Post Category → Formation

How Paralegals and Junior Lawyers Can Hurt Startups

TL;DR: In engaging startup law firms, founders need to pay close attention to the differences between inexperienced junior legal professionals, like paralegals and junior attorneys, relative to experienced senior attorneys and partners. In order to fit their high-cost structures into tight startup budgets, some law firms significantly water down their services by forcing startups to regularly engage mostly with inexperienced junior people; many of whom are advising founders on issues they simply lack appropriate experience and judgment for. For high-stakes, complex issues, many of which come up in the early days of a company, this can lead to costly missteps for which startups end up paying a very high price.

Because of their inexperience, first-time founders often get tripped up in engaging their first legal services providers. Very often, they think they just need “a lawyer,” without understanding that, just like doctors, law has dozens of specialties and sub-specialties; and they need lawyers who specialize in emerging technology companies. But even if they narrow down the options of firms they are talking to, founders often lack an understanding of the differences in how various startup law firms/practices are structured in terms of senior professionals v. junior, and how that has a very material impact on the kind of service the company is going to receive.

In What Partners in Startup Law Firms Do, I walked you through what the different titles and levels of expertise at law firms mean. Partners at serious, respected firms have gone through extremely strict vetting and training processes, ensuring that they’re capable of delivering very high-stakes (very high-cost of errors) and flexible legal expertise in complex, multi-variate contexts that fast-moving startups often find themselves in. The process of moving away from Partners toward more junior-level attorneys and paralegals is often referred to as “de-skilling.” It requires adding rigidity and uniformity to work (checklists, templates, standardization, automation), so that less-capable professionals are able to handle limited-scope projects without blowing things up.

De-skilling is an important and very useful part of building up any law firm, because it allows firms to make highly-specialized and trained Partners accessible to companies when they’re needed (which is often, but certainly not all the time), while also handling lower-stakes and simpler work more efficiently and at lower cost.  While every law firm that works with startups offers a level of de-skilled work, it’s clear that firms vary dramatically in how far they go with it.

Some firms keep partners and senior-level attorneys highly involved with a startup from Day 1, while delegating periodically to paralegals and juniors. Other firms go so far as to make paralegals and junior lawyers the main point of contact for early-stage founders. To a first-time founder, the difference between these two approaches can seem subtle, but in terms of what is actually being delivered by the firm (and long-term outcomes), the differences are the opposite of subtle. In fact, we constantly see fast-growing startups make extremely expensive legal mistakes (or poorly thought-out strategic decisions) because the founders were relying on paralegals and juniors – as a “cost saving” mechanism – when those junior professionals were totally out of their league in the advice they were giving.

When paralegals and junior lawyers are made the main legal contacts of a startup, it’s the law firm’s way of saying “You’re little right now, and therefore just a number to us. But if you become something more significant, we’ll allocate our real expertise (senior level) to you.” The problem with this mindset is that many of the decisions made in the very early days of a startup are setting up the foundation and relationships that the company is going to live with throughout its trajectory. The company may be small at the moment, but actions being taken can be extremely high-impact and permanent, and therefore often require experienced judgment. This is especially true if the company doesn’t fit into a cookie-cutter context that can be distilled into a linear, simplified template for a junior to follow.

High-cost firms with weak(er) brands often over-delegate to inexperienced paralegals and juniors.

While a number of variables can play into it, the single largest driver of how much startup law firms rely on paralegals and junior lawyers is the interplay between the firm’s overall cost structure and the budget that startups engaging that firm are willing to accept. I emphasize that it’s the interplay of those two factors, because while some very high-cost law firms could stretch the amount of junior delegation that they throw onto startups, their reputation is sufficiently strong that founders who engage them are willing to pay the high cost of staying closely in contact with partners and seniors.

The very top of the top-tier of high-cost startup “BigLaw” – the top 3-5 firms, what I often refer to as the “Ferrari” tier – often doesn’t have to play games with excess de-skilling. They’re expensive, founders know they’re expensive, and yet they stay very busy anyway because if you’re legitimately on a Unicorn track (>$15MM Series A, clearly gunning for a 10+ figure long-term valuation) you’re a fool for using any other firm outside of that category. Companies on this track usually don’t struggle to pay their legal bills, even if they’ve engaged a Ferrari firm, because the size of their financings can more than accommodate a large legal budget.

It’s often the second tier of the very high-cost firms that I’ve seen start playing games with over-delegation to juniors. These firms also have extremely high operation costs, including all of the pricey infrastructure of the Ferrari tier, but they don’t have the brand credibility to command appropriately sized budgets from their early-stage clients. How do you make the math work in that case? You offer founders lower-priced fixed-fee projects, while putting in the fine print that the founders are going to spend 99% of their time talking to paralegals and juniors incapable of offering effective advice outside of very narrow contexts. Some of these firms will also throw in some half-baked automation software (cue the “machine learning” and “AI” buzz words) to make over-dependance on juniors seem “cutting edge,” when it’s actually a playbook that firms have been using for some time; and smart entrepreneurs know to avoid it.

The true Ferrari tier of Startup BigLaw often doesn’t need to play games with over-delegation to juniors, because founders who engage them know exactly why those firms are so expensive, have accepted it, and are willing to pay for experienced, senior-level attention. It’s more… OK let’s stick with the car analogy, the “Jaguar” tier of BigLaw (high-cost, but not the top of the top tier) that most often follows the junior-driven playbook. Their operating costs are the same as (or very close to) the Ferrari firms, but they have to offer discounts and lower budgets to attract startup clients (weaker brand); necessitating a watering-down of the actual offering to make the math work. What you end up with is still far from cheap, but requires you to stay within a very rigid, narrowly defined path for everything to not fall completely off the rails.

