Startup Law Pricing: Fixed v. Hourly

TL;DR: There are very natural reasons – inherent in the dynamics of complex, high-end legal services, including for startups – that explain why flexible time-based billing is still the most common pricing structure among law firms specialized in emerging companies (startup) law. And there are very real downsides and limitations to “fixed fee” pricing that founders all need to be aware of.

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

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

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

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

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

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

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

The idea that time-based billing means lawyers are just going to maximize how much they charge clients, and never optimize, is economically ridiculous and ignorant. The lawyer-client relationship is very long-term, and smart entrepreneurs can easily get info in the market if they feel their lawyers are over-charging. Switching to more efficient firms is not that difficult.  Costs in Startup Law have been going down significantly over the past decade, with hourly billing still being the norm.

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

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

If your law firm has agreed to a fixed fee, and suddenly you find yourself spending a lot more time interacting with paralegals working off of checklists (instead of lawyers), now you know what “alignment” really means.  Fixed fees are not magical, and they come with very real tradeoffs.

The predominance of the hourly billing model among high-end law firms is, first and foremost, a reflection of the significant variability among client needs and expectations, and the fact that flexible hourly billing is the most effective way to tailor work for each client.

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

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

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

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

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

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

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

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

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

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

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

Contracts v. Might Makes Right

TL;DR: When a first-time entrepreneur is navigating an environment full of entrenched players who all know and depend on each other, the difference between a balanced decision process and a shake down can come down to a contract. Take contracts, and the independence of the lawyers who help negotiate them, seriously.

Background reading:

A background theme of many SHL posts is the following: entrepreneurs enter their startup ecosystems, from the beginning, at a massive structural disadvantage relative to the various market players they are going to be negotiating with. Everyone else knows each other, has worked with each other over the years, and has already made their money. And then you show up.

Now assume that environment as the background, and then imagine you start striking deals with these people: for a financing, a partnership, participation in a program, etc., but assume there are no contracts or lawyers involved. What do you think will eventually happen? Here’s how it will play out: as long as you continue to deliver exactly what everyone wants from you, very little will happen. When everyone’s expectations and preferences are 100% aligned in the short term, the absence of contracts means very little. They’ll “let” you stay in the spot you’re in. 

Until things (inevitably) go sideways. A market shift suddenly means a change in strategy might be necessary, but there’s disagreement on how and when. A quarter comes in under projections, and there’s disagreement as to what that means. A potential outside investor expresses interest in making an investment, and there’s internal disagreement as to whether it should be pursued.

I focus here on the word disagreement, because in many situations on high-level strategic issues, the right answer isn’t always clear cut. The goal (grow the company, improve economics) may be clear, but the right execution strategy is far harder to see.  People will disagree, and where they stand on an issue often rests on where they sit. For example, “portfolio” players (institutional investors) will often be far more comfortable, and even insistent, on taking higher risk (but much higher reward) growth strategies than entrepreneurs and employees, who have only “one shot.”  See Common Stock v. Preferred Stock for a more in-depth discussion on the substantial misalignment between “one shot” players (entrepreneurs, employees), who usually hold common stock, v. portfolio/repeat players (investors), who usually hold preferred stock.

The core point of this post is this: in an environment of substantial disagreement, and where everyone other than the entrepreneur is a repeat player that knows and has economic ties to each other, the first-time entrepreneur (who speaks for the early common stockholders generally) will lose every timeunless contracts in place say otherwise. 

In the absence of laws and contracts, the law of the market is “might makes right,” and established, repeat players have all the might.  

Here is a scenario that I’ve encountered far too often (although increasingly less so as awareness has increased) that is almost comical when viewed objectively:

  • A financing has closed, putting in place a “balanced” Board of 2 VC directors, 2 common directors (one of which is a new CEO, the other a founder), and an “independent” director.
  • In attendance at the meeting are 6 people: the Board and company counsel.
  • The 2 VCs regularly syndicate deals with each other and have known each other for a decade.
  • The new CEO is a well-known professional CEO who has worked in several portfolio co’s of one of the VCs, and was “recommended” by that VC for the position.
  • The “independent” director is an executive well-known in the local market who also has worked with the VCs at the table for over a decade, both of whom recommended her for the position.
  • “Company counsel” represents 6 portfolio companies of the VCs at the table, and has represented them as investor counsel on as many deals, and is actually currently doing so for other deals. In fact, company counsel became company counsel because he came “highly recommended” by the VCs when they were first negotiating the deal with the entrepreneur.

So let’s summarize: there are 6 people at the meeting, and 5 of them have all worked with each other for over a decade, regularly send deals to each other, and in some cases (at least with respect to the lawyer and a VC) are currently working with each other on other deals not related to this company. And then there’s the entrepreneur.

Wow, now there’s one “balanced” Board, don’t you think? I’ve encountered entrepreneurs (whose companies are not clients) in this situation before. I let them know that, whatever they think their position at the company is or will be, they are simply leasing that position until their investors, who hold virtually all the cards and relationships, decide otherwise; and regardless of what the common stockholders think. It’s possible things turn out fine, as long as all goes as planned. It’s also very possible they won’t.  But what’s absolutely clear is who decides, in the end.

