Category Archives: Legal Tech

Feb 03 2013
5 Comments
BigLaw, Deals, Formation, Lawyering, Legal Tech, Venture Capital

DIY Startup Legal Tools: Self-Diagnosis v. Self-Treatment

Image by Barbara Krawcowicz via Flickr

I have an awesome idea for a startup. Let’s call it LunaDoc. LunaDoc will be a website where you answer a series of algorithm-based questions about a health-related issue you’re dealing with, and then it will suggest to you a diagnosis. Sounds great, right? That’s probably why dozens of these exist already.

But let’s go one step further. After diagnosing you, LunaDoc will generate a prescription and send it to your pharmacy of choice, after which you can pick it up without the hassle or expense of ever having to talk with an actual physician.

If you’re half sane, you should have suddenly thought something along the lines of, “Whoa there, tiger.” Why is that? Because self-diagnosis, or educating someone enough to better understand their problem, is great. But self-treatment, or turning that new knowledge into a high-stakes action with potentially permanent consequences, without consulting a professional, can be absolutely nuts.

Sidenote: As I’ve done many times before, I’m going to leverage this healthcare example into a metaphor for the startup law context.  I truly believe there’s a lot that people in startup law can learn from the healthcare profession, so I’m going to milk this metaphor until the cows come home.

Self-Diagnosis

For years entrepreneurs have been fortunate enough to have an incredible amount of accurate, well-articulated, and free knowledge about startup law issues on the web; some in the form of blog posts and some in the form of articles. I’m a huge fan of recommending online resources to clients as a way to educate themselves without being billed hundreds of dollars an hour for it. And it makes the time that I personally spend with them more efficient (and cost-effective) because we can get right down to business without having to go through basic stuff. I keep my stash of helpful online reading here: SHL – Startup Law Links. 

Startup law blogs and articles are the legal equivalent of healthcare websites that help with self-diagnosis. Their role is simply educational, and can help a client (patient) better engage a professional in turning the diagnosis into a solution. While some doctors might complain about patients becoming “google doctors,” a more educated client base is uncontroversially a net positive.

Self-Treatment: Guided v. Unguided

Lately, however, we’re starting to see the web do what it always does: provide tools that attempt to dis-intermediate an economic relationship and let people completely handle things themselves. Self-diagnosis is evolving into self-treatment.

Major law firms have started posting standardized contracts on their websites for free.  Capography, a really cool new tool, lets entrepreneurs manage their own cap tables and even run a limited number of waterfall analyses to see how funds would flow in an exit. Docracy has emerged as an incredible source for hundreds of free contract forms for a wide variety of contexts, and they even let you execute the contract from the comfort of your own home, without ever having to go through the hassle or expense of talking with an actual lawyer (sound familiar)?

The much greater danger with these kinds of tools, much like with LunaDoc, is the issue of permanence. Education is flexible and easily correctable, but treatments are forever. Or perhaps better said, contractual and transactional mistakes are often extremely expensive to fix, if they’re fixable at all.

While everyone knows how much of a fan I am of standardization, automation, and any tool (toy) that allows attorneys to avoid repetitive, boring tasks, the fact of the matter is that tech startups are not coffee shops, and startup contracts are not wills. As I’ve mentioned before, startup law is a multi-specialty, highly contextual sport.  There are countless tax, employment law, securities law, and other state law issues that might come into play in your particular context, some of which need to be handled in the contract, and others that are completely separate from it. Signing the wrong contract, or taking the wrong legal action, isn’t that different from taking the wrong pill.  The side effects may be serious, or even lethal.

But, wait, aren’t law firms themselves putting up these standardized forms? Read the terms of service, my friend. Zero liability. Their skin isn’t in the game. Just yours. Those are marketing tools.

Attorney-Directed Self-Help

There’s a slightly different approach that a few companies are taking to allow entrepreneurs to do some things themselves and minimize their legal spend, while ensuring that a professional who understands the context is guiding the process. Brightleaf has a brilliant concept called a Leaflet. After speaking with a client and understanding what they’re trying to do, an attorney can easily turn a form into a self-help, automated tool. For example, you can turn the Company’s board-approved Option Grant form into a leaflet that allows the client to input the name, date, etc., and auto-generate option grant forms without bothering his law firm. Of course, every time you generate a form, the attorney sees it. Self-help, but with an experienced and invested professional making sure you don’t blow something up.

