Lies About Startup Legal Fees

It usually takes experience in the market for business people to truly understand the realities of hiring and working with lawyers. I can’t tell you how many times I run into first-time founders who’ve been fed absolute nonsense from ‘advisors’ ‘mentors’ or similarly named people about their ‘secrets’ for managing legal spend. The truth is that unless you’ve taken a company from seed to Series A, Series B, Series C, to an exit in which a serious party on the other side actually diligenced the legal history your ‘secrets’ put together, your theories about lawyers are hot air.

Failed companies never pay the price for poorly managed legal; unless the failure was the result of the legal problems, which does happen. Successful companies, however, pay deeply for legal mistakes. It’s  just a question of timing. There are definitely steps you can take to prevent legal spend from getting out of control, but it requires separating reality from delusion. The below is my attempt at doing that.

1. Software automation (or free templates) will not replace your lawyers, or dramatically cut legal spend.

See: Luddites v. Tech Utopians. New market entrants in technology have a tendency to come out with guns blazing, promising their ability to cut out enormous amounts of waste as reason to adopt them. Sometimes they’re telling the truth. Other times it’s well-calculated hyperbole.

Virtually every serious automation tool that has emerged with “cut huge amounts of legal spend” as its primary selling point has evolved into a tool for lawyers. Why? Because, contrary to some popular opinion (and marketing talk), good lawyers really aren’t charging hundreds of dollars an hour to just fill in numbers or check off boxes. Good tools are very helpful for making lawyers/firms more efficient, and you want lawyers who use those tools, but a piece of software isn’t going to replace your lawyers any more than a piece of software will replace your software developers.

Yes, there is form-filling and box-checking ripe for automation, but it’s not nearly as large of a percentage of legal spend as some let on.

2. Handling it yourself won’t save you legal fees.

I could write an entire book listing all the “hold my beer” moments I’ve encountered with someone on a management team thinking that they were wisely saving legal fees by taking an issue into their own hands, and it then predictably blowing up in their faces.  Part of it boils down to simple sloppiness. Other times it’s a clear case of someone not knowing what they don’t know.

There’s a related dynamic here to the first point about technology companies overstating their ability to cut legal spend. Anyone selling anything (a product, a service, themselves) has to justify it somehow, and “those damn lawyers” are a great bullseye. A COO / CFO wants to justify his salary, and an easy way to do that is by claiming to ‘save’ you legal fees via DIY legal work. You’re not saving anything. You’re magnifying your fees, but deferring them temporarily.

3. Quickly hiring an “in house” lawyer won’t save you a dime.

CEO: “We’re thinking about hiring an in-house lawyer to save some legal fees.”
Me: “Great. What’s his/her starting salary?”
CEO: “$95K”
Me: “Going to be complete shit, and will cost you 10x more long-term.”
CEO: “What? That’s more than some of our execs make.”
Me: “Senior lawyers worth having won’t even talk to us if we’re recruiting with less than $200K. And our lawyers have fantastic work-life balance. You’re recruiting in the same legal talent market I’m in. You really think you found some magic button that cuts the market rate in half?”

Look, I get it. Good lawyers are expensive. Really good lawyers are even more expensive. Fact: Talent is expensive. Everywhere. Make it incur three years of opportunity costs (law school) and a small mortgage (about $200-225k for law school, all in) before it can hit the market, and it gets a whole lot more expensive. 

Last time I checked a solid software developer will cost you six figures in salary; ignoring equity. And ‘coding’ mistakes are 10x more fixable, and potentially less costly, than legal mistakes. It is absolutely the case that a small portion of the tech community arrogantly believes that engineering talent is the only talent really worth paying for. Good luck with that.

I’m not trying to defend what lawyers make here (I don’t need to), but what I am saying is hiring lawyers has the exact same talent market dynamics of hiring any other kind of professional.  So you say you’ve found a lawyer willing to work for a lot less. Congratulations, you caught lightning in a bottle; found a rupture in the space-time continuum.

Or you just found a lawyer completely lacking in the experience/skillset needed to actually replace the work outside counsel (including a set of specialists) is doing for you. There is definitely a time to hire a general counsel, but for it to actually make sense mathematically and not result in extremely expensive mistakes, it’s usually much later in the company’s history than you think. Past “startup” territory.

4. A few real truths on startup legal spend.

A. Compensation and specialization drive talent quality. Quality prevents errors, and therefore controls fees long-term.

Fundamentally, two things drive lawyer recruitment (I know, because I recruit for MEMN): compensation and quality of life. Very large firms generally have terrible quality of life for their lawyers, for a number of reasons too complex to discuss here. But that’s why large firms have to pay their lawyers the most.