The point here isn’t to come down hard in saying that one approach or the other is right for every startup, but to simply ensure founders are aware of it, and use their judgment rather than being duped by clever marketing. Companies on what could truly be called “cookie cutter” trajectories can be OK having paralegals and inexperienced junior lawyers be their main legal contacts via what amounts to a “LegalZoom with a little extra” type of legal service offering. But experience has shown me that many entrepreneurs over-estimate how much of their legal work is (air quotes) “standard,” which can result in a blow-up once the legal technical debt comes due.

For negotiation-oriented issues, like structuring the subtleties of financings or serious Board-level discussions, there may also be ulterior motives behind investors pushing their portfolio companies to lean on inexperienced advisors (law firms that push startups to use junior people), with fabricated “standards” as an excuse. If it’s all just templates and standards, then what’s the harm in having your investors pick your law firm, right? Watch incentives and conflicts of interest. See: Negotiation is Relationship Building and When VCs “own” your startup’s lawyers.

When you, as a first-time entrepreneur, don’t know what you don’t know about high-stakes legal and financing issues, and you’re interacting with extremely seasoned and smart (but misaligned) business players, the last thing you want is to be relying on advisors who are only marginally more experienced than you are; or worse, are also “owned” by the money across the table.

High-end Boutique Law Firms are leaner and can offer lower costs, without over-reliance on inexperienced juniors.

Excess amounts of de-skilling and delegation to paralegals/juniors is not the only way that the legal market has attempted to lower legal costs for startups. An alternative, which we are a part of, is the emergence of high-end boutique law firms. These firms can offer regular access to true Partners and Senior Lawyers, but at rates equivalent to what the Ferrari tier charges for junior lawyers (hundreds less per hour); because they’ve cut out a lot of the overhead infrastructure that tends to inflate the cost of BigLaw. If your clients are Apple, Uber, and companies on that track (Ferrari tier of BigLaw), the way you build and market your firm will by necessity look very different from firms who deliberately target clients that, while serious and building important products/services, rarely make it onto the headlines of the NYT or WSJ (boutique firms).

This “lower overhead” (lean) boutique approach to law is not without its trade-offs, and I make that clear in my writings on the emerging boutique ecosystem. Every firm structure ultimately still has to follow math, and there simply is no magical wand that you can waive to deliver (again with the car analogies) Ferrari performance and resources at Acura/BMW prices. The very highest-end law firms that cater to marquee billion-dollar companies (and aspiring Unicorns) are extraordinarily expensive to grow and run, and there are very smart people running them who are well aware of how to safely trim costs within the constraints of what it takes to serve their clients. Boutiques offer a fundamentally different cost structure, because they are designed for a fundamentally different kind of client that doesn’t need a lot of the resources of the Ferrari class.

And please spare me the vaporware marketing suggesting that some new whiz-bang-pow piece of automation technology fundamentally changes the math of law firm economics. At the tier of corporate legal work that we are discussing (scaled, high-complexity and variability, high cost of errors, contextualized subjectivity), the amount of work even within the realm of possibility of being automated away with AI and data is a microscopic portion of what serious firms do. With apologies to the soylent-sipping lawyer haters out there (I see you, Silicon Valley uber-engineers), Siri isn’t going to negotiate your financings, or navigate your corporate governance, any time soon. We love legal tech and have adopted a lot of useful new tools, some of which are still in private beta; but nothing in the next 5-10 year horizon is going to fundamentally re-make law firms. Not at this level of complexity.

Properly structured high-end boutique law firms can and do offer significantly lower costs than BigLaw, without denying startups regular access to Partner-level, flexible strategic expertise. But the savings come from removing costs and resources that are required only if you are trying to serve the very highest end of the tech market; and boutiques don’t.

I tell founders all the time, “If you legitimately think an IPO or billion dollar valuation is on your visible horizon, please hang up and call the Ferrari tier of BigLaw.” We don’t do IPOs, and we’re not going to do your 10-figure cross-border merger involving 5,000 employees, 500 stockholders, and four tax jurisdictions. Hard pass.

At E/N, our Partners are perfectly happy letting the Ferrari firms compete for and serve Ferrari clients, while we work with a segment of the tech ecosystem that has been badly underserved.  Our clients tend to exit between $50MM and $250-ish MM, and obviously at lower sizes if it’s an earlier-than-expected sale. Their legal needs and financings are sufficiently large and complex to pay rates high enough to support serious lawyers and right-sized infrastructure for scalability, but the founders also have an instinctive understanding that their trajectory isn’t going to be anything you’d call “cookie cutter,” nor are they aspiring to be a Unicorn.

High-end boutique startup law firms thus offer a balanced compromise and useful value proposition for founders building companies that clearly need credible, highly-trained and specialized senior-level expertise (without reckless over-reliance on paralegals and juniors, or half-baked automation software), but for whom the Ferrari tier of the tech legal market is clearly overkill. Boutiques cannot and do not scale like the very top-tier of BigLaw, but the fact is that an important segment of the tech ecosystem doesn’t need them to.

Founders exploring the legal market should, at a minimum, ensure that they understand not just the varying cost structures of law firms, but also the varying levels of expertise/service those firms are offering within their cost structures. Two firms might look like apples to apples on the surface, but what your budget actually gets you ends up being wildly different. Firms promising low fees in exchange for inexperienced junior professionals (who can’t navigate significant complexity/flexibility safely, and offer poorly-fitted rigid advice) are selling something that – to experienced players who aren’t easily fooled – looks far less like efficiency, and far more like a time bomb.

What Partners in Startup Law Firms Do

TL;DR: True “Partners” in serious law firms deliver high-impact, high-complexity legal advisory safely, because of their years of experience and having gone through deep institutional vetting processes with very high standards. Apart from Partners, firms often have a roster of non-partners who can handle more routine and “de-skilled” work efficiently without the higher rates of Partners. But inexperienced entrepreneurs run into very expensive problems when they think that, just because some of their legal needs can be done more cheaply by de-skilled legal labor, they don’t need Partners at all.