VCExpert’s Private Company Analysis Tool (PCAT) allows a law firm to input and update a Company’s capitalization info, and a client can then run any number of reports using that data without having to consult the attorney. Again, someone’s there making sure the inputs are correct and that things don’t go awry, but the client doesn’t have to ask his attorney to generate a different report (often hours of work) every time he wants to see the vesting status of options or the funds flow of a potential exit.

Empowering clients and unlocking information from artificial silos is awesome. Pretending that technology can completely replace professional judgment and contextual understanding when it simply can’t… not so much.

Yes, I understand that self-help tools are really about the under/un-served.

Of course, downloading a free contract form drafted by someone who at least knew what they were doing is light-years better than issuing stock with a 3-line contract written on a napkin.  And that’s why I’m not going to say that un-guided self-help tools aren’t a benefit to the startup ecosystem.

Much like how cheap, mass-market contract websites have made wills and basic corporate forms available to people who would never have contacted an attorney to begin with, I get that there’s an underserved market here that needs these tools.  Just keep in mind that how much effort and expense you’re willing to incur in protecting your startup is, in many ways, a reflection of how seriously you take its prospects.  If you’re sitting on a dud, who cares if your employment forms aren’t enforceable in your state, or if you didn’t fill out your stock issuance forms correctly? But if you think it’s a home run (and why would you waste your time on something that you think isn’t?)… well, you get the idea. Investors will too.

Dec 31 2012
2 Comments
BigLaw, Lawyering, Legal Tech

Why law firms should act more like medical practices.

If I try to schedule an appointment at my doctor’s office and my general practitioner or nurse practitioner (we’re assigned to both) aren’t available, either because they’re out of the office or don’t have time, guess what happens? I see someone else. If a client calls or e-mails her law firm and the partner & associate (usually assigned both as well) are either out or too busy to respond, which is often the case, guess what happens? She waits for them to become available.

Why the difference? Healthcare patients can be flexibly transitioned between different practitioners for general matters, while legal clients are generally stuck with the people they always work with, even for completely basic stuff.  You’d think that with the cost of a medical error seeming to be much higher than the cost of a legal error, reality would be reversed… but it’s not. While part of the answer has to do with professional culture and the way law firms are structured, the more practical reason has really to do with only one thing: records.

Any remotely competent medical practice maintains a thorough set of internal historical records on its patients. More importantly for purposes of this discussion, they maintain a narrow set of standardized, easily reviewable information that a physician could quickly read to understand the most critical issues that are likely to interact with whatever the patient needs addressed at the moment: prescriptions, previous medical conditions, previous procedures, family history, etc. Let’s call this an electronic health record, noting that we are talking about internal records within a practice, not the bigger problem that standards for maintaining records across practices in our healthcare system leave a lot to be desired.

Shockingly, for most law firms anything remotely resembling a well-organized, easily reviewable electronic legal record is completely absent from their business processes.  Want to know the key info about a company that needs you to quickly draft them some bridge documents? Start reviewing the documents the last guy drafted.  This is equivalent to a doctor having to review all of another physician’s dictated notes every time he’s assigned to a new patient. It’s inefficient, if not frustratingly moronic.

In our office I introduced a very simple concept that addresses this problem only for the most basic of information. We call it a Company Snapshot – a single page document that anyone assigned to a client can review in 3 minutes to know the exact name of the Company, state of incorporation,address, key contact info, who’s on the board, and a few pieces of other useful information.  It doesn’t go anywhere near addressing the fundamental problem described above, but it still prevents a fair amount of pointless document reviewing whenever a junior attorney needs to draft a simple document for a newly assigned client. One could easily imagine the concept being extended to providing a clear timeline of key events/transactions in a Company’s history, a summary of its capital structure, and notes regarding any abnormal issues that would usually throw a wrench in getting some basic legal work done (equivalent to an uncommon medical condition –mine would be having only one kidney– that any physician treating a patient needs to know about).