In-house positions and boutique firms are recruiting pipelines for what I call “BigLaw refugees”; talented lawyers looking to still get paid well, but take a moderate pay cut (sometimes) in exchange for the ability to keep their marriages in tact, and their kids out of therapy. But as discussed above, to get the full-time attention of those lawyers, even with great work-life balance, you still have to pony up in amounts virtually no true startup can afford. That’s why outside counsel (‘fractional’ lawyering) is valuable.

And working with lawyers who specialize in emerging tech/VC work will ensure you’re paying for talent experienced in the kind of legal work you actually need. See: Startups Need Specialist Lawyers.

B. Law firm “overhead” increases legal spend above base lawyer compensation, but enables scalability and quality. 

On top of the money paying a particular lawyer’s salary, you have the ‘institutional overhead’ of the firm that employs the lawyer. For a deeper discussion of law firm overhead, see: Startups Scale. Solo Lawyers Don’t. 

Companies who think only large firms with the highest rates have the best lawyers (compensation) are ignoring the interplay of overhead and compensation. If you cut overhead intelligently, you can still pay lawyers very well, but at lower rates to clients. The issue is how much overhead to cut out.

Institutional overhead, properly structured and right-sized, is not wasted money any more than the ‘overhead’ (on top of salaries) of any company is wasteful. In law, it enables recruitment, technology, training, staff, and other infrastructure that turns a set of lawyers into an integrated legal services provider, with bandwidth that can be optimized to keep work moving.

Think about what type of company you want to build long-term, or at least expect to be for the next 5 years, and ensure you engage a firm with the right institutional infrastructure (overhead) to serve that company. Very very large firms are designed for unicorns, and require the most ‘infrastructure,’ and therefore overhead.  In fact, the majority of what you pay large firms is paying for infrastructure. Are you planning to be a unicorn?

We are quite honest in saying that, as a high-end boutique firm, our target client is looking to (realistically) exit at under $250MM. We don’t work for unicorns; nor do we try to.  But we also don’t work for small businesses hoping to sell for a few million.

We pay our lawyers compensation that is highly competitive with large firms, which (again, a talent market) ensures quality. Our lawyers also bill about 25% fewer hours per year than BigLaw lawyers, which improves their quality of life (helps recruiting/retention).  But because we have dramatically lower institutional overhead, our rates are lower; although nowhere near the lowest.

In my experience, the size of your Series A round is usually a pretty good indication of the type of company (exit size) you’re trying to build; companies truly going for unicorn status raise much larger rounds. Pre-Series A, the majority of serious tech companies require some accommodation to manage their legal budget; no matter how efficient their lawyers are.

If Post-Series A, your company’s legal bills still seem completely unmanageable, that’s often a good indication that the law firm you hired is too big for what you’re building (non-unicorn-track using a high-infrastructure unicorn law firm); assuming your expectations on what the bill should be simply aren’t unhinged. Remember, small firms can have very high quality lawyers, because they aren’t paying them less. They just have a leaner infrastructure designed for non-billion-dollar clients.

C. Flexible pricing / payment from a quality firm is 1,000 times better than “going cheap.” But be realistic about the budget. 

If you get anything from this post, it is this: good, scalable legal counsel costs real money, like any talent. There is no magical software, recruiting strategy, or template on google that will get around that. Anyone who thinks they are cheating this rule, and have somehow found bargain-basement counsel that works, is just not yet hearing the ticking of the time bomb they’ve turned on in their company.

The absolute best strategy for engaging serious legal counsel, but not going bankrupt on legal fees is to ensure that:

  • you’re working with lawyers who have the right specialization for what you need;
  • at the right quality level, and with right-sized overhead for the scalability you need; and
  • who will flexibly work with you on budget/payment at the very early stages.

Law firms who specialize in emerging tech work are not new to the challenges of very early-stage startups trying to manage a legal budget; at all. It is deeply engrained to each lawyer’s expectations. And there are a lot of levers that those firms can and will pull for clients they want to work with: fixed fees, deferred fees, equity arrangements, etc.

The key part is “clients they want to work with.” They are selective, because they have to be.  Serious law firms are not in the game to work on mickey mouse fixed-fee or discounted projects to eternity; nor can they afford to be. They do that to scale down for valuable prospects with the right potential lifetime value (LTV) as clients, but who need help when the budget is slim. That’s why any early-stage, limited budget company that approaches a serious law firm should be ready to “pitch” their company to the firm.