Related Reading: Startup Lawyers – Explained 

First-time founders are often mystified by the organizational structure of law firms, because of how different it is from a product-oriented business. They often think they simply need “a lawyer,” without digging deeper into the important differences among lawyers.

The first thing to understand is lawyer specialization. See Why Startups Need Specialist Lawyers. While a typical “startup lawyer” is (or should be) in fact a corporate/securities lawyer with a heavy specialization in “emerging companies” work, there are many other kinds of lawyers that scaling startups eventually need: employment, tax, commercial/tech transactions, patent (sometimes), data privacy, etc.

Once you get past understanding the specialty of the particular lawyer, you start getting into differences among lawyers within a specialty. If you engage a typical law firm, either BigLaw or a decent sized boutique (like E/N), you’ll see titles like Junior Associate (in our firm juniors are called Fellows), Senior Associate, Counsel, and Partner. Those titles are very important in terms of signaling the skillset that a particular lawyer brings to the table.

Very broadly speaking, the title “Partner” refers to the most senior (in expertise) people within a law firm. In a law firm that recruits top-tier legal talent, just being hired by the firm requires being in the top 5-10% of the overall talent pool. After the initial “filter” of getting hired, a lawyer has to have at least 7-9 yrs of experience within a specialty before they’re even eligible to become a Partner. Achieving that level of experience is by no means an automatic ticket. A very small % of lawyers in the market are eligible to even be hired by a top-tier firm, and then an even smaller % of those lawyers will make Partner. On top of needing to have done the job for X number of years, serious law firms have strict criteria for vetting the work product and judgment that a lawyer has produced, from a quality, complexity, and client satisfaction standpoint, in order to determine whether they are, in a sense, worthy of the Partner title.

You can think of serious law firms as universities for specialized vetting and practical training of lawyers, and the Partner title as a PhD.  That obviously means that the legitimacy of the law firm’s brand matters wildly for whether the term Partner even means anything. Just like a PhD from Harvard or Stanford, or any institution highly regarded within a particular field, says a lot more than one from a school no one has ever heard of, anyone with minimal credentials can hang out a shingle and call themselves a “Partner” of their firm; in which case the title is meaningless.

Within the legal field, you’ll often see a single lawyer get preciously close to being fired by Law Firm A because of how low quality that lawyer’s work product is (not even meeting Firm A’s minimum standards), and yet end up a “Partner” at random Law Firm B that dishes titles out like candy, because their brand lacks real value. Law firms are not created equal. Not even close.

Why is all of this vetting even necessary? Specialization, even sub-specialization, and heavy quality filtering processes are unusual for many fields and industries. The answer relates to issues I’ve discussed in Legal Technical Debt. Unlike software and other product-oriented industries, mistakes in law, particularly high-stakes law, are often extremely expensive to fix, if they are even fixable at all. Not infrequently, they’re permanent. Once a contract is signed, or an action with potential legal liability is taken, there’s no v1.2 over-the-air fix that can be issued unilaterally if bugs (errors) arise. Contracts would be pointless if you could tweak important terms without the other side’s consent.

This is why applying software industry thinking like “move fast and break things” can be spectacularly disastrous when approaching legal issues, because that thinking only works when you can take an iterative approach to low-stakes bugs. To make matters even worse and harder, legal mistakes are rarely discovered immediately after they are committed. They often sit in the background for years until the full reality comes out, with “interest” having compounded on the “debt.” The “complexity” that top-tier firms are designed to safely manage isn’t something that they themselves fabricate out of thin air. As companies grow, the number of relevant (extremely smart) parties with competing/conflicting high-stakes interests grows, as do the number of legal issues they touch; and many of those issues weave into each other by necessity such that a move on one triggers cascading, unintuitive effects on others. The complexity (and cost of errors) is inherent and unavoidable, like a highly contextualized and fragmented code base of contracts, relationships, regulations, and complex formulas, but where the cost of a “bug” is 50x.

So within top-tier law firms with reputable brands and vetting processes, Partners represent the highest level of flexible expertise, quality control, and experienced judgment that a particular firm is able to offer for managing very high-stakes, very complex and strategic issues safely without producing expensive errors whose costs are borne by clients. And ensuring you have direct access to that expertise is important for your most complex, high-stakes legal advisory.  But that being said, not everything you need from a law firm requires such a high level of expertise; and that’s why law firms have lower-cost, well-trained people with other titles and levels of vetting, like associates and paralegals.

As you move from Partners to lower-level professionals, the process is often referred to in some circles as de-skilling. It basically means that the law firm as an institution has put in place the appropriate quality control mechanisms to allow people with less fully-vetted and more narrow skillsets to do a limited segment of work that is appropriate for their abilities, while still producing an end-product meeting the firm’s quality standards. Highly-detailed checklists, template forms, and software-supported systems of institutional knowledge are common ways that law firms de-skill legal work (make it easier to do by introducing training wheels and boundaries) and push it down to people who charge less but are also more available than Partners.

Partners, for example, don’t need to issue your random option grants. Non-lawyers with appropriate oversight can do that. A Partner also doesn’t need to review your random NDA.  But a high-stakes term sheet, M&A deal, or key hire? You don’t want a non-partner leading that, because it’s too high-impact and the right output depends too much on highly contextualized, subjective, and complex nuances (human judgment) as opposed to simplified rules that a lower-level professional can follow. The typical way a startup engages a law firm is to view one or two Partners as the quarterbacks and main contacts of the legal team, who can then delegate lower-level, de-skilled work to cheaper but still well-monitored professionals. This puts the most experienced and trusted legal advisors in charge of the highest leverage strategic issues, while integrating them with cheaper professionals who can also get more routine work done.

The spectrum of Partners for high-stakes, high-complexity work through de-skilled professionals like associates and paralegals helps explain a lot about the different kinds of legal service providers you’ll encounter in the market.

