Why experienced entrepreneurs hire better lawyers.

There are goods and services for which quality is apparent to the consumer from the beginning, and then there are those where what you actually got for your money can take years to figure out.  Transactional lawyering is decidedly in the latter category, although it often takes a client some personal seasoning (or good advice) to figure that out.

Fundamentally, there are two “jobs” that a client will typically hire outside corporate counsel for in a transaction. The first is getting the transaction done. This is the job that all clients are aware of, no matter how much experience is under their belt.  As long as the client gets his/her desired economic terms, papers get signed, and wires get initiated, all seems to have gone as planned.

But the more experienced entrepreneurs (and unfortunately that experience often isn’t pleasant) know that good legal counsel will serve a second function. While not as simple to define as the first, let’s call it transactional insuranceSome illustrations would be helpful here.

Formation. You have a great startup idea, got together with some co-founders, and want to make it official. You incorporate, issue some founder stock, perhaps authorize an equity plan, and you’re good to go. Put the papers away and forget about them. No worries here, right?

  • What if one of the founders later claims that some of the Company’s IP is his/hers and not the Company’s?
  • What if some of that founder’s work was done on a prior employer’s time/hardware, and that employer now claims ownership of the IP?
  • What if one of the founders dies? Where does their stock go?
  • What if one of the founders gets divorced. Where does their stock go?
  • What if a founder decides to leave the Company after  a year? Where does their stock go?
  • What if someone sues the Company and you personally?
  • What if the IRS comes back 4 years from now and says you owe them a bunch of $ on your vested stock?
  • What if it turns out that a founder had a non-compete agreement with a prior employer with deep pockets, and working at your Company violates it?
  • Insert 3 dozen other scenarios here.

VC/Angel Financing: Everyone signed the papers and sent you checks. Awesome. No worries, right?

  • What happens if we decide to sell the Company early?
  • What happens if we want to raise a new financing, but not all of our current investors are on board?
  • What if an investor decides 5 years from now that he wants his money back?
  • What happens if the IRS claims 3 years from now that we issued stock at too cheap of a price and tax is owed?
  • What happens if an angel investor sues the Company claiming that we fraudulently withheld information from them?
  • What happens if the SEC claims that we sold stock illegally to unqualified investors? Wait, what does college football have to do with this?
  • Insert 3 dozen other scenarios here as well.

The quality of the process and legal drafting that took place in the above scenarios will determine whether a resolution could be as simple as (i) pulling up a document, (ii) pointing to Section 2.3(a)(i), and (iii) getting back to work, or something that could destroy years of hard work in an instant.

From the perspective of a lean entrepreneur who just wants Minimum Viable Lawyering, signing some papers provided for free or a few hundred bucks felt like success.  But experienced entrepreneurs typically have a better sense of the nightmare they may be inheriting by going with the attorney or firm who claims to do the exact same thing as the “overpriced” guys, but at a substantial discount.

Granted, there is a lot to be said for Job #1, and there’s no shortage of movement in the legal industry toward getting the transaction done quickly and cost-effectively.  That topic is the subject of perhaps 80% of my blog posts.  But something is only truly cost-effective when it efficiently accomplishes all of the tasks that you hired it for – not when it provides the trappings of a job-well-done, but kicks any number of disasters down the road.  

I can’t tell you how much time we spend cleaning up the work of bad lawyers who looked, at the time, like a bargain. Experienced entrepreneurs hire efficient lawyers. Inexperienced entrepreneurs hire cheap ones.