For high potential companies, great tech/VC lawyers will be flexible on budget and payment as long as the founders are reasonable in their expectations. And the best way to be reasonable is to follow the points in this post. Accept that you need good legal talent, badly. Accept that it costs real money, and that you likely can’t afford the full cost up-front, and that’s normal.  If you’re as good as you hope you are, you will find a way to navigate that reality.

Startups Scale. Solo Lawyers Don’t.

TL;DR: Freelancer marketplaces push solo lawyers as a way to keep legal costs down for startups.  But what they’re marketing is very different from what they actually deliver. Solo lawyers can’t scale, and lack specialization. For high-growth startups, that is a big problem.

Background Reading:

In the landscape of options for getting legal covered for a tech company, there are generally speaking three types of providers, in order of largest to smallest: (i) BigLaw, (ii) Boutique firms, and (iii) Solo lawyers.  I’ve written quite a bit about the comparison between (i) and (ii), but this post is mostly about (iii).

Overhead

“Overhead” is a term often used to refer to everything that a lawyer’s rate has built into it that doesn’t directly go into compensation. Very large firms (BigLaw) have significant amounts of “overhead”; only about 20-25% of the $575/hr you pay for a top-tier BigLaw senior non-partner actually goes into her pocket.

But it’s far too simplistic to assume that all those resources are simply being burned for no reason. Large, fast-moving, complex transactions require collaboration among lots of different kinds of legal professionals, including different kinds of specialties of lawyers, paralegals, legal assistants, legal technology providers, etc. For the very top end of the market, good arguments can be made that the “overhead” of large, international firms is actually quite necessary. The idea that a bunch of freelancer lawyers/legal professionals could just team up to get a billion-dollar merger done efficiently and on-time is little short of delusional.

Boutique firms are the market’s response, enabled in part by new low-cost technology and infrastructure, to BigLaw’s overhead. Those deal lawyers who don’t cater to, and aren’t pursuing, the Ubers and Facebooks of the world, are acknowledging that while they do need institutional resources (overhead) to create strong teams that can close meaningful deals, those institutional resources don’t need to eat up more than half of revenue; certainly not with today’s technology. A $100MM acquisition, or even in many cases a $10MM financing, is sufficiently complex and fast-moving that, again, you are delusional if you think a bunch of freelancers working independently are going to get it done effectively; but a small integrated team of affiliated lawyers, or even a handful of boutique firms, can easily get it done outside of a 1,000 lawyer firm with offices on multiple continents.

Solo lawyers are on the opposite end of the overhead spectrum. They are the freelancers of the legal world. Their ‘overhead’ amounts to maybe a few SaaS subscriptions and a computer. MEMN’s specialist network, in fact, has a fair amount of solo lawyers in various legal specialties. Their rates are naturally lower than lawyers in large or even small firms, due in part to overhead. You might conclude – and there are definitely solo lawyer marketplaces out there trying to drive this conclusion – that every early-stage startup should obviously be using solo lawyers, because they’re “cheaper.” But this overlooks certain key facts about the nature of startups, and about legal services, that call for a reality check.

Legal bills don’t correlate completely with hourly rates.

It’s not that complicated to understand that a well-structured team of lawyers billing $425/hr can easily produce a lower legal bill than independent solo lawyers billing at $275 if they have the right institutional resources – technology, team, knowledge, process (“overhead”) – in place. They’re also often supported by junior professionals/non-lawyers with dramatically lower rates to cover routine items. At very early stage, a lot of the tasks that startups need actually require very little lawyer involvement at all if the right infrastructure (‘overhead’) is in place. If you assume solo means cheaper, you’re often wrong.

Specialization drives efficiency.

What is a “startup lawyer”? That will take too long to fully explain in this post, but I can tell you what it’s not: a litigator, a small business lawyer, a generalist who dabbles in a little estate planning, real estate, and a few seed financings on the side, or a generalist corporate lawyer. I’ve been shocked by how many of these solo lawyer websites market lawyers as “startup lawyers” when they clearly, from their own bio descriptions, are nothing of the sort. Similar to the first point above, a lawyer at $425/hr who has done a project 50 times will be dramatically more efficient at it than someone at $275 who has done it once.

This is not rocket science. Smart founders know that developers with higher salaries often get far more done than 10 developers at lower salaries. The talent market dynamics of lawyers are not that different from those of developers.

In a talent market, the cheap guy is usually cheap for a reason.

In an industry where results are driven by human, not just institutional, capital, you simply cannot hire whoever walks in the door and train them to produce A-level service; no matter how fantastic your resources are. As elitist as it may sound, most lawyers on the market simply lack the capacity and knowledge to correctly manage and close complex legal work. They may be very well suited for certain areas, but the moment you leave the minors and start playing in the majors, everything goes off the rails.