I don’t have the clout, at least not yet, to push anything broader in scope than the Snapshot, but I would hope that other firms are working toward a similar goal.  The lives of attorneys would be much-improved if they could optimally shift work among themselves when a single attorney is too busy to serve all of his usual clients. And clients would be better-served if, when all they need is to grant some options or issue some bridge notes, they don’t have to wait for their attorney to close that big M&A or VC deal that’s been consuming his week.  One partner in our firm described it as a shift from tribal knowledge to institutional knowledge. Whatever you want to call it, it needs to happen.

Sep 14 2012
5 Comments
BigLaw, Funding, Lawyering, Legal Tech, Tech, Venture Capital

The Economic Deflation of Startup Law

News.  Two big issues have been floating around the startup law space lately. First, Yokum Taku introduced “convertible equity” in an attempt to address the potential downsides (for entrepreneurs) of convertible debt, which set off a debate that Antone Johnson spectacularly Storified. More interesting to me, however, was AngelList’s announcement that seed rounds can now be closed, soup-to-nuts, on their platform.  The real news there, for lawyers at least, is that Wilson Sonsini will close those rounds for free.  Yes, as in nothing.

Startup Law – Deflation Accelerating

Much has been written about the “deflationary economics” concerning startups and the web, with Mark Suster’s post probably being one of the best articulations that come to mind.  Not as much has been written about the indirect effects that industries experiencing economic deflation can have on other sectors they interact with.  Wilson Sonsini’s AngelList pronouncement is, in my opinion, the clearest sign that the portion of the legal sector working with technology startups is itself experiencing rapid deflation — and not because lawyers have suddenly shed their luddite tendencies and read ‘The Innovator’s Dilemma’ (though they should).

What’s happened, essentially, is that with literally every other service used by their clients becoming radically cheaper, and the resulting downsizing of investment rounds, startup lawyers simply couldn’t maintain their usual fees and keep a straight face.  This deflation started out with what you might call Stage 1 deflation, with standardized docs emerging, fixed fee packages, etc.  Startup Law was just efficient at this stage, especially compared to other areas of the law.  But with free, dynamically generated documents from high-end firms available online, and now with one of the best firms in the country saying they will close seed rounds for free, I’d say its reached Stage 2, where commoditized is the more appropriate adjective.  And I’d argue that this has some serious implications going forward.

How We Got Here

First, it’s worth reflecting on the different steps that startup law firms have been (or should be) taking in order to compete in this deflationary environment.  I’d break those steps into 3 categories: contractual, technological, and operational.  These steps could also serve as a model for other parts of the legal field that, while not as aggressively deflationary as startup law, will likely eventually follow a similar path.

Contractual. 

  • Standard Firm Docs – In order to make contract drafting more efficient, firms started modularizing the language of their own documents.  If an investor gets a 1x participating liquidation preference with a 3x cap as opposed to the 1x non-participating currently in the document, ‘drafting’ involves mostly cutting and pasting bracketed language, with minimal tinkering.  While this cut down on internal drafting, it still left room for bickering about language with the other side of the deal.
  • Universal Standard Docs - Going one step further, standardized investor docs like the Series AA and the NVCA Model docs emerged, allowing for parties on both sides to have a common language framework to work from.

Technological.

The contractual efficiencies developed in startup law still required the usual process of opening a word document, filling in blanks, moving around language in a very straight-line fashion, and then proofing to make sure everything is coherent.  Closing required creating signature packets, then tracking signatures and assembling them back into fully executed copies.  But then technology emerged to streamline a lot of this process.