The difference between a well-advised entrepreneur and the one in the above scenario is this: the former will have real protections in place to ensure the common stock are treated fairly, and have their voice on key company matters. The latter may feel protected, but ultimately their position is at the discretion of their investors; and protection that is contingent on the whims of people on the other side isn’t protection at all.

Well-drafted contracts are, when negotiated in a transparent manner, a key mechanism for controlling the power of sophisticated repeat players who, absent those contracts, can simply force through whatever they want because of their political / economic leverage. What else might this reality tell us about negotiation dynamics in startup ecosystems?

Rushing through negotiations / contract drafting favors established players.

If the default market position gives power to established players, and contracts are a mechanism for controlling that power, the inevitable result is that those established players (at least the most aggressive ones) will try to get entrepreneurs to rush through contract negotiations.

“Let’s just go with what’s standard.”

“It’s all boilerplate.”

“Let’s save legal fees and put them toward building the business.”

“Time kills deals. Let’s get this closed.”

If someone is telling you that what the documents say doesn’t really matter, or that you should just stick to a template, it’s because, outside of the contract, they’re in control.  That doesn’t mean you should burn endless amounts of time negotiating every point, but take the material provisions seriously.

A market ethos of “relax, we’re all friends here” is designed to favor power players.

Old-school business folks know very well how large amounts of alcohol have often been used to seal business deals. In the startup world, alcohol may still be used, but just as effective is fabricating an environment suggesting to first-time entrepreneurs that everyone is just holding hands and singing kumbaya, and being independently well-advised isn’t necessary.

I’m all for having very friendly relations with your business partners. Life is too short to work with people you don’t get along with well.  But any time someone extends that thinking to the point of telling entrepreneurs that “everyone is aligned” and they should let go of the skepticism to focus on “more important things,” I call bullshit. Alcohol and kool-aid; stay sober in business.

“Billion or bust” growth trajectories mean contracts matter less. Outside of those scenarios, they matter more. 

Among emerging company (startup) lawyers, it’s always been well-known that the Silicon Valley ecosystem as a whole takes standardization, automated templates, and rapid angel/VC closings to an extreme relative to the rest of the country/world. I’ve pondered why that’s the case, and in discussing with various market players, concluded that it has a lot to do with the kinds of companies that Silicon Valley tends to target: billion or bust is a good way to summarize it. I wrote about this in Not Building a Unicorn. 

If the mindset of an ecosystem is significantly “power law” oriented in the sense that “winners” are billion-dollar companies, and everyone else will just crash and burn trying to be one of those billion-dollar companies, I can see why the finer details of deal negotiation may be seen as an afterthought. That environment, which is very unusual when compared to most of the business world, leaves a lot less room for the “middle” scenarios – things aren’t going terribly, and we’re clearly building a solid business. but neither is this a rocket ship, and there are hard questions to be decided – where the deep details of who has what contractual rights really matter.

In a heavily binary “unicorn” world, you’re either knocking it out of the park, in which case no one even reads the contracts and just lets you do your thing, or you’re crashing and burning, in which case the docs are just useless paper. As a law firm headquartered in Austin and structured for non-unicorns, we don’t work in that world, and actually avoid it.

For true “balance,” pay close attention to relationships.

In my opinion and experience, the best outcomes result when the power structure of a company (both contractual and political) doesn’t give any single group on the cap table the ability to force through their preferences, but instead requires some hard conversations and real “across the aisle” coalition building to make a major change.

Balanced boards are, on top of other contractual mechanics, a fantastic way of achieving this, when they are in fact balanced. The above-described scenario where everyone except for the entrepreneur knows and has strong economies ties to each other, including a company counsel “captive” to the VCs, is a joke; and sadly, a joke played on too many startups.

As I wrote in Optionality: Always have a Plan B, build diversity of relationships into your Board and cap table. Feel free to let “the money” recommend people, because their rolodexes are valuable, and are often part of the reason why you’ve engaged with them. But you should be deeply skeptical of any suggestion that the preferred stockholders should, alone, decide who the CEO is, who company counsel is, who the independent director is, etc. etc. Letting them do that certainly may get your deals and decisions closed faster, but unless you are successful in delivering a true rocket ship, you will ultimately regret it.

The common stock, including the founding team and early employees, need a strong voice at the table, especially given the power imbalance with repeat players. Well-negotiated contracts and independent, trustworthy company counsel are the way to ensure they have that voice.

How fake “Startup Lawyers” hurt entrepreneurs

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

Background reading:

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

Thrown to the juniors.

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

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

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

Fake “startup lawyers.”

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

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

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

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

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

Stop treating entrepreneurs like suckers.

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

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

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

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

Flexibility in Choice of Counsel

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

Background Reading:

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

Parsing that out requires a bit of backstory:

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

Unneeded Infrastructure

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

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

Flexibility in Specialist Selection

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

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

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

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

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

Flexibility + Focus maximizes quality and “fit”

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

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

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

Announcing E/N Alpha

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

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

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

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

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

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

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

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

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

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