Some firms (often small niche boutiques) are all Partners. Not a single lower-level non-partner on the roster. That can make sense if the work being done is all extremely complex and bespoke, as might be the case in very cutting edge fields. But in most fields (including corporate/securities law) a Partner-only firm will just mean you’re overpaying for work that could be done safely by someone cheaper, and also probably be done faster because larger rosters of professionals with different skillsets prevent bottlenecks by allowing work to be triaged (like a hospital). See: When a Startup Lawyer Can’t Scale for a deep-dive into what happens when startups engage solo lawyers or Partners who don’t have real infrastructure for scalability and full service.

On the opposite end of the spectrum are so-called law firms that don’t have any true Partners, meaning no one whose fully led a client base into high-stakes 9 or 10-figure highly-complex transactions, and gone through the vetting process of already reputable firms and achieved the Partner title in a meaningful sense. Firms full of non-partners will heavily gravitate toward de-skilled work, which often means large amounts of standardization and therefore inflexibility. Their less-experienced lawyers and professionals aren’t capable of handling high levels of complexity safely, so they’ll necessarily attempt to standardize their offerings to make them easier and safer to deliver; with the value proposition being that they can also be cheaper, because they have no expensive Partners to pay.

This heavily de-skilled and standardized approach to legal can work for a certain kind of client needing certain kinds of lower-stakes work, but it will run into problems if they try to handle everything a growing client needs, including higher complexity, higher-stakes transactions that simply cannot be simplified or distilled into an algorithm or checklist for lower-level professionals to manage. While some non-partner firms still refer to themselves as law firms, others instead refer to themselves as “alternative legal services providers.” Ultimately what they call themselves matters less than the fact that their value proposition to clients is very different from a law firm with true Partners.

A real top-tier law firm offers a blend of high-complexity, high-stakes Partner-led flexible legal judgment with more routinized de-skilled work, while an alternative legal provider leans heavily on de-skilled, more routine low-stakes work that “tops out” on how much flexibility and complexity in can handle. Serious firms are designed like Partner-centric creative studios at the top of their hierarchy, because their core value proposition is extremely well-trained and specialized intellectual horsepower capable of addressing hundreds/thousands of unique and very high-impact circumstances effectively. Highly-vetted (and compensated) Partners are the only “full stack” experts capable of ensuring quality control of that kind of highly variable and complex service with extremely high error costs. Remove those Partners, and the whole thing collapses into a nuclear disaster of errors and poor judgment.

Alternative legal providers are, instead, structured more like factories or product-oriented companies, because their offering is by necessity limited and simplified through routinization and inflexibility. Eliminate Partners (with their unique and rare, and therefore expensive, skillset) from your cost structure, and you’ll certainly cut costs, but you’ve also set a hard ceiling on how much flexibility and complexity your operation can now handle without a blow-up. The core “service” of an alternative provider isn’t actually experienced, flexible human judgment, but rigid institutional processes with less-skilled (cheaper) people adding a light layer of variability.

It’s much riskier for a startup led by inexperienced entrepreneurs to engage a non-partner alternative legal provider (instead of a law firm) than it would be for, say, a large company with an in-house counsel. Why? Remember, true Partners serve as the highest-level quality control and strategic quarterbacks of a legal team. If you’re a large company with highly experienced in-house counsel, they (the in-house lawyer) can serve as your Partner of sorts; developing a unique strategy appropriate for the context, monitoring for errors, and coordinating different appropriately trained people to execute on the strategy. But early-stage startups don’t have highly experienced (and highly paid) in-house lawyers. They cost hundreds of thousands of dollars, and in some cases even millions, a year.

Because inexperienced entrepreneurs have no idea how to appropriately vet and triage high-stakes legal work, or how to develop a contextualized and flexible legal strategy, having them engage legal service providers full of nothing but non-partners capable of only managing a limited scope of “standardized” work starts off a very long-term game of legal russian roulette. Sure, your option grants will probably be done right, as will an NDA review. But eventually (pretty quickly, usually) a higher-stakes, higher-complexity situation arises, and cookie-cutter de-skilled offerings just won’t work. No serious company follows a fully “standard” (whatever that means) growth trajectory.

Real Partners are expensive, and you often need them only for your highest-stakes issues where a wrong decision can have million or even billion-dollar implications, but when you need them, you really need them.  These kinds of situations arise often and unpredictably in the early days of a fragile, chaotic startup where the overall trajectory of the entire business is still being sorted out, founders are negotiating with market players 100x as experienced as they are, and a single decision can produce permanent consequences that you’ll have to live with for years.

So when entrepreneurs are diligencing firms to work with, they need to be thinking about a number of variables:

  • Does the firm have the right specialty of work I’m looking for, and access to other specialties I might need?
  • Does this firm have true Partners (with credible expertise and vetted backgrounds) that I can trust to handle non-routine and very high-stakes, high-complexity matters safely?
  • But do they also have the appropriate institutional infrastructure of lower-level professionals to get less high-stakes but still important work done on time and correctly (de-skilled work)?

Partners are necessary for high-stakes, high-complexity work that can’t fit within a template framework. Non-partners (and infrastructure) are necessary for speed and efficiency on day-to-day needs that are more predictable. When the “buyer” of legal services is an experienced in-house general counsel, they can often do without Partners. That’s why a lot of the most successful alternative legal service providers (who don’t have Partners) entering the market are targeting large companies with in-house counsel who can safely bypass Partners for specific segments of more routine, lower-stakes work, while correctly identifying higher-impact issues and applying Partner-level expertise to them.

But startups led by entrepreneurs engaging directly with a firm should understand that because no one on their internal roster has the expertise to credibly handle and triage the most high-impact, high-complexity legal issues that they’ll inevitably run into as they scale, Partners are essential, including for interacting with highly experienced and misaligned players on the other side of the negotiation table (like investors) who have their own Partners advising them. Focusing too much on routine, low-stakes things like how quickly or cheaply a firm can check off some boxes or fill in a template misses the much bigger picture of why the number of law firms taken seriously by the top players in the industry is much smaller than the total number of firms in the market.