  • Proofing Software – A significant amount of time on a transaction used to be spent by junior attorneys flipping through pages to make sure names are properly spelled, commas are in the right place, and defined terms are properly in place.  Software like Deal Proof emerged that can scan a document and generate a proofing list for an attorney, cutting down on that proofing time by anywhere from (my estimate) 50-75%.
  • Document Automation – Companies like Brightleaf have emerged to turn the cut-paste-and-proof process of working with form docs into one of simply clicking certain options in a form.  Want that 1x participating LP w/ 3X Cap? Just click the right box in your template, and the language will get filled-in automatically, and every other area of the document that is impacted will also be modified. No need to proof.
  • Electronic Closing.  -  With multiple parties often signing dozens of documents, the usual closing process involved creating “signature packets” where you PDF’ed the signature pages of each contract, and created single files containing all the pages that each individual party had to sign.  Without doing this, mistakes would be inevitable.  With electronic signature software like Docusign, this process is largely removed.  Put the ‘Sign Here’ tabs for each person in the appropriate places, and Docusign will (1) guide them to where they need to sign, and (2) generate fully executed documents.

Operational.

One obvious end-result of the contractual and technological developments has been that drafting simply takes a lot less time, which naturally means less money billed.  But what they’ve also done is made the drafting and closing process a lot simpler.  To modify a vesting schedule or a liquidation preference, you don’t really need to understand the actual mechanics of the language. Just click the box.  And to get a deal signed up, you don’t need to create complicated signature packets and coordinate signatures.  Just drop the Docusign tags in the right place, and it’ll do the rest.

Firms have taken advantage of this simplicity by pushing work down to junior attorneys and even paralegals, who bill a lot less per hour.  Where it might have previously required an experienced attorney to draft and close a seed financing, an innovative firm might have a paralegal do 95% of the work, with zero drop in quality.  A partner or senior attorney might spend a few minutes discussing very high-level issues with the client, but that’s it.

The Next Step: Deal Platforms

I have zero doubt that Wilson Sonsini is taking advantage of all three of the above categories.  But the key to really get the kind of deflation reflected in the free AngelList closings is the next step of legal technology: Deal Platforms.  Rather than just the initial drafting of docs being automated, with negotiation over terms and language to follow, the automation becomes bilateral.  If the investor wants a better liquidation preference, he simply fills in a field or checks a different box, and if the Company disagrees, they uncheck that box.

Contract language becomes completely secondary – commoditized – on a deal platform.  One can easily envision a time in which the negotiation of a full venture deal, not just a convertible note financing, involves nothing more than checking boxes and filling in a few fields, with full documents automatically generated and then electronically signed.  The chances of closing such a deal for free are practically zero, but all that automation could make a ~$10K legal bill for a full institutional venture capital financing a reality, which would be about a 50-80% cut on current rates.

Takehome: Nobody should be myopic enough to expect AngelList-like automation to stop at the seed deal stage.  Again, The Innovator’s Dilemma, legal version.  See below from AngelList’s Q&A.

Does Docs support Series A rounds?

No. Docs only supports seed rounds right now. (emphasis added)

Implications: Freemium Startup Law

There are a number of ways that this rapid deflation has and likely will impact the structure of startup law practices.  One result of the already-occurring deflation has been the growth of boutique firms competing with BigLaw by offering similar, albeit more limited, services at lower billable rates.  I wrote about this previously: ‘In Startup Law, Big Can Be Beautiful.‘

The economic advantage of a boutique practice is that firms can avoid the high billable rates necessary to sustain the breadth and overhead of large law firms, while still offering their experienced attorneys comfortable salaries.  That works well in an environment where the demand is for cheaper seed financings and venture deals. But what happens when free or practically free becomes the dominant expectation?

Cross-subsidize.  As Wilson Sonsini’s move has made absolutely clear, large firms have their own economic advantage with respect to legal fees: cross-subsidizing low-end work with profits from larger deals.  Large firms don’t just handle formations, seed financings, and venture deals, they also handle cash cow M&A and IPO transactions that are not experiencing anywhere near the kind of deflation going on at the low end.  Those deep pockets make offering free startup work a lot easier, provided enough of the loss-leaders generate big deals down the pipeline.

This model of offering a lot of stuff for free and profiting off of the high-end users should look very familiar to techies: it’s the freemium model, applied to law.  And it distinctly favors large, brand-name firms.  Boutique firms lack the institutional capacity to handle the large transactions that a larger firm can use to cross-subsidize free work.  Without more radical change, their only hope is to make up for deflation with volume.  But [insert large number] * free doesn’t pay the bills.  Commoditized deal work favors the cross-subsidization of large firms over the lower labor costs of boutique practices.