Serious talent requires serious compensation, which sets a floor on hourly rates; regardless of overhead. If that is too difficult to understand, good luck in business. It can be (and is) simultaneously true that the legal market is flooded with under-employed lawyers willing to discount and jump through hoops for work, and yet great lawyers who can manage and navigate specialized complexity/scale are in very high demand and short supply. 

Fast growth requires scalability. Switching lawyers is costly.

A startup can go from 2 founders needing to just incorporate to needing fast VC, employment law, tax, licensing, etc. support in just 1-2 years; sometimes sooner. You’ve got a VC term sheet on the table, 10 equity grants that need to get done in 2 days, a resolution to the issues with the VP you just fired, and assistance finalizing that LOI with the big customer that will help close your round; and you need all of this done this week. Virtually every single startup that has switched to MEMN from solo lawyers has had the same universal complaint: they are SLOW.

Of course they’re slow. All that (air quotes) “unnecessary overhead” they cut out to get you that awesome hourly rate is precisely what could’ve funded the institutional resources that ensure legal work keeps moving: a well-trained team to collaborate with, technology (and training for technology) that streamlines unnecessary tasks, non-lawyer professionals to knock out checklist items while the lawyers focus on the big stuff. Scaling companies need legal teams, and max out a solo lawyer very quickly.  If a single solo lawyer happens to peculiarly have all the time in the world, please re-read my comments on talent markets.

And if you think it’s smart to go with the solo who is ‘cheaper’ and then switch quickly to a firm: again, a reality check. Switching lawyers/firms is costly. The new lawyers have to familiarize themselves with what the prior guy did, on forms that they (usually) aren’t familiar with. That takes time, and increases the likelihood of errors. Finding a firm that can scale-down for very early-stage, but then scale up when needed, all using its own forms and resources, is far smarter than taking an iterative approach with your legal team.

In short, the changing legal landscape available to tech companies is being driven very much by technology, and it’s been great not just for entrepreneurs, but also for lawyers looking for alternative platforms to work from.  I’m a big fan of how solo lawyer marketplaces are helping connect demand with supply in areas where the ‘overhead’ of firms really is unnecessary.

But be very careful about buying into any marketing suggesting that there’s this untapped market of great solo “startup lawyers” just waiting to fill your startup’s legal needs at unbelievably low rates.  Solo law works great for small businesses, who don’t scale fast;  and also for certain legal specialties where projects are very compartmentalized. But true startup/vc law requires institutional resources and well-trained, well-coordinated teams of lawyers/non-lawyersThe goal of tech startups is to scale quickly.  But solo lawyers can’t scale at all. That means that solo “startup lawyers” are, at best, a bad fit; and at worst, an oxymoron. 

Luddites v. Tech Utopians: 409A and Legal

Background Reading:

TL;DR: Luddites pretend that technology can’t out-do them at anything. Tech utopians pretend tech can do everything. The truth lies in the middle.

In my sphere of the world, I interact with two profiles of people, both of whom I find somewhat obnoxious.

The first are luddites; often lawyers. These people cannot fathom the idea of clients wanting anything less than hand-crafted, white-glove attention to every legal matter. The compromises on quality and customization brought about by software and automation tools are an offense to their professionalism. They’ll walk you through 10 ways in which they can beat a piece of software, completely oblivious to the fact that 99.9% of the market doesn’t give a damn, if the software’s output is good enough.

The second are the opposite of luddites; what I’d call tech utopiansoften young founders or engineers. To these folks, effectively everything legal professionals do is hand-waiving non-sense, charging hundreds of dollars an hour to fill in forms.  Build a simple automation tool, or DIY checklist for them, and their eyes light up; enraptured with how ‘smart’ they are for not ‘wasting’ money on legal services. And I happily admit to a bit of schadenfreude when they end up paying 10x later for cleanup, as part of their education in the value of legal counsel.

Luddites are in self-denial regarding how much of their work can actually be done quite well, and sometimes better, by technology. Tech Utopians are in denial about how much work still requires, and will require for a very very long time, highly-trained, highly-intelligent people who can analyze and deliver things that even the most advanced technology cannot. And yes, those people are way more expensive than software.

The bottom 25% of most professions is probably dead in the water relative to software; think TurboTax and LegalZoom. As AI becomes more sophisticated, that will probably move up to something closer to 50%. This is quite visible in law as lower ranked schools (many of which are a racket) are getting sued by debt-saddled graduates who can’t find jobs, and the credentials of lawyers at well-paying firms edge up each year.  To some extent, it’s never been better to be an elite lawyer. It’s never been worse to be any other kind.

