Your Startup’s Legal Bill: The Printer & The Cartridge

A client of mine recently used an analogy to explain why he dropped another small, local law firm for MEMN: their printer is cheap, but their cartridges are really expensive.  That statement explains perfectly why many founders, because of their lack of understanding of basic law firm economics, can get really screwed by firms touting their low hourly rates as evidence of their “efficiency.” The core problem is this:

  • In the short term, your legal bill is a two-part equation: hourly rate * time spent. Naturally, that means that a lawyer billing $225/hr can generate a substantially larger bill than a lawyer billing $375/hr if the “cheaper” lawyer takes 3x the time to do the same task as the more “expensive” one.
  • In the long-term, “time spent” is itself a two-part equation: time spent to initially complete the task + time spent fixing mistakes (if the mistake is even fixable).  This should come to no surprise to a CEO who’s spent time interviewing and hiring developers. One developer wants a $60K salary, and the other wants $100k. Is the $60k one a bargain, or overpriced sh**?

The above two points should help make the analogy between printers and lawyers clearer:  a printer can seem like a great deal because the manufacturer locked you in with a low cost of adoption, but you should really pay attention to how much the cartridges cost, and how many you’ll have to use – and whether it flat out sucks. Because that’s where the real expenses are. It’s the exact same thing with lawyers: an exceptionally low hourly rate can seem like a great deal, but how many hours will this ‘bargain’ rate be multiplied by? And what exactly are you getting for that rate?

The “Hourly Rate” Issue

As mentioned above, it is absolutely the case that a lawyer billing $400/hr can produce a dramatically lower legal bill than a lawyer billing $225/hr; meaning that, under the right circumstances, you should be willing to pay more if the value is truly there.  But are there circumstances in which a lower rate does not mean lower quality? Yes, as I discussed in “When the A-Lawyers Break Free: BigLaw 2.0” a lot of clients are shocked to find out that when an attorney at a large firm bills them $675/hr, only maybe 20% (if she’s lucky) of that rate actually makes it to the lawyer (the talent). The rest goes to pay for all the background infrastructure necessary to support a firm full of dozens of different practice groups, offices, summer intern programs, etc.

Thanks to new technology and business models now viable because of that technology, a new breed of law firm is emerging that (unlike their predecessors who attracted attorneys by offering jeans, MacBooks, and a more relaxed atmosphere at the cost of lower compensation) can compensate their attorneys on par with and in many cases better than larger firms.  And those small, focused firms have dramatically lower overhead costs than larger firms. The end result is that, even with significantly lower hourly rates, the attorneys are still highly compensated.  Again, in law as in the world of developers, you get the talent you pay for.

Nutshell: make sure your hourly rate pays for legal talent, not an outdated delivery model.

The “Time Spent” Issue: The Problem with Generalists and Solo Lawyers

Moving to the second part of the equation: what allows a lawyer or law firm to do something more quickly, and with fewer mistakes, than another firm?  The first and most obvious answer is of course: better lawyers (and paralegals). No shocker there. Better, more experienced doctors work more efficiently and with fewer mistakes than crappier ones.  But there’s actually more nuance here than meets the eye.

Focus

You’ve developed a strange rash on your arm, and you need someone to help you treat it. Who do you suppose will be able to get it done more efficiently and effectively – a cardiologist or a dermatologist? It seems like a stupid question, but many people don’t understand the concept of legal specialization.  Focused repetition leads to specialized domain knowledge, which leads to higher quality and efficiency.

There are an endless number of business lawyers, corporate lawyers, even IP lawyers, running around touting themselves as startup lawyers. The reality is that they’ve spent 95% of their careers doing absolutely nothing related to the venture-backed startup space, but because they either stayed at a holiday inn express or because they know someone connected to startups, they’ve started to dabble in the area. How complicated could it really be? I’ll keep my answer short: get ready to be schooled.

Process and Technology

Being a generalist forces you to reinvent the wheel when specialists have already-developed forms, processes, and technology in place to minimize time burn.  A new client of MEMN recently said a prior firm charged $1700 to draft a form contract for hiring developers (which, btw, was garbage).  The startup lawyers who just read that are laughing because they know that a client who asks them for that kind of document gets billed literally 5% of that, if anything at all.