People building a coffee shop or other small business (with very limited legal needs) might engage LegalZoom, or a productized de-skilled legal offering that looks like LegalZoom with paralegals and moderately-skilled attorneys added on top to add a narrow band of customization. And large companies with experienced in-house counsel will regularly engage alternative providers for narrow segments of lower-stakes work that doesn’t require Partner attention. But early-stage executives building highly complex enterprises facing extremely high-impact strategic legal decisions know that the issues they’re touching are much higher-stakes, and focus on the Partners of the firms they engage for that reason.

Some alternative legal providers are very open about their narrow capabilities, and how they’re very different from an actual law firm. They are serving a legitimate, unmet need by heavily productizing a narrow segment of high-volume, lower-margin work. Clerky is a great example of a reliable, productized startup legal offering that doesn’t pretend to replace law firms, and is open in its marketing about what it is and what it’s not; a tool for handling a very limited scope of work for very early-stage startups who can’t yet afford quality counsel, or have counsel but need extremely simple, standardized tasks done cheaply but safely (with software automation) because of their small budget.

But sometimes alternative providers like to mask their limitations, and market themselves as “full service” firms; and Partners at actual law firms then grab some popcorn and wait for the fireworks. While scaled enterprises with experienced in-house counsel are the most appropriate market for de-skilled legal “products,” those “buyers” are also far more scrutinizing of legal services because they have the experience and judgment to separate fact from fiction. Inexperienced entrepreneurs don’t know what they don’t know about legal, which makes them easier targets for bad actors peddling X or Y legal product as a comprehensive solution, when they actually carry enormous gaps and limitations that will only become obvious when it’s too late to fix them. First-time founders are also prime targets for misaligned but clever market players (investors, commercial partners, acquirers) across the table who might want a young, inexperienced startup to be disarmed with less capable advisors; allowing that player to then take advantage of the uneven playing field.

De-skilled legal labor enabled by technology and well-designed processes absolutely has its place in the market – and well-run firms take advantage of it; but it’s as a supplement to the high-stakes, high-complexity work that the smartest industry players trust top-tier firms and Partners to do, not as a replacement. Anyone suggesting otherwise is marketing a highly-polished time bomb as a solution. 

Ask a law firm the right questions about the scalability and credibility of their expertise, including their Partners, or the reality check delivered to you when the legal “technical debt” comes due will be ice cold.

Small Business v. Startup

TL;DR: Small business law is nowhere near the same thing as Startup Law. Many of the expensive legal errors that we see founders make often result from not understanding their distinction.

Background reading:

As I’ve written many times before, what separates startup lawyers from the vast majority of other kinds of services that an early-stage founder will need to engage is the extremely high cost, and in some cases permanence, of errors. Making a mistake in coding, accounting, or other areas is often a matter of issuing a version update, changing a report, or perhaps paying a small fee. Making a mistake in a contract (which can’t be unilaterally fixed), or taking a misstep that exposes you to legal liability, can create irreversible exposure that in some cases blows up companies, or in others proves 10x-20x+ more expensive than simply having done it properly the first time.

This is why smart entrepreneurs building serious companies take far more seriously what lawyers they engage – their background, credentials, experience, network and reputation – than they do for other professionals.

One way to avoid huge costs in engaging lawyers is to understand what distinguishes startup lawyers from other lawyers, and to really understand the difference between a small business and a startup; because it’s “small business lawyers” whom I usually encounter making the most egregious mistakes that harm startup founders.

A “startup lawyer” is a corporate/securities lawyer with a heavy specialization in early-stage companies. I have seen litigators, real estate lawyers, patent lawyers, etc. who for some reason represent themselves also as “startup lawyers,” and any founder who understands how legal services work should be completely terrified of using them. See: How fake startup lawyers hurt founders.

A “startup” is a business that, while starting out small, expects to (i) grow much more quickly relative to a typical new business, (ii) expects to have more cross-jurisdictional legal issues (less local) either via hiring across state/country lines or customer relationships across state/country lines, (iii) usually intends to use equity in some manner for recruiting purposes, instead of keeping it closely held by 1-2 founders/partners, and (iv) often, but not always, expects some form of capital injection from angel or seed investors in the near future.

Contrast a “startup,” with a small business, like a coffee shop, or a boutique clothing store. In the small business case, early customers and employees/contractors are expected to be geographically contained, it would be highly unusual to use equity ownership for recruiting purposes, and beyond money from a partner or two, it would be very unusual to raise outside capital for years until the business has proven successful and an expansion plan has been put in place.

Startups, as defined above, hit far more complex corporate, securities, tax, financial, intellectual property, labor/employment, etc. legal issues far more quickly than small businesses, and that is why startup lawyers and small business lawyers are very different people, with very different credentials. If you contrast a highly regarded startup lawyer with a small business lawyer, you’ll find the former will almost invariably have graduated from much higher ranked schools, trained at much larger firms early on in their career, and generally be connected and have access to specialists in a much wider variety of legal fields; because startup law is way more complicated, and prone to expensive errors, than small business law.

And this is why so many of the expensive errors we encounter when startups arrive at our doorstep come from founders engaging small business lawyers lacking the background and resources to properly do the work; on top of services like LegalZoom and Rocket Lawyer, which are not structured for startups.

A small business and a startup are not the same thing; not even close. From a legal perspective, they are totally different worlds. In fact, I rarely/ever encounter specialized startup lawyers who even represent themselves as small business lawyers; but I too often see the reverse, where small business lawyers will throw in “startup law” on their website to see if they can train on a founder’s dime.

Do your diligence, or you’ll regret it.

Startup Law Pricing: Fixed v. Hourly

TL;DR: There are very natural reasons – inherent in the dynamics of complex, high-end legal services, including for startups – that explain why flexible time-based billing is still the most common pricing structure among law firms specialized in emerging companies (startup) law. And there are very real downsides and limitations to “fixed fee” pricing that founders all need to be aware of; including, most importantly, that flat fees reward law firms for reducing the quality and flexibility of their work (such as not negotiating key terms, and delegating to junior professionals) in ways that first-time entrepreneurs are often unable to detect. Aggressive investors particularly like promoting flat fees as a way to incentivize your lawyers to not negotiate.