Tech-Enabled Lawyers

The truth about almost every profession, at least when you move beyond the lower rungs, is that technology is a supplement, not a replacement, for people. It’s a tool. And a very powerful one for those who can figure out how to leverage it.

MEMN’s recruiting process is designed to systematically filter out luddites. That’s because, not only do I simply not have the time or desire to waste hours of my life trying to train them, but technology (automation, machine learning, communication tech, project management, etc. etc.) is so deeply integrated into our workflows that to add anyone who doesn’t ‘get it’ into the mix would cause a total breakdown. Before I look at emotional or analytical intelligence, or communication skills (all of which are important), I want to know what kinds of technology this person already uses in her/his life.

When lawyers from other firms ask how they might operate and scale leanly like MEMN, my answer is as swift as it is depressing: “first, you have to fire half of your payroll.” They usually start laughing, until they see the dead serious look on my face. The legal profession is full of luddites, everywhere; even among the younger generation and in firms that service tech clients. And there’s no room for them in tech-enabled law firms. “Get it” or get out.

And yet with all of the technology that we leverage, I tell every single MEMN client that we are not cheap, and never will be. Cheaper than our true competitors, certainly. And dramatically more responsive. But talent costs money.

409A: Trim that fat

When I wrote 409A as a Service: Cash Cows Get Slaughtered a few years ago, highlighting how eShares was using their own technology to trim the fat in an industry that (in my opinion) really was in many cases extorting startups, the response from the luddites was predictable. “Here are 10 reasons why you can’t automate a 409A valuation.”

Over the years, eShares as a platform has grown (as I knew they would), and many of our clients have been thrilled to take advantage of their service. Tech-enabled 409A; not fully automated. They recently published a blog post called The art and science behind an eShares 409A breaking down how automation is used in their reports, and how it’s not.

The future of professional services belongs to people who embrace technology and let it do what it does best, without diminishing the areas where human intelligence and creativity are superior, and will continue to be so for a very long time. Not tech-less. Not tech-only. Tech-enabled. 

Legal Technical Debt

Siri, please amend my charter to authorize a Series AA round, prep me an offer letter for a CTO, issue options to 3 recent hires… oh and review/execute that stock purchase agreement with my accelerator. Keep the fees under $500.”  — Not too far off from how a (confused delusional) segment of the startup community thinks startup/vc law should work.

Imagine if advisors told startup founders that, in order to conserve cash, they should aim to spend as little as possible on developers. Find cheap ones. If the non-technical CEO can code something himself to get by, do so.  Just get it done. Don’t overpay.  In fact, if we can automate our development process, do it. Keep cash spend on ‘the business.’

Anyone with an ounce of experience in building successful tech companies would recognize this advice as absurd and dangerous, as if quality and accuracy are irrelevant. Yet every so often I hear about advisors giving this exact advice to founders, about legal spend. And while fewer may acknowledge it, such advice is equally as absurd.

Of course you’d say that, Jose. You’re a startup lawyer.

Well, maybe. But let’s process it a bit.

Why would minimizing your spend on software development (like legal services) be stupid and dangerous?

It can be explained in part with the term ‘technical debt.’ via Wikipedia:

“Technical debt… is a recent metaphor referring to the eventual consequences of any system design, software architecture or software development within a codebase. The debt can be thought of as work that needs to be done before a particular job can be considered complete or proper. If the debt is not repaid, then it will keep on accumulating interest, making it hard to implement changes later on. Unaddressed technical debt increases software entropy.”

While I’m not a developer, my general understanding of the term is that bad coding becomes more expensive to fix over time, in an almost compounding way. And there are even circumstances in which it is so bad that nothing short of a complete re-write will make it scalable and useable. In other words, going cheap on developers just means you are compounding your cleanup cost and headaches for the future, and even threatening a complete shut-down of the product.

Minimizing legal spend works exactly in this way, but magnified 10x.  I frequently write on SHL about the many parallels between complex contract drafting/VC law and top software developers. Both groups involve highly skilled people capable of analyzing, managing, and manipulating large amounts of complexity. Both implement changes for which the stakes on a company are very high. Both expect to be compensated well for their skill set.

Software developers produce the code base on which your product runs. Lawyers produce the code base on which your company, including its relationships with investors, board members, executives, and employees, runs. 

A crucial difference between software code and legal code is that bugs are far easier to find and fix in the former than in the latter. Software code is constantly being revised, with thousands or millions of users revealing bugs on a regular basis. Legal code (contracts) are executed and then put away, often to be reviewed only at high-stakes moments, when fixing them is extremely expensive or even impossible.

