compensation structure that works mathematically but will attract and retain the people you need is even harder. Many lawyers can’t actually afford it. There is a world of difference between a single lawyer handling his own little portfolio of clients v. building a real firm that can handle hundreds of clients, day in and day out, with minimal hiccups. 

Even within very large firms, you might run into lawyers who are, effectively, solos. By this I mean that they lack the relationships/connections within their large firm to really ensure their clients will get served properly. Again, the clearest symptom is slowness. If clients are regularly having to follow up with a lawyer, solo or within a firm, because stuff is not getting done, that is a clear sign that you have a startup lawyer who can’t scale.

An easy way to vet a startup lawyer for whether she/he can scale is: 

  • Analyze their website: are there other lawyers/professionals with similar experience on their roster? Some solo lawyers, sensing that smart clients know they can’t scale, will brand themselves as a firm, when really their “firm” is nothing more than… a website.
  • Ask them: when you’re not available, who else do you have quick access to for ensuring my work gets done? Ask for names, and diligence.
  • Talk to their clients: find out what companies in your network already work with them, and ping them for feedback (on your own).

Small businesses who may need their lawyer for one non-urgent thing every year or so don’t need to worry about their lawyer’s scalability. But tech startups are, by nature, high-growth and need regular, consistent, and sometimes urgent legal bandwidth. And changing lawyers/firms can be a serious pain, and lead to mistakes.

Hire a startup lawyer that can scale to the level you expect your company to be within the next 5 years, or you’ll regret it.