First-time entrepreneurs, who’ve usually never hired serious lawyers before, understandably get heart burn when thinking about the cost of legal services. The goal of this post is to provide some clarity on how legal billing for startups works in general, and to also bust a few myths circulating around ecosystems on the topic.

First, I strongly suggest reading: Lies About Startup Legal Fees. A few highlights:

  • Long-term, client-facing legal technology does not dramatically cut legal spend for startups.
    • As a legal CTO who regularly tests and adopts new legal tech for our boutique firm, I have a very clear understanding of what technology, including cutting edge machine learning/AI, is capable of accomplishing in high-end, high-complexity legal services. In the very early days, where complexity and cross-client variability is minimal (like formations) tech can and does play a key role in keeping costs down, but in startup law its utility breaks down fast. I am a very early adopter, but one thing I don’t adopt is techno-BS.
    • In the long-term, given the high, often irreversible cost of errors and the significant variability between clients, legal technology plays only a small role in cutting overall spending. This is, at the end of the day, a highly trained human judgment/skill driven business, with targeted technology in the background. Anyone trying to make this area “LegalZoom-y” will eventually crash right into the fundamental realities of the business.
    • While some techies will certainly tell you otherwise, the most “disruptive” developments in law aren’t in adopting software or technology, but in eliminating unproductive overhead, simplifying firm structures, and implementing project and knowledge management more consistently and deeply; enabled by off-the-shelf tech that is hardly earth shattering. These strategies cut the cost of legal by hundreds of dollars an hour, while improving responsiveness and quality; which exactly zero pieces of tech can even get close to doing. See: The Boutique Ecosystem v. BigLaw. Subtractive, not additive, innovation.

Sidenote: there are big market opportunities for AI/ML and other legal tech in serving very large clients with hundreds/thousands of related contracts and transactions, all on top of a single corporate structure. I call this “vertical” legal tech. It’s in “horizontal” legal tech (automation across companies) that much of legal tech’s promise has been overblown. After automating secretary/paralegal work, it hits a hard wall of customization, complexity, and high error cost that renders the most cutting edge technology virtually useless.

  • DIY almost always costs more in the long-run – “Legal Technical Debt” is real. The cost of fixing legal errors compounds over time, and saving $1 today will very often cost you $5-10 in a few months or years, no matter how many blog posts you’ve read or templates you’ve downloaded.
  • Compensation and institutional infrastructure drive legal quality and scalability, which controls costs. – Great lawyers, just like great software developers, expect to be compensated for their talent. Oh, and btw, Law School costs about $200-250k and 3 years of your life. Very large firms and smaller firms can both have high-quality lawyers if they pay them properly, with the real difference being the additional overhead on top of compensation. Larger firms have much higher overhead to pay for infrastructure needed to represent unicorns in very large deals. Boutique firms are lower-overhead, and better designed for “normals.” Solos are best for small businesses.

Second, another Startup Law myth worth busting is the idea that fixing legal fees (as opposed to more flexible hourly billing) “aligns” incentives between entrepreneurs and their lawyers. I touch on this topic a bit in Standardization v. Flexibility in Startup Law.

It’s become lazily fashionable to criticize the billable hour as the main source of inefficiency in law. But the reluctance in traditional law firms to adopt technology and improve processes is driven, at least among startup-focused firms, far more by the decision-making structure of the firms, and the inertia that creates, than the billable hour. Partners in those firms often have so much control over how their clients are served, that the firm as an institution is incapable of mandating large-scale change. The egos of partners hold back the profession far more than billing structure.

The idea that time-based billing means lawyers are just going to maximize how much they charge clients, and never optimize, is economically ridiculous and ignorant. The lawyer-client relationship is very long-term, and smart entrepreneurs can easily get info in the market if they feel their lawyers are over-charging. Switching to more efficient firms is not that difficult.  Costs in Startup Law have been going down significantly over the past decade, with hourly billing still being the norm. There is a very short feedback loop on law firm pricing, which incentivizes firms to reduce truly unnecessary costs. A team can very easily take an invoice and ask other founders/startups whether it is inflated relative to market norms. The feedback loop on qualitative issues, like poor negotiation or errors, is far longer and more opaque, because those issues often aren’t discovered until years later, and even then its hard to compare apples to apples between companies. 

If you (cynically) think that hourly billing gives your lawyers a strong incentive to over-work, then fixed billing gives your lawyers an even stronger incentive to under-work. By guaranteeing a law firm a price on a transaction, regardless of how long it takes, you’ve tied their ROI to how little time they spend on it; narrowing optionality, delegating to less trained people, and rushing through material issues all become drivers of profitability. In the world of serious legal services, where speed/cheapness are hardly the only concern of clients, and there are very material, difficult-to-detect qualitative variables in service output, the idea that this is “aligning” lawyers with their clients is nonsense. Fixed fees do not align incentives; they reverse them.

Fixing fees, when the circumstances for “fixability” aren’t really in place (more on that below), therefore raises serious quality concerns. In healthcare, a botched job is almost always quickly noticeable to the patient. In law, especially startup law (where the client often isn’t seasoned enough to detect errors/rushed work) big quality issues can, and often do, take years to surface, since they’re tucked away in docs that sit unused until a major event, or the inexperienced founders simply never realize that an option their lawyer could have brought up, wasn’t. This, by the way, is why the most experienced players in any market are always deeply skeptical of new legal service entrants promising low prices, even if they’re early adopters in many other areas. It takes real effort and quality signaling to get them off of reputable legal brands. That reluctance is logical, given the opaque and high stakes nature of the service; very different from most fields.