Conclusion: Move Fast, Move Up, or Move Out

At this point (when deal platforms become ubiquitous), I see smaller startup law practices having to either (A) get used to operating at much lower margins, or (B) find a way to move up-market and take a piece of the larger deals.  I wrote previously about the possibility of boutiques using technology to scale for large transactions here: The Ad-hoc Law Firm? Granted, I don’t have much visibility into how boutique practices are doing, though I’d love to hear from other attorneys or knowledgeable people on how they see the future panning out.

As for large firms operating in this space, the choice is much more straight-forward: either become radically efficient with your commoditized startup work in order to keep the pipeline flowing, or get out.  I’ve seen firms here in Austin completely exit startup work for exactly this reason.  Thankfully, we’re going with the other option.

Aug 11 2012
2 Comments
BigLaw, Legal Tech, Tech, Venture Capital

Legal Startups: All Chasm, No Revenue

Kenneth Adams over at Koncision wrote a blog post recently that caught my attention: The Perils of Innovation, about the challenges of true innovation in the corporate law field.  Take-home point:

Bringing innovation to the transactional world is like competing against a giant cartel. It’s like competing against faith. That’s what makes it so bracing, but it’s also why most people offering technology solutions to the transactional world will fail.

I started commenting on his post until I realized I was writing a mini-essay and that, given the relevance to other topics I cover, it made more sense to post here.  Ken talks about the recent shut-down of Ridacto, a little contract analysis tool that I came across – wait, now that I think about it, Ken was the one who introduced me to it, via Twitter – and found interesting, but a bit shy on execution. You uploaded a contract (more on that later), it ran an analysis, and then produced a proofing report that pointed out issues with defined terms, section references, etc. Much like a simpler version of Deal Proof, which my firm licenses but for some reason no-one used until I discovered it.  It’s highly imperfect, but has honestly saved my life as a junior associate, and has saved the clients I’ve worked with probably about 5-figures so far.

Here’s my comment to Ken’s post:

I’m pretty optimistic about the future of transactional legal tech, but I think that any startup trying to enter the space has to be incredibly strategic about how they build momentum.  I tried Ridacto – it seemed interesting, though the UI was a bit confusing.  But I think the real issue was that their approach to how they analyzed contracts would simply be a non-starter at a law firm of almost any size – hey, upload this contract for a private transaction that hasn’t occurred or been announced yet, we’ll analyze it for you, but we promise we’ll delete it afterwards!  Umm, yeah, good luck with that one.  I got my hand slapped by my IT overlords because Box, not Dropbox, but crazy-secure used by like the CIA Box, wasn’t secure enough for them.  Just suggesting Ridacto would get me laughed at.

Lesson: If you’re a legal startup, your customers, or at least those controlling their buying/use decisions, are pathologically paranoid about security and credibility.  You simply can’t be a $100K, bootstrapped, “lean startup” and expect to get any momentum in this space.  In some ways, you never get to truly enjoy the Early Adopter phases of most tech startups. You start out right in the middle of Geoff Moore’s famous “Chasm” – all the problems of a startup – burning cash, an un-proven business model or product + all the problems of a scaling tech co. that usually has revenue to rely on, like gaining credibility and convincing conservative customers.

The last sentence or two is a point I want to drive home.  The transactional legal field does have early adopters who love playing with new toys, myself included, but we’re (i) few and far between, (ii) usually at the junior level, and (iii) as a result, don’t control the purchasing decisions of our firms.  As a junior, I’ve recently been able to convince our firm of about 4-500 lawyers to trial two pieces of tech that can, and already are, transforming parts of our practice.   One of those is a true startup – BrightLeaf. But there are a number of factors that had to be in place before I could do that:
  • Price – low up-front cost, subscription based. If it doesn’t work out, we make a clean break, little money lost.
  • Trial Period/Demo – don’t expect any firm to consider your product unless you offer a trial, or at least a demo that they can play with.  Demos can be helpful where the firm would need to build in a bunch of of its own information to truly get a feel for the product.
  • Security – I’d have every single aspect of our firm in the cloud if I could, but I have to answer to IT people who get panic attacks at hearing the word “dropbox.”  If you’re handling anything with sensitive information, you need security credentials, and that isn’t cheap.
  • Credibility –  Hire ex-corporate lawyers that can sell – good luck finding them.  Network and get in contact with a single firm that (i) is an industry leader, (ii) has people who are willing to trial software – most likely tech-focused lawyers, and (iii) would allow you to mention their name in marketing materials.  Lavish them with attention.  Most law firms are sheep. Nothing perks the ears of a corporate partner better than “Well, X and X LLP are using it.”  That’s how legal language gets adopted. Same with legal tech.