Process and technology are at the core of why the hourly rate of a law firm or lawyer says very little about what you’ll end up paying.  I’ve seen solo lawyers and boutique firms talk about “overhead” as if it’s something to be absolutely kept to a minimum at all costs.  The problem, of course, is that if you don’t invest in technology, knowledge management resources, etc., it is 100% certain that you are going to be incredibly slow and inefficient compared to those firms who do, even if those firms have higher hourly rates.  This is the core problem with solo lawyers.  Yes, their hourly rate is low, but they practice like it’s 1995. And that’s expensive.

While we’ve done everything we can at MEMN to cut out fat and bloat, I have zero qualms about investing in technology that will enhance quality and efficiency. That’s not “overhead.” It’s called running a 21st-century business.  We also have an amazing espresso machine. Treat your talent well.

Conclusion: When you hire talent for your own startup, you don’t immediately go with the person asking for the lowest hourly rate. If you do, you’re a moron. Remember that lawyers and law firms are like printers (and developers).  What looks cheap could end up being the most expensive mistake of your life.

When the A-Lawyers Break Free: BigLaw 2.0

Nutshell: The world of transactional tech law used to be divided into A-Player lawyers earning the gold at large firms and everyone else making a decent living at second-tier small firms. SaaS eliminated that world, and small can now mean better, faster, and more lucrative; which means A-Lawyers are breaking free.

No one who operates in the startup space needs to be told that bigger does not always mean better.  In fact, the opposite is often the case. Being large often makes you slower, more bureaucratic, and inefficient. Just try getting a piece of new technology adopted at a major law firm, or getting a secretary to learn that technology.  I’ve been there.

Big Was Better

If bigger leads to better performance, there must be something about the nature of the product or service in question that requires a large organization.  In law, that “something” was historically (i) expensive, proprietary resources to properly service clients (barriers to entry), (ii) the need for collaboration among multiple specialties, and (iii) high amounts of friction in effecting that collaboration.

Before the days of SaaS and Secure Cloud Storage/Collaboration, top-tier transactional law required at a minimum (i) a law library, (ii) internal word processing, (iii) teams of administrative support and attorneys, and (iv) dozens of legal specialties under the same roof.  Without that, you would be slow and inefficient.  In that world, choosing a small firm usually meant, as a fact, that you were dropping down a tier in quality.

And then things changed. Your “library” is now a subscription SaaS service. Word processing you can outsource by the hour. Same thing for admin support.  People working remotely often collaborate more easily than people working within the same law office, if they use the right tools. When BigLawyers step back from their billing timer and realize this, two very important thoughts come to mind:

  • Why are you all here? – Why do we (all kinds of different lawyers working in different areas that require different processes) need to still work under the same structure? I’m tired of having to justify to a bunch of litigators or IP lawyers that some software that I NEED for MY practice needs to be put into the budget. Why can’t I come to work in jeans if my clients don’t care? Why do I even have to come in to work today? All I do is stay in my office anyway.
  • Where the f*** do all my billings go? I bill $600 an hour. I take home like 20% of that. Wait, you mean all of this obsolete, bloated, bureaucratic infrastructure is the reason 80% of what my clients pay disappears? They hired me, not your brand. Why am I here?

Focus Always Wins

Every variable that once made the large, full service law firm necessary and optimal has been turned on its head by the web, SaaS, and the cloud. Now, a corporate lawyer at a small firm can staff a deal just as quickly, if not more quickly, utilizing a network of smaller, more focused, more efficient and (yes) better lawyers and law firms. It doesn’t take a Harvard MBA to understand why a top trademark lawyer operating out of a trademark boutique that does nothing but trademarks is going to be vastly superior at (guess what?) trademarks than a lawyer who works alongside dozens of other types of lawyers. Focus trumps being a generalist; and that applies equally to lawyers and law firms. 

But the reality of how SaaS has changed the landscape isn’t exactly news, at least not to people who follow these topics. Why then has it still seemed as if large firms have a lock on the best lawyers?