If your law firm has agreed to a fixed fee, and suddenly you find yourself spending a lot more time interacting with paralegals working off of checklists (instead of lawyers), now you know what “alignment” really means.  Fixed fees are not magical, and they come with very real tradeoffs. You can have the exact same end-price for a transaction between time-based lawyers and flat fee lawyers, and the flat fee lawyers will be rewarded for minimizing the work they perform, and reducing quality; especially when the client isn’t fully capable of assessing that quality, which is often the case with new entrepreneurs. 

In a high-stakes deal, guess who would love to see your lawyers rush and under-negotiate? Investors. Watch out for law firms with deep ties to the investor community. If they’re peddling fixed fees, it’s because their real clients (investors) are incentivizing them to.

The predominance of the hourly billing model among high-end law firms is, first and foremost, a reflection of the significant variability among client needs and expectations, and the fact that flexible hourly billing is the most effective way to tailor work for each client, without reducing quality standards.

  • Need a reseller agreement? We’ve drafted them for $1.5K, $5K, and over $20K. Unpredictable variables: strategic importance of the deal, dollar value, size of the company, location, who the reseller is, who the reseller’s lawyers are, industry, and a dozen others.
  • I see “seed stage” startups who spend nothing on legal for a full year, some that spend $10K, others $25K, and a few that spend $100K, all due to widely varying needs.
  • I’ve seen “Series A” financings close for $15K, $30K, and over $100K, and everywhere in-between, and all for perfectly logical reasons understood by the client in the context.
  • M&A deals are totally all over the place in terms of time and costs.
  • In short, companies are not like medical patients. Biology and medical science produce very clear “bell curves” that enable things like health insurance pricing and fixed-fee medical procedure costs. There is no underlying DNA/biology constraining variability among companies, and therefore far less rhyme or reason across a legal client base.  The drivers of legal cost variability are far wider, subjective, unpredictable, and randomly distributed, which makes fixed-fee pricing not feasible for many broad-scope firms and clients.
    • Name another field in which, on top of there being significant variability of the working environment (the legal/contract ‘code base’ for each company), there are also subjective drivers of cost on both the client side (your client’s preferences heavily drive time commitment) and also the third-party side (the counterparty/lawyers on the other side can dramatically increase time commitment). The level of structural uncertainty and variability is much higher than healthcare, construction, manufacturing, consulting, and many other industries.
  • Given the above, the only way to make fixed-fee pricing work economically in corporate law is to “tame” this variability, and that “taming” results in downsides that are often unacceptable both to firms and to clients.

So what are the variables that help “tame” client work enough to make fixed fee pricing viable in Startup Law?

A. Very early work – There is a reason that formation documents are the most heavily automated and price-fixed in startup law: the number of unknowns and idiosyncracies are minimized. When a startup has decided on a “standard” VC-track C-Corp structure (which, btw, we see this becoming a less obvious decision for founders – see More Startups are LLCs), there are no outside parties to negotiate with, or other lawyers to deal with. The scope is clear, and the circumstances in which costs could go off the rails are minimized. Most of our clients are incorporated/formed on a fixed fee.

  • Anyone who observes the heavily tech automation / fixed-fee driven nature of startup formations and extrapolates that across the full spectrum of legal work is incredibly naive as to how complexity and client variability increase exponentially immediately after formation; as circumstantial differences start to creep into the legal “code base.” The low hanging fruit for legal automation has been eaten (see Clerky), and people who understand both technology and law are rightfully skeptical re: what even the most advanced, cutting edge AI can really do for high-complexity corporate law for the next decade, outside of very *very* narrow applications.

B. Narrow the scope – Remember the point that fixed fees don’t align incentives, but instead reverse them? Fixed fees make it costless for the client to demand more work. This logically means the law firm has to start drawing hard boundaries over what is acceptable for the client to ask for (inflexibility). We recently started our Alpha Program offering a limited scope of early-stage work on a fixed monthly fee. While there’s definitely been interest, a lot of our best clients opt out simply because they prefer maximal flexibility in terms of what work gets done, and how it gets done. In their mind, the whole point of hiring serious lawyers, just like hiring serious software developers, is to not get boxed into a narrow approach.

C. Narrow the client profile – I know a decent number of firms that have built successful practices on heavy fixed fee utilization. The almost universal way they’ve accomplished this is by dramatically narrowing the type of client they take on. Specific industries, specific geographic locations, specific sizes or growth trajectories, etc. Pick a narrow niche, and own it. If you can make your clients look and act far more alike by limiting the type of client you take on, you can more easily create that healthcare-like “bell curve,” and then start pegging prices. But for many law firms that have a diverse client base with diverse needs – including firms that represent startups with varying industries, growth and funding trajectories, subjective preferences, etc. – this is simply not feasible. I have never seen a firm or lawyer successfully utilize fixed-fees at scale without significantly narrowing their target client profile; the economics otherwise don’t work.

  • Note: I have made the argument many times that part of “BigLaw’s” problem is that it simply does too much, and that the “subtractive innovation” brought about by lean boutiques with more specialized practice areas that can collaborate ad-hoc is a meaningful transformation of the legal market. But virtually every specialized high-end boutique we work with still heavily utilizes time-based billing, for all the reasons described here. For fixed-fees to work, you need far narrower specialization than by practice area; like “small businesses under 40 employees” or on the opposite end “very high-growth SaaS companies raising top-tier traditional venture capital.”
  • The need for very narrow specialization driven by fixed fees will create problems for clients who engage a firm that isn’t a 100% good fit. They will inevitably find themselves pushed to mold their company to the rigid capabilities of the narrow firm, which will feel like putting the cart before the horse. What this means is that the decision to keep many law firms more generalist, with more flexible time-based billing, is for many clients a feature; not a bug. 