Low up-front costs for customers and trial periods/demos, so not much revenue to rely on up-front – classic startup.  Security and credibility to convince conservative decision-makers that you’re legit, will make it past their IT people, and truly understand their problems – that’s the Chasm, and it costs money.  Usually a tech co. has some revenue from early adopters to rely on when its dealing with the Chasm, but not a legal startup.  You start out right in the middle of it.

Good luck being a true “lean startup” in this space.  Frankly, I think that an intrapraneur – operating with the brand and budget of a large Co., but with the freedom to innovate – has much better odds than a true entrepreneur running a legal startup. I know many VCs aren’t (yet?) pouring money into the legal space, but we’ll see.  We desperately need innovation, but it’ll take serious, well-funded risk-takers with a strong understanding of corporate law practice (not an easy combination to find) to make it happen.

Jun 12 2012
2 Comments
BigLaw, Lawyering, Legal Tech, Quora, Tech

The Ad Hoc Law Firm?

The other day I wrote a post, In Startup Law, Big Can Be Beautiful, in which I reflected on the trend of boutique law practices popping up in the startup space, and whether large law firms really are as out-dated in this area as today’s zeitgeist would suggest.  One theme of the post was the notion of startup law being integrated, much like healthcare, in the sense that input from many specialists is often required to provide proper counsel to a client.  Boutique practices are obviously at a disadvantage in this respect because their whole model is built around not having teams of lawyers in dozens of specialties under the same roof: they call this “overhead.”

I recently came across an article with an extremely interesting concept: the ad hoc law firm. It talks about how solo practitioners and boutique practices, at least in some areas, are creating networks through which they can consult with one another and scale when required, but operate independently when not.  From a theoretical and economic perspective, this certainly sounds like the best of both worlds: you have capacity equivalent to a large firm built into your network with specialists and generalists on call when needed, but you only pay for what you use.

I posted a question on quora, which unfortunately no one has answered, asking what sorts of process boutiques and solos have in place to make this kind of system work.  The area that really interests me is how technology can be used to facilitate this concept.  Right now it seems that most boutiques simply call a specialist when they need one, and then begins a process of probably checking conflicts and transferring the necessary documents over.  Consulting outsiders seems to carry far more friction than it would inside of a firm.

But what if all the boutiques/specialists in this “network” operated on the same platform, and scaling was simply of matter of “inviting” others to a particular deal, much like you invite someone on LinkedIn or Basecamp. A few clicks and all the requisite checks and file access could happen automatically.  Going one step further, what if these networks had a shared document management system, through which they could share work-product with one another? That would address another advantage mentioned in my post: that volume and experience curves favor large firms.

That sounds like a powerful idea, and if someone’s not working on it already, there’s an enormous market opportunity to be grabbed.  Cloud-based law practice services like Clio and Lawloop are well-positioned to go after this, but right now it seems they’re focused more on connecting attorneys within a single firm.  Some form of Google+-esque granularity would need to be built in to accommodate a wider network.

May 16 2012
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Lawyering, Legal Tech, Tech

The Startup Lawyer Tech Audit

A lot has been written on the kinds of questions you should ask a startup attorney/firm before hiring them, much of which is quite good. I’d recommend Five Questions That Startups Should Ask a Prospective Law Firm by Matt Bartus.  I want to focus on something seemingly esoteric, but surprisingly important in terms of the value that startup lawyers deliver to their clients: legal tech.