Money

In every profession, the best expect to be paid according to their talent. This is not rocket science, nor is it surprising. A-Lawyers have stayed in BigLaw for one very simple reason: it paid the most. Notice the past tense.  When big really did mean better, the better clients went big, and that means big paid more.

But it was only a matter of time that enough top lawyers started asking themselves “where the f*** do my billings go?” and realized that BigLaw’s overhead and bloat leaves an enormous amount of room to cut out fat, charge less, and still take home WAY more.  Yes, my friends slaving away in BigLaw trying to hit your 2000-2150 billables quota so you can earn that nice little bonus amounting to 3% of your billings, the cat’s out of the bag. Many of us at small firms earn more than you do. A lot more. And we do it with better technology, a more flexible schedule, and often working from wherever we want. All while our clients pay a lot less. Who, long-term, do you think is going to win at attracting talent?

You know what’s better than profits-per-partner? Profits in your wallet.

Networked Law: BigLaw 2.0

Examples of specialists we (corporate lawyers at a small firm) use to staff deals (i) a former silicon valley BigLaw tech transactions partner (head of his group) now operating a solo practice, (ii) a T100 in Texas trademark lawyer operating out of a trademark boutique, (iii) one of the country’s leading open source specialists operating a solo practice, and (iv) a veteran venture capital paralegal working virtually from Palo Alto. Everyone bills 40-60% less on an hourly basis than they would at a major law firm, which doesn’t even account for their ability to optimize pricing, process, technology, and staffing for their practice area. And, yes, everyone takes home more than they would in BigLaw.

You know what that’s called? D-i-s-r-u-p-t-i-o-n.  I don’t use that word lightly. This is not a piece of software that large firms can ultimately pay a consultant to help them adopt, but a fundamental restructuring of how top-tier transactional law operates.

The Future

Small firms are not just for the mickey mouse club anymore. The A-Lawyers are asking “Why are you all here?” and “Where the f*** do all my billings go?” and are doing something about it. Focused, faster, efficient, networked, and now with much bigger paychecks. Small law has been around for a while. But BigLaw 2.0 is just beginning to ramp up. As more A-Lawyers set themselves free, most of BigLaw will have to face the reality that all the branding in the world can’t save a bloated, overpriced, and now completely unnecessary delivery model.

p.s. We’re hiring.

409A as a Service: Cash Cows Get Slaughtered

Background: 409A is a set of tax rules passed, in part, to stop companies from avoiding taxes through issuing underpriced (cheap) equity as compensation.  While well-intentioned, it spawned a cottage industry of third-party valuation firms/i-bankers who charge companies, including startups, thousands (sometimes tens-of-thousands) of dollars to get ‘409A valuations’ for their stock to avoid tax penalties in setting their stock’s Fair Market Value.

Anyone who deals with 409A valuations on a regular basis knows that they are the quintessential ‘cash cow’ for valuation firms and small i-bankers; evidenced by the number of those firms that are constantly inviting lawyers and influential tech players out to lunch in order to get referrals (btw, sorry guys, I’m blogging right now). And if they’ve dug a little deeper, they’ve found that, particularly at the early stage, these valuations are generated in an almost entirely automated fashion. Hence, cash cows: premium price, lots of hand-waiving to make them seem difficult to produce, but ultimately with a low marginal cost.

The Necessary Evil

In practice, startups have been advised by lawyers and their advisors to avoid a 409A valuation until a Series A. Pre-Series A there’s usually not much on the balance sheet and no arms-length price on the Company’s equity to generate a meaningful valuation, so startups just wing it.  Post Series A, however, the vast majority of startups pony up $3-10k to get their valuation, and it has to be refreshed (i) every 12 months, (ii) if there’s a material change in the startup’s financials, or (iii) if a new equity round is done; otherwise it goes ‘stale’ and no longer provides a safe harbor on FMV.

That can get expensive quickly, though any serious company looking to get acquired by a large company or eventually go public knows that the consequences of not doing this can be substantially more expensive.