Our approach to pricing legal services for our startup clients is the result of sitting down and talking to founders about what their concerns really are. What we’ve found is that, more than fixing prices (with all of the downsides that entails), clients just want to prevent surprises, and to not feel like they overpaid. If something takes longer for very good reasons, it’s OK for it to cost more. If it can be done faster, while fulfilling all the client’s goals, then cost-savings should go to the client. Happy clients generate more work and referrals. When combined with transparency and open dialogue, there’s a symmetry and fairness in this approach that is often much more aligned with the “partnership” nature of the long-term lawyer-client relationship than the inflexible dynamics of buying a hardened product. 

So we’ve implemented a number of processes to accomplish that – including regular (more frequent than monthly) billing reports, transparent budget ranges based on our historical client data, and flexible payment options. We’ve found that these go very far toward helping startups get comfortable with their legal bills, without deluding anyone into thinking that you can somehow universally fix the costs of services that are inherently unpredictable to everyone. Our Net Promoter Score (NPS) as of today is 77.

Tying this all together, entrepreneurs should understand that there are very logical, client-centric reasons for why the billable hour remains the dominant billing model for serious law firms working with diverse clients; notwithstanding what lazy arm-chair commentators say about the billable hour. Law is hardly the only industry that utilizes “cost plus” billing, which is what the billable hour is. Occasionally I run into founders who struggle to grasp this, and then I’ll find that they’ve engaged a software developer as a contractor who, lo and behold, is paid by the hour. Many startup lawyers refer to their job as “coding in Word.”

That developer didn’t go to Stanford to practice cookie-cutter programming, and I didn’t go to Harvard to practice cookie-cutter law.  Fixed fees are not – at all – a magical panacea that suddenly smooths out all the challenges of engaging serious lawyers. To the contrary, they create their own major problems.  Open dialogue between client and law firm will keep costs reasonable, and minimize surprises, without getting stuck with all the downsides of productizing something that fundamentally isn’t a product.

How fake “Startup Lawyers” hurt entrepreneurs

TL;DR: Entrepreneurs need to be aware of the growing trend of lawyers from random backgrounds re-branding themselves as “startup lawyers,” despite having only the thinnest understanding of the subject.

Background reading:

There are two trends worth discussing in this post, both of which I’ve seen seriously hurt entrepreneurs and startups.

Thrown to the juniors.

First, one reason many entrepreneurs are dropping very large law firms for more “right sized” boutiques is that those law firms have become so unaffordable for almost any early-stage company that entrepreneurs end up working almost exclusively with very young, junior lawyers. I touched on this issue briefly in The Problem with Chasing Whales.  One partner in our firm worked on a seed financing in which his BigLaw counterparty literally said on their phone call “I only have 15 minutes to spend on this deal; otherwise I start having to write off time.”

The firm you engage may have a marquee brand, but if to that firm you are small potatoes, you will end up working with that firm’s B or C-team, which will put you much worse off than having hired a set of lawyers that take your company more seriously.

Junior professionals absolutely have a place in law, but that place is not working directly with CEOs on their most strategic decisions, no matter the size of the company. It’s working mostly in the background, with real senior level involvement and oversight. When an entrepreneur is thrown to junior lawyers, it reflects how the firm has prioritized (or not) that work, even if to the entrepreneur the project is extremely important.

Fake “startup lawyers.”

But the title of this post is really about a second, even more troubling, trend. I’ve been seeing an increasing number of litigators, real estate lawyers, patent lawyers, and lawyers with all kinds of backgrounds who have suddenly decided to brand themselves as “startup lawyers.” A little tweak to the website, read a few blog posts, perhaps host a free session at a co-working space or two, and voila, now they’re ready to help entrepreneurs.

Holy crap is this dangerous. Imagine if you were talking to a doctor about a potentially serious heart condition, inquired about their experience, and then got back the following response: “well, I’ve been a dermatologist for the past 5 years, but after reading a few blog posts I decided I’d try my hand at cardiology.” Walk out the door, fast.

In the “thrown to the juniors” case, at least those juniors have some accurate, up-to-date institutional infrastructure (templates, checklists, internal firm training, partner review, etc.) to rely on as they try to help startups. But these random re-branded lawyers are essentially training on early-stage companies, while relying on extremely generalized resources (like this blog) as guidance. We see mistakes everywhere, often because we get hired to clean up the mess.

In every serious law firm with a real reputation for representing emerging companies, lawyers who call themselves “startup lawyers” are corporate/securities specialists with a strong understanding of early-stage financing, tax, commercial, IP, M&A, and labor law as they typically relate to early-stage companies. They have the depth and breadth of expertise to properly serve as an early-stage company’s “outside general counsel,” of sorts, while relying on deeper subject matter specialists when needed. 

But a litigator or patent lawyer who read a few blog posts and stayed at a holiday inn express? Disaster. As I’ve written many times before, “startup law” is largely built on contracts, and the entire point of contracts is that they are permanent unless everyone involved agrees to “fix them.” There’s no “v1.1” update to fix bugs. That means the iterative, “move fast and break things” “we can fix it later” culture of software development is the last approach anyone in their right mind will apply to legal issues.

Stop treating entrepreneurs like suckers.

Ultimately, what these developments reflect is an underlying mindset among lawyers (and other market players) that “startup” is synonymous with “little shit companies.” First-time entrepreneurs may be very smart, but they don’t know what they don’t know, and they rely on their ecosystems and advisors for guidance in almost every area. It’s the same problem that leads them to get pushed to hire captive lawyers who really work for their investors, instead of hiring independent counsel that will actually do its job. 

Just throw a junior, or a random lawyer who managed to maneuver into a few referrals, to them; they’ll figure it out. They’re just a tiny company anyway. Whatever.

So my request to the broader ecosystem is: please, stop referring entrepreneurs to your random, local lawyer friend who decided to take a stab at this “startup law” thing. That’s not how this works, and you are hurting real people, building real companies with long futures built on the foundations put in place by these fake advisors.

And to entrepreneurs: be careful out there, and do your diligence. Many of us know that you wouldn’t quit your job for, or pour your life savings into, a “little shit company,” so align yourself with an inner circle of people who think accordingly.