There are very basic ways that technology and process can dramatically cut down on the time that it takes to complete a transaction.  Getting the right answers to the following questions won’t guarantee that you’ve found a good firm, but it will at least signal that the attorneys you’re talking to have the right business mindset in place; that cost-effectiveness, and not just technical perfection, is one of their priorities.

1. Do you have a fixed-fee formation package?

It doesn’t matter if you aren’t actually using them for a formation.  The simple fact that they have a fixed-fee package suggests that they understand standardization and template building, and have put processes in place to ensure that the wheel isn’t reinvented every time another client comes along.

2. Do you use document automation software?

Building off #1, the next step in the use of standard documents is the automation of their drafting.  A number of companies have emerged with excellent software solutions for building a firm’s form documents into dynamic templates that can be manipulated with a few clicks, removing the hours of editing and proofing that go into producing a set of docs.  Even when a firm has standardized templates (#1), filling those templates out manually can take quite some time.

Not everything can be automated. In fact, most things probably can’t.  But again, what we’re looking for is a signal. Is this firm thinking hard about how to cut out the fat and streamline when it’s possible, or do they have the (pathetically common) lawyer attitude that time saved just means less money to collect.

3. What kind of proofing software do your associates use?

You’d be amazed how much time (hours) associates can bill for simply turning back-and-forth between pages to make sure that the word “Fair Market Value” is defined, or that the company’s name has the commas in the right places.  While highly imperfect, software solutions exist for cutting this down significantly. Ask about it.  If the firm doesn’t know what you’re talking about, what does that tell you?

4. Do you keep all executed documents in PDF form, and are they OCR’ed?

It may sound like I’m just geeking out on you now, but picture this scenario: your company hired Guy X as an executive officer sometime in the past 4 years.  For some reason, you need to know the exact date that he was elected by the Board, and you call your firm to ask for the info.  An associate (me), who bills by the hour, gets asked to look it up.  Which do you prefer:

A. I type in Guy X’s name into a search box, and up pops the executed board minutes for the date on which he was elected.

B. I have to wade through unsearchable PDFs or (worse) open an actual minute book binder and read through each set of minutes until I find the guy’s name.

Imagine how many times this scenario will play out in the life of your company.  Think diligence in a venture capital round. Yeah, you get the idea.

There are of course a host of other questions and issues that you could get into with your prospective firm.  But these four questions should be enough of a litmus test to place the business attitude of the firm you’re talking to.  Do they see themselves not just as professionals, but as service providers whose integrity depends on the value they deliver?  You’d be shocked by how many attorneys, even in my field, think that all it should take to be an excellent lawyer is an “attention to detail.”  Thankfully, the rest of us are here to eat their lunch.  Delicious.

May 05 2012
1 Comment
BigLaw, Lawyering, Legal Tech

In Startup Law, Big Can Be Beautiful

A question that I’ve found interesting for quite some time is whether the part of the legal profession that serves tech startups and ‘emerging’ companies is ill-suited for full-service law firms, and whether solo practitioners and smaller firms are “disrupters” of such firms.  To clarify, a “full service” firm is one with attorneys that practice all of the legal specialties a company is likely to require in the course of its business: corporate, tax, employment, IP, litigation, etc.

Some solos and boutiques are outspoken in their opinion that a tech entrepreneur will waste her money hiring an attorney at a full-service firm, even one with deep startup experience.  Many, however, overstate their case.

The general argument against full-service startup law practices goes something like this:

  • lots of offices, lobbies, and bureaucracy that are completely unrelated to what you as an entrepreneur need
  • the attorneys bill very high rates to support all of this overhead
  • you’ll be small potatoes, and likely get stuck with a junior associate
  • so cut out the fat and go with an efficient, lean solo practitioner or boutique firm.

This argument resonates very well with tech entrepreneurs, because it’s precisely what startups themselves try to do with other industries – dis-intermediate, get rid of waste, do more with less.  Of course!  A startup law firm should run just like the startups it serves.