409A-as-a-Service: The Slaughtering

Finally, eShares (the paperless stock certificate and capitalization tracking company) has pulled off something brilliant: 409A as a Service. Priced as a continuous service (which makes total sense given the on-going need for re-doing a valuation) and supported by a well-known valuation firm (Preferred Return) startups get continuous 409A valuation services at a monthly fee: $159/mo for a post-Series A startup – higher for later stage.

Doing the math, that’s $1,908/yr: easily a 40-50% discount on even the most ‘sweetheart’ deals offered by local valuation firms for post-Series A startups. If you need a refresh within a year, you’re in 90%+ discount territory. Add in the fact that (i) it’s done paperlessly via the web, and (ii) the valuation gets continuously updated for major changes in capitalization or financials (no huge cost to avoid going stale), and we have ourselves a game-changer.

The pricing for Series B, Series C+ valuations is even more competitive relative to market rates for 409A services.  It’s also a brilliant feature for eShares because of how it ties in directly with their existing capitalization tracking platform.

Something tells me that this slaughtered cash cow is going to net eShares and Preferred Return a lot of steak dinners in the future.  The cottage i-bankers who’ve built practices off of milking 409A as much as possible? Not so much. The better i-bankers of course do higher-value things that justify their costs, so they have nothing to worry about. Yes, there are serious parallels to startup law here.

Nutshell:  Startups historically had to pay $3-10k for a valuation after closing a Series A in order to protect themselves from 409A issues, and they had to keep re-paying it on an on-going basis to keep it from going stale.  eShares has changed all of that by offering 409A valuations as a continuous service (as they should be) and pricing them in a manner that aligns more closely with what it costs to produce them.  Cash cows, particularly when visible to techies who like to disrupt things, eventually get slaughtered.

p.s. Like all of the other tools I recommend to startups for saving their capital, I have no financial interest in eShares.

The Deflation of Startup Law Continues: Clerky

Almost exactly a year go, I wrote a post (The Economic Deflation of Startup Law) in which I (i) documented how the rapid adoption of technology and standardized contract language in early-stage startup law was dramatically deflating the cost of quality (crappy law has always been affordable) legal services available for founders, and (ii) made a few predictions about how this might affect the segment of the legal market that serves early-stage tech entrepreneurs.

Background

  • Contractual Changes – Standardization of contract language within law firms  & the emergence of universally standardized documents like the NVCA model docs, Series AA, and Techstars Docs, to name a few.
  • Technological Changes – Proofing software, Document Automation, Electronic Closing, etc. – reducing the amount of lawyer time required to complete a formation, bridge financing, etc.
  • Operational Changes – Technology and standardization simplify the labor input required to complete a transaction, allowing less trained, less expensive professionals to perform more of the back-end work.
  • Deal Platforms – Technology is moving from being merely a tool within the traditional law firm process to a bilateral platform that allows parties on both sides of a transaction to close, from beginning to end, with significantly less lawyer time required.
  • Freemium Startup Law – Very early-stage legal work (formations, bridge/seed financings, routine forms), once the bread-and-butter of solo lawyers and boutiques serving entrepreneurs, will no longer support those practices, no matter how efficient they try to be.  The margins will be too thin.  Those attorneys able to serve higher-quality, later-stage clients (those that make it to Series B, C, exit) where legal work will remain much more high-touch, high-margin will dominate the market and cross-subsidize their work for premium early-stage clients.  In short, Startup Law will move closer to a freemium model, where standard work is significantly cheaper, and being able to attract “premium” clients is essential for profitability.

The point of this post is not to comment on the accuracy of my predictions. One year is too short a time-frame to judge (we’ll see in 3-4 more years), though I will say that in Austin’s legal market I’ve seen a definite trend of solo and almost-solo lawyers attempting to expand their practices into multi-specialty firms, suggesting their desire (or need) to move up-market. Nationwide, I’ve also encountered a few small firms with much higher-caliber partners/associates, broad networks of specialists, and low-overhead platforms to compete head-on with BigLaw: this is where things will get very interesting.