Unlike software code, you can’t unilaterally issue ‘updates’ to executed contracts. Any experienced lawyer has seen a deal cost 6-figures more than it should have, or even completely die, because of legal mistakes made earlier in the company’s history. So think of contract drafting for a scaled startup as high-stakes software development for which virtually any material bug is completely unacceptable once the code is shipped. Still want to ‘minimize’ legal spend?

Law is Code; Not Product.

In my experience dealing with many many sets of founders, a part of the startup community carries the very deep misconception that startup/vc law has been, or even can be, completely productized. Want to ‘just’ issue some stock, grant some options, close a seed round, etc? It’s been done hundreds of times before, so it must be all ‘standard’ by now. Just click a few buttons, fill in some names and numbers, and you’re done.

This is the attitude of someone using a product for which clean, standard, predictable, pre-defined features are already in place. “Just” issuing a service provider some stock should be like ‘just’ moving some files around on Dropbox, right? There’s a serious flaw in this thinking. The clean, standard, predictable company and contract history simply does not exist, and hence full automation is pure fiction. 

  • What state are you located in? Laws vary, even if you’re a standard DE corp.
  • Are you a C-corp? S-corp?
  • Are there protective provisions that need to be complied with?
  • Any anti-dilution protection?
  • Enough authorized shares in the charter?
  • Enough reserved equity in the equity plan?
  • A well-documented value of the equity?
  • Is there a written agreement explaining the consideration and complying with securities laws?
  • Is the recipient an individual or an entity?
  • Board approval?
    • Are we confident the composition of the Board is well-documented?
  • Is stockholder approval necessary?
    • Any specific thresholds?
  • Vesting?
    • 83b?
  • Acceleration? What kind?
  • Any other special provisions/requirements implemented by past investors?
  • etc. etc. etc.

Virtually every VC, angel group, accelerator, large company, etc. has its unique variances in the contracts it executes/negotiates. States have different requirements. Laws change. Reality: people are not standardized.  They have their idiosyncrasies, and people determine what does and doesn’t get signed; what gets added to the code base.

Even if companies share 90% of the same legal DNA, the 10% variance is a massive wrench that makes automation, or even any kind of significant simplification, impossible without taking on enormous legal technical debt. That statement is not coming from a luddite lawyer who hates technology, but from the CTO of a startup/vc law practice that I am 100% certain is on the cutting edge of legal technology (the kind that actually works) adoption.

Telling a VC lawyer that you ‘just’ want to issue some stock is not equivalent to ‘just’ using a pre-coded feature in a product. It is far more like telling a software developer that you ‘just’ want to add a feature to your existing, non-standard, unique code base.  Imagine telling that developer to do it as quickly and cheaply as possible. Imagine hiring the cheapest developer you can find to implement that feature.

The contract that actually issues the stock may be 99.8% standard, but it has to be implemented into the historical set of contracts/context without blowing anything up. Contracts and laws do not sit in little, isolated modules without any impact on the other. They’re all inter-connected, with a change in one potentially resulting in a cascade of effects in others. Hence the code base analogy.  The larger, more complex the code base (set of contracts, number of jurisdictions, people involved), the greater the skill and experience required to work with it safely. And having a well thought-out, well-designed architecture implemented from Day 1 dramatically impacts the scalability and resilience of that code base.

So when a client says they ‘just’ want to issue some stock, all they might think about is opening a word document, filling some names, and signing. Of course that can be automated.  What often isn’t considered is the lengthy, complicated list of steps and analysis needed to fit that template document within the Company’s existing legal history. That, not the template stock purchase agreement, is what lawyers do, and software cannot do.

De-Valuing Law, like De-velopers, is De-lusional.

Anyone who sells a product or service into a market learns that not every buyer is willing to pay the cost necessary to deliver that product or service in an efficient manner, within the bounds of physics/reality.  Some buyers simply can’t afford it. But many others just don’t value the product or service enough to pay even the lowest possible price. As a lawyer, I learned very early on in my career that this is the case with founders looking to engage lawyers.

If I’ve been sold the lie that startup/vc law is a completely commoditized, standard product, I am going to shop for lawyers, and assess cost, the way I would for any other commoditized, standard product. I “just” want to issue some stock. Like I “just” want some toilet paper. There are founders (a minority, but many) who understand very quickly why they need to pay good compensation for software developers, and yet will question every single invoice from lawyers.

While I’m always more than happy to walk through an invoice when it makes sense, MEMN’s client intake process has been deliberately designed to filter out clients who, for whatever reason, de-value lawyers in this way.  Our website’s home page says “World Class Counsel, Brought Down to Earth.” Translation: top lawyers who are more efficient, responsive, and accessible than the large firms where they’ve historically been found. We compete with other firms who provide top-tier legal counsel to scaling tech companies; not with the unrealistic price expectations of people who, through inexperience or delusion, want Teslas at Kia prices.