Whoa there, tiger.  I would argue that, as tempting as this line of reasoning is, it’s the wrong analogy.  The practice of law, even startup corporate law, is not like running a startup.  A more helpful analogy would be something like healthcare.  Here’s why:

1.  There’s No A/B Testing For Contracts

Tech entrepreneurs focus (wisely) on experimentation and iteration. Keep testing, keep modifying, until you find a product-market fit to scale on. In law, unfortunately, once a contract is signed, it’s signed. A year later, fixing a mistake can be extremely expensive, or even impossible.  Take the wrong pill, and you might not get to pivot.  If you think your company is worth anything, “minimally viable lawyering” is the last thing you want.

2. Startup Law is Integrated, Not Isolated

In the same way that cardiology or neurology don’t exist in little bubbles separate from other medical specialties, startup law doesn’t exist in it’s own isolated bubble.  Tax law, securities law, state corporate governance laws, employment law, intellectual property law, etc. all weave into the contracts and decisions that a startup company will have to execute as it grows.  Having specialists in those fields to quickly and efficiently consult is extremely valuable.

The other day a client of ours wanted to make a slight modification to certain options his company had previously issued.  To myself and the corporate partner serving the client, it seemed innocuous, but we ran it by “our tax guys” just in case. Turns out it would’ve obliterated ISO status for those options, resulting in serious tax liability for those optionholders. Whoops.  Don’t ask a general practitioner to perform heart surgery.

The best healthcare comes from integrated systems where knowledge among specialties is shared in an optimal manner.  The legal field isn’t much different.

3. Experience and Repetition = Efficiency

In a law firm, a transaction or contract is bespoke only once.  More people (a larger firm) means more experience, more transactions, and more templates to build off of the next time someone asks for a weird investment structure or employment provision.  Smart law firms know how to use technology to leverage this fact and push themselves far along the field’s experience curves, so that work becomes better and faster, and therefore cheaper, as time goes on. Focusing on billable rates, many of which are variable, is misleading.  As one notable VC blogger wrote: it’s the hours, not the rate, that matter the most.

4. Institutional Knowledge

Much like in healthcare, thoughtful legal practices are molding their processes and technology to, in certain ways, remove the all-knowing sage attorney as the sole link between the client and the firm.  Walk into a cutting-edge healthcare system, and an enormous amount of your health background, along with a lot of that institution’s own knowledge, will be stored in their IT.  If your doctor isn’t available or appropriate, you can see another, or a nurse practitioner, or a physician’s assistant, all of whom can tap into the institution’s experience to provide you excellent service.

The legal analogy should be pretty clear.  The “you get partners all the time” argument from a boutique practice may sound good, but just as a pulmonologist shouldn’t be taking your temperature when you have a cold, some tasks can and should be segmented.  If a young associate is tapped into the proper institutional knowledge, and is doing tasks appropriate for his skill level, what’s the problem? You’ll get better, faster service because of it.

Anyone who’s studied the history of technology will know that one major source of disruption is the use of technology to simplify tasks so that lower-skilled (read: cheaper, more accessible) people can do them.  That’s called “innovation,” admittedly a difficult-to-pronounce term for many attorneys.

5. Pricing Flexibility

Well-established, brand-name law firms in the startup space operate on a “pipeline” model.  Like venture capitalists, their “home run” clients generate the vast majority of their profits, which hopefully (if they have a good client base) more than make up for the losses on small startups.  For that reason, it’s large firms that are at the forefront of providing efficient early-stage legal services.  For clients they see as high-potential, they’re far more willing to defer fees, discount, or even accept equity, in lieu of immediate payment.  Smaller firms generally lack the capacity (specialties, number of attorneys) to service “home run” clients, which prevents them from providing this kind of cross-subsidization.  Living more hand-to-mouth, they’re more likely to expect up-front or immediate payment of their fees, which can be problematic for cash-strapped founders.

To sum things up, the “Big is Bad, Small is Good” view of startup law can be dangerously misleading.  There are lots of great things that can be said about smaller practices, particularly those that specialize in a market niche.  But terrible (and excellent) startup law comes in all sizes.  There are large firms that really will just throw you wholesale to a clueless junior associate, and there are small firms that simply lack the institutional knowledge and breadth to properly serve clients.  Be aware of what you’re getting for your money, and don’t fall for false analogies that can get you and your company into trouble.

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