Deflation 2.0 – Clerky

Instead, I’d like to talk about how the above developments have manifested themselves in the form of a Y-Combinator startup called Clerky. Details:

  • Founders are UPenn and Harvard (represent!) JDs of Orrick pedigree, and the head partner of Orrick’s Emerging Companies Group is an advisor; lest you question the quality of the drafting.
  • Appears to have handled formations for several Y-Combinator classes (note: classes – hundreds of companies) over the past several years; lest you think they haven’t been vetted and won’t get traction.
  • For formations, founders fill out online questionnaires very similar to those used by startup-focused law firms, and documents are automatically populated with the appropriate names, numbers, vesting schedules, etc.
  • There is a “reviewer” option where the founders can designate a person (an attorney) to review the final documents pre-execution to give a thumbs-up.
  • Execution is handled electronically on the platform.
  • Delaware filings and registered agent registrations are handled by Clerky.
  • Final executed documents are stored online.
  • Currently Available: Simple Incorporation (no equity, IP docs, etc.) – $99. Full formation (equity docs with vesting, IP assignment, bylaws, etc. – option plans and indemnification agreements coming soon) – $398.
  • Coming Soon (In Private Beta): Employee Offer Letters, Consulting Agreements, Advisor Agreements, NDAs, Convertible Notes., LLC to C-Corp Conversion

So what exactly has Clerky done? Once they get option plans and indemnification agreements up and running, they will have taken what would cost $5K-10K in legal fees at an inefficient law firm (or $2.5K-$5K at a more efficient one) and reduced it to $398 by going one step past building tools for lawyers to developing a platform that effectively replaces them – or at least ~95% of the work they do for early-stage clients. LegalZoom prices, but for premium, startup-focused documents.

What about free options?

Major law firms have attempted to address the large portion of the founder population for which even $2.5K-$5K is too high a formation price tag by offering documents online for free. I even wrote this post offering my own checklist for forming your own startup and issuing equity, lawyer-free, via publicly available documents.  But $398 is close enough to free that founders in this same category will be willing to pay for peace-of-mind, knowing that their docs are filled-out and filed properly, and that a reputable service is helping them maintain them. Plus it’ll save them hours of having to read the forms themselves.

Curmudgeon Criticism 1: Founders will want more customization than Clerky Offers

Yes, there will always be a segment of the founder population that wants high-touch, more flexible lawyering from the very beginning and will pay for it.  But the reality is that for the large portion of the pre-funding founder population that just wants to “get the job done” and focus on their product, Clerky, with its 80-90% discount on even the most efficient startup lawyers, will be a viable option. I don’t see Clerky taking up 90% of all startup formations, but it absolutely will be chosen by the most cash-strapped portion of the founder population for which a barebones formation makes sense.  Instead of relying on bottom-of-the-barrel lawyers peddling cheap prices, those founders will get a solid legal foundation.

Curmudgeon Criticism 2 Good lawyers will never accept a third-party service’s drafting language for their own clients.

After an inevitable phase of whining, kicking, and screaming, smart lawyers will accept whatever good clients and the market dictate, or they’ll just leave the space.  As stated above, there will always be clients who are willing to pay a premium for ensuring that all of their lawyering is 100% airtight, but those clients will be fewer and farther between.  And you can certainly expect a chorus of lawyers poking through the Clerky docs with a laundry list of ways their own documents are better. But like many disruptive innovations, it’s about the ratio of quality to cost, not absolute quality. At $398 for documents based on those used by one of the country’s leading tech firms and delivered by a YC company run by Ivy-League JDs, the value for founders is unquestionable. Quality, both in terms of legal drafting and user experience, will also improve over time.

Clerky will allow founders to engage quality, scalable lawyers earlier on.

Clerky’s “reviewer” option and its clear intent to incorporate lawyers in their processes shows that the goal here is not to completely replace lawyers, which would clearly be silly and reckless. The nuances of individual circumstances, the need for sound professional judgment that can’t be reduced to an algorithm, and the general realities of running a company will always require good, human legal counsel.

What a service like Clerky does is allow founders with very low legal budgets to stop having to settle for low-quality, mismatched lawyers who end up costing a whole lot more money (in mistakes) than founders expect. As I wrote in a previous post, a lot of founders know they need a lawyer, but can’t afford a good one, so they take the “staging” approach of going cheap up-front with plans to “upgrade” later. The consequences of this approach can be very expensive, and often disastrous.  Founders need lawyers that can serve them at all stages of development, not just when they’re tiny and the stakes seem low.