The seed-stage period is the toughest time for startup legal budgeting. Things are starting to get more complex, but with only a few hundred thousand raised (let’s put aside California ‘seed’ rounds), every dollar paid hurts. Fixed fees, flexible payment arrangements, deferrals (but be careful), and good old-fashioned budgeting are the key to getting through that period with your lawyers. Any experienced set of startup/vc lawyers will know how to be flexible for seed-stage companies. Just always remember that flexibility (and efficiency) does not mean defying the laws of physics to get things as cheap as you’d like them to be. 

At the level of law that scaling companies require, technology will forever (or at least into the very distant future) remain a complement and not a replacement for lawyers. Yes, the legal industry as a whole is and will continue to undergo disruption as software eats up the more routine, commoditized parts of the profession. But VC-backed companies are not dealing with commoditized lawyers, and talented, creative VC lawyers are hardly, not even remotely, underemployed.  If anything, those of us who adopt new tools as they are developed have found our practices enhanced, not diminished, by technology.  It allows us to deliver more concentrated value with our time, which means a healthier attorney-client relationship overall.

If you engage your lawyers as the developers of an important foundation for your company – expecting effectiveness and efficiency, but staying realistic about the amount of complexity and value actually underlying their work, you’ll be surprised by the rewards.  For those who continue fantasizing about replacing lawyers entirely with apps, nothing will provide a better education than the moment the debt comes due.

Lawyers are Slow, But Firms Shouldn’t Be

TL;DR Nutshell: Don’t be fatalistic in assuming that working with good lawyers always means slow response times. But also don’t delude yourself into thinking that any particular lawyer, if she’s good, will be immediately available for your every need. Asking the right questions about responsiveness up-front will prevent a lot of frustration in your startup’s relationship with its lawyers.

In my discussions with founders re: what they look for in hiring lawyers for high-growth, investor-backed startups, I’ve found that everything usually boils down to 4 criteria (often in the following order from most important to least, but not always):

  • Quality – Top founders usually have a strong understanding that (i) decisions when the Company has $5K in the bank account can (and often will) have a material impact on the business when its hit $20MM ARR, and (ii) cleaning up legal mistakes is orders of magnitude more expensive than doing it correctly the first time.

Quality is typically the main reason that startups ‘upgrade’ from generalist lawyers. See: Startups Need Specialist Lawyers, But Not Big-Firm Lock-In

  • Trustworthiness/ Like-ability – Your lawyers will be (or should be) close advisors working with you on the most high-stakes, strategic decisions of your company’s lifecycle. That relationship will get dysfunctional quickly if you can’t trust them, or simply don’t like them as professionals.

Trustworthiness is typically the main reason startups switch lawyers/firms from those that their lead investors insisted they use. See: Why Founders Don’t Trust Startup Lawyers

  • Efficiency – Hiring good lawyers, like hiring good developers, will never be cheap. It’s a basic law of markets that top talent requires top compensation. That being said, there are a lot of ways that founders can ensure that their legal budget is paying for great lawyers and not for expenses/overhead that isn’t actually resulting in better value.

Efficiency is typically the main reason startups avoid, or stop using, very large firms with billing rates 4-5x of what top lawyers require in compensation. See: How Startups Burn Money on Startup Lawyers

  • Responsiveness – This usually comes last because many founders have, through frustrating past interactions with the legal profession, come to the conclusion that ‘dealing’ with lawyers inevitably involves long wait times. Sort of how I brace myself every time I have to enter a specialist doctor’s office, because I know a 9:30 appointment, which was scheduled weeks ahead of time, usually means actually being seen around 11.

Send your lawyer an e-mail and expect a response in 3-4 days, if he’s not too busy. That’s just what it takes to work with good lawyers when you’re a small startup with a modest legal budget, right? The big fish have their attention most of the time, so just get in line… It doesn’t really need to be this way. Understanding 3 concepts related to lawyer economics will help you avoid this scenario:

1. Appreciate institutional bandwidth – and why, for speed, firms > solos. 

If recruiting and motivating top lawyers requires competitive compensation, then with basic math you’ll see why great lawyers who work with early-stage startups must work with many startups, not just yours, to get paid. Good startup lawyers are busy people, because maintaining a strong portfolio of work allows a lawyer to get paid well without burdening any particular company with an excessively large bill.