With Clerky, the “cost” of hiring a good lawyer at the very early stages of a startup can be the time it takes to quickly review some Clerky docs and answer any questions a founder might have about non-standard matters. For quality startup lawyers who stop pretending that all document drafting, no matter how routine, needs to occur in private silos, this is liberating. They can focus their practices on more complex matters that are far more profitable and interesting from a professional standpoint, while still maintaining relationships with early-stage clients who might one day require their skills. It also means the need for deferring fees will be dramatically reduced.

A missing piece: what do the documents say?

One issue that has gone under-addressed in the startup legal landscape is how to make all these automated legal documents understandable to founders.  While no founder should care to understand all the nuances of their option plan, stock purchase agreements, etc., they should at last be able to grasp at a high-level the concepts that they contain.  And sitting down with a lawyer for every explanation is and always will be too expensive for most founders.

Offering lists of books and links to founders is very helpful.  A “customer support” model of cheaper professionals without JDs who can easily answer common founder questions will also likely emerge.

One startup here in Austin is taking an interesting approach: crowdsourced annotations of contracts (Lawful.ly). They call themselves the “Rapgenius for Law.” Imagine having all of the legal forms that your startup uses available online with annotations, so you can click around the document and get plain-english explanations of what a particular provision means. That’s what they are working on, and hopefully it (or something similar) will fill a gaping hole in the early-stage startup law landscape.

For lawyers who’ve built their practices on charging clients thousands of dollars for basically filling in forms and doing some cutting-and-pasting, the future looks increasingly grim. For those of us who love working with entrepreneurs and tech companies, but find cookie-cutter legal work utterly boring and a waste of our intellect, life is getting a whole lot better.

Integrated Startup Law — Specialists Matter

Without getting bogged down on details, you can largely categorize physicians as general practitioners and specialists. Generalists are the every-day doctors that provide primary care for more routine matters, and also (hopefully) coordinate care with specialists (cardiologists, neurologists, etc.) when appropriate. Unfortunately, the U.S. healthcare system does a terrible job on that second part, but this is a blog about startup law, not healthcare. End of digression.

The practice of transactional law, including startup law, can also be categorized in this way.  A “corporate lawyer” serves the role of the general practitioner. Her job is to handle the more common matters that a client is likely to encounter, and to coordinate with specialists (tax, labor, IP, etc.) when their input is needed.

Biology is Integrated

Anyone who’s studied health policy knows that, by far, the most effective and efficient healthcare delivery models in our country — Kaiser Permanente, Mayo Clinic, etc. — are what many call “integrated.” Specialists and generalists work under the same system, and share information with one another in as frictionless of a manner as possible. The reason for this is that the human body itself is an integrated system. The heart doesn’t operate in complete isolation from the brain any more than my macbook’s hard drive operates in complete isolation from the CPU.  So it makes little sense that medical practitioners who specialize in different systems of the body work alone, as if the knowledge of other specialists is irrelevant to their own work.

Startup Law is Integrated

What I try to ensure that our clients appreciate is that the law itself, including the law that affects startups on a daily basis, is also integrated.  Even at the most standardized of startup legal events — formation — there are at least half a dozen specialties of law that play a role in the steps a client needs to take.  Securities Law, Labor Law, Intellectual Property Law, Commercial Litigation, State Corporate Governance Law, Tax Law, etc.

A view commonly heard about early-stage startup law is that it’s all become so “standardized” that large, sophisticated institutions with specialists (not just generalists) are no longer needed to properly serve clients; the end-result being a retreat to a “cottage industry” mentality where small practices of generalists have set up shops pitching themselves as delivering the same service, but without all that unnecessary “overhead.”  Some have gone so far as to call this trend a “disruption” of law practice.

My response to this perspective is three-fold:

1. “Standardized” and “Simple” are not the same thing. Not even close.

Production of the iPhone is standardized; otherwise no one would be able to afford it. But that doesn’t mean the design and building of the iPhone is “simple” in a sense that it could be produced by a fragmented cottage industry lacking the resources of Apple.  In the same sense, the set of twenty or so documents that we produce for our startup formations has become standardized to the point that we can produce it quickly at scale, but the expertise of at least half a dozen specialties went in to producing it, and is required to constantly update it and ensure it fits the current state of the law.  A set of lone generalists, even brilliant ones, simply wouldn’t cut it.

2. The exact same process, delivered from a smaller office, while wearing denim, does not a disrupter make.

Disruption of an established industry comes from delivering what consumers want, but in a radically different, often cheaper way.  Productizing the expertise of highly educated and specialized individuals and delivering it at scale so that far more people can afford it: that is disruptive – and it’s happening in startup law.  Cutting off the relevant expertise of a large portion of the profession, moving into a smaller office space, and continuing to deliver the product in the exact same way: t’is not disruptive.

Because smaller legal practices often do have salary structures that lower their labor costs, they do tend to have lower hourly rates.  But many (that I’ve encountered) use this lower labor cost as an excuse to avoid adopting the kinds of technology and practices that actually make the delivery of startup law efficient.  In other words, “our hourly rates are lower, so it’s OK if we take longer to do something.”  People operating in Big StartupLaw, particularly techies like myself, are often floored to see how backward some (not all) smaller practices are. This is not a space for “cottage” practitioners, though not all smaller practices fit that definition.

3. Specialists will need to be consulted.

Forming your startup or raising a simple seed financing might be thought of as the legal equivalent of getting a cold (simple service is fine), but actions taken at the not-that-much-later stages of the startup, like drafting executive employment agreements, developing and protecting intellectual property, issuing securities, negotiating commercial contracts to be enforced in multiple jurisdictions; these can touch on legal nuances that are a whole lot more like brain or heart surgery. Leaving everything in the hands of a generalist can end up ugly.  We’ve seen this happen many times.

The high growth nature of tech startups means they can go from playing legal tee-ball to the major leagues very quickly, unlike most kinds of businesses that utilize small firms.  Legal representation that can scale with the startup at all of its stages, rather than max out once the startup becomes successful, is extremely valuable; particularly because the costs of switching law firms are not insignificant. The key is to find a firm that packages and prices its services appropriately for each stage of a startup.

Fragmentation v. Integration

Many smaller practices are well aware of these limitations in their model and have developed informal networks of specialists from other firms to call upon in situations when their expertise is needed.  I’ve touched on this topic here.  While this is definitely a good thing, thus far I’ve been unimpressed with the mechanisms (i.e. none) that smaller practices have put in place for actually drawing upon their “network” in an effective and efficient manner.

Having to formally engage a new law firm (including running a conflicts-check) to ask a question that someone under an integrated system could get answered by walking down the hall doesn’t exactly smell like progress to me.  Even if it works for lengthy, project-based engagements, the kind of quick, 15-minute consults that are commonplace (and necessary) in an integrated firm will inevitably go under-utilized in a system with that much friction.

Some “multi-specialty” firms have done a little better and brought in-house the handful of types of specialists that are most likely to be needed by a startup: employment, tax, and IP seeming to be the most common.  But that’s a tough model to sustain because those specialists almost invariably need to also work for large non-startup clients (the kinds that don’t work with small firms) to keep their practice profitable.

Of course, as in other industries, at some point the right platform for allowing a fragmented system of specialists to coordinate ad-hoc may emerge in a way that can match the quality and breadth of the integrated system. But for now, this “PC” of startup law is nowhere to be found.  For matters beyond the absolute most basic, Apple-like integration wins.  Note, however, that a smaller footprint can actually be the optimal model for attorneys/firms with enough brand recognition (gravity) to dominate a particular niche specialty (not generalist) of the market.

Conclusion: Process efficiency and technology innovation will disrupt legal practice. A “cottage mentality” will not.

Progress and innovation in the startup law space will not come from doing things the same old way, while wearing jeans in a less fancy office space.  It will come from sophisticated parties that, instead of retreating from the web of specialties that make up the field, find smart ways to affordably package and productize their knowledge.  This process is well underway, and it’s incredibly exciting to operate in.