However, while a solo lawyer who is very busy will have only one thing to tell her client when they need something done quickly – “wait” – lawyers in firms have institutional bandwidth. If I’m busy, and I often am, I have other lawyers (and staff) in my firm who can be assigned to keep work moving. Properly run law firms know how to manage bandwidth and ensure that work is “spread” throughout their roster, without a loss in quality. This allows great lawyers to stay busy (required for compensation), without burdening clients with ridiculous wait times.

This point is, however, related to a second important concept:

2. For your primary counsel, hire a firm, not a lawyer. But size of practice area matters more than the size of the whole firm. 

The old adage “hire lawyers, not firms” has a lot of truth in it, but that truth only applies with the right factual backdrop:

  • It’s usually said by in-house general counsel, who themselves maintain a roster of specific lawyers (at various firms) that they can task on projects to manage bandwidth. Founders do not have this, and trying to build it for them would be a waste of time.
  • It assumes that there is something very unique about a particular lawyer that you need that others in her firm cannot provide. If you are doing cutting edge niche legal work that is unique to your particular market – like perhaps a patent lawyer with a very deep understanding of your special technology that no one else on the market has, this may make sense. For general startup/vc law, this is flatly not true if the firm you’re working with maintains proper standards and training for its roster of lawyers.

Of course, your primary contact with a firm will be a specific lawyer. But if you want to avoid waiting days, or even weeks, for something as simple as a response to an e-mail, you need legal bandwidth, and that means a firm. Expecting a specific lawyer to handle everything you need is the fastest way to ensure you are going to wait a long time for that lawyer’s attention, unless you’ve got several hundred thousand dollars a year in your legal budget for him. That’s called “in house counsel.”

But take note: there are a lot of law firms with 500, 1000, even 2000 lawyers who are incredibly slow. Why? Because they don’t actually leverage institutional bandwidth. A lot of those lawyers inside these large firm are either (i) in completely unrelated practice areas and hence aren’t actually available to help your particular lawyer (useless to you), or (ii) working in silos (just sharing a brand) with no effective mechanism for collaborating with one another. There are deeper reasons behind this “silo” problem that span issues like technology and compensation structures, but that’s too deep for this post.

Keeping dozens of different specialties of lawyers under the same firm is massively inefficient – to use econ jargon, we can call it “diseconomies of scope.” But within a specific practice area, there are very large efficiencies – shared technology, training, templates, institutional knowledge, and access to client information  – that a focused firm has over a bunch of independent lawyers. That’s why the specialist ecosystem that MEMN leverages is made up predominantly of specialized boutique firms, not solo lawyers (although there are those as well), each with their own institutional bandwidth within their practice area. See: The Tech Law Ecosystem v. BigLaw. 

3. Don’t hire an M&A or IPO Lawyer who uses startups as lead gen. Hire a startup/vc lawyer.

There is a massive difference between a lawyer who focuses on M&A (large exit transitions) and simply pursues startup clients as lead gen for very large deals v. a lawyer whose focus is startups and venture capital. The technology law firms that have very good response times have segmented large exit transactions as a specialty that operates alongside, but separate from, emerging companies corporate work. On top of improving response times, this results in better startup/VC lawyers and better M&A lawyers.  Find one of those firms.

Compare these two lawyers:

  • Lawyer A is assisting this month on (i) a formation, (ii) two seed deals, (iii) a Series B and Series C financing, and (iv) a $500MM acquisition.
  • Lawyer B is assisting this month on (ii) a formation, (iii) three seed deals, (iii) 2 Series A financings, and (iv) a Series B and Series C financing.

If you’re a startup client w/ one of those seed deals or VC financings and have a question, or you’re just a client with a quick question on a new hire, who do you think is more likely to respond promptly to your e-mail? Lawyer A, because of the fundamental fact that large, high-stakes, fast-paced exit deals tend to consume lawyers’ attention (for understandable reasons, big fees at stake) is going to take a lot longer. Hire Lawyer B over Lawyer A, and just ensure that Lawyer B’s firm has M&A specialists for when you need them… or hire Lawyer A and take a number.

Recap: Startups move fast. It is extremely frustrating to founders when their lawyers can’t keep up.  That doesn’t mean you should expect McDonald’s like responsiveness – these are highly skilled, busy professionals managing a portfolio of clients, not your in-house assistants – but if it takes days to even get a response to your e-mail, there’s an underlying problem that should be dealt with. For primary corporate counsel, find a firm with lawyers who focus on early-stage/emerging tech work, and with institutional bandwidth within that specific practice area.

And if you want the truth on how responsive a group of lawyers are, there’s no better place to go than that firm’s client base.  Believe me, if a founder CEO is frustrated with the responsiveness of her lawyers, you’ll have zero trouble getting her to talk about it.