It usually takes experience in the market for business people to truly understand the realities of hiring and working with lawyers. I can’t tell you how many times I run into first-time founders who’ve been fed absolute nonsense from ‘advisors’ ‘mentors’ or similarly named people about their ‘secrets’ for managing legal spend. The truth is that unless you’ve taken a company from seed to Series A, Series B, Series C, to an exit in which a serious party on the other side actually diligenced the legal history your ‘secrets’ put together, your theories about lawyers are hot air.
Failed companies never pay the price for poorly managed legal; unless the failure was the result of the legal problems, which does happen. Successful companies, however, pay deeply for legal mistakes. It’s just a question of timing. There are definitely steps you can take to prevent legal spend from getting out of control, but it requires separating reality from delusion. The below is my attempt at doing that.
1. Software automation (or free templates) will not replace your lawyers, or dramatically cut legal spend.
See: Luddites v. Tech Utopians. New market entrants in technology have a tendency to come out with guns blazing, promising their ability to cut out enormous amounts of waste as reason to adopt them. Sometimes they’re telling the truth. Other times it’s well-calculated hyperbole.
Virtually every serious automation tool that has emerged with “cut huge amounts of legal spend” as its primary selling point has evolved into a tool for lawyers. Why? Because, contrary to some popular opinion (and marketing talk), good lawyers really aren’t charging hundreds of dollars an hour to just fill in numbers or check off boxes. Good tools are very helpful for making lawyers/firms more efficient, and you want lawyers who use those tools, but a piece of software isn’t going to replace your lawyers any more than a piece of software will replace your software developers.
Yes, there is form-filling and box-checking ripe for automation, but it’s not nearly as large of a percentage of legal spend as some let on; and the low-hanging fruit is already eaten by software like Clerky.
2. Handling it yourself won’t save you legal fees.
I could write an entire book listing all the “hold my beer” moments I’ve encountered with someone on a management team thinking that they were wisely saving legal fees by taking an issue into their own hands, and it then predictably blowing up in their faces. Part of it boils down to simple sloppiness. Other times it’s a clear case of someone not knowing what they don’t know.
There’s a related dynamic here to the first point about technology companies overstating their ability to cut legal spend. Anyone selling anything (a product, a service, themselves) has to justify it somehow, and “those damn lawyers” are a great bullseye. A COO / CFO wants to justify his salary, and an easy way to do that is by claiming to ‘save’ you legal fees via DIY legal work. You’re not saving anything. You’re magnifying your fees, but deferring them temporarily.
3. Quickly hiring an “in house” lawyer won’t save you a dime.
CEO: “We’re thinking about hiring an in-house lawyer to save some legal fees.”
Me: “Great. What’s his/her starting salary?”
Me: “Going to be complete shit, and will cost you 10x more long-term.”
CEO: “What? That’s more than some of our execs make.”
Me: “Senior lawyers worth having won’t even talk to us if we’re recruiting with less than $200K. And our lawyers have fantastic work-life balance. You’re recruiting in the same legal talent market I’m in. You really think you found some magic button that cuts the market rate in half?”
Look, I get it. Good lawyers are expensive. Really good lawyers are even more expensive. Fact: Talent is expensive. Everywhere. Make it incur three years of opportunity costs (law school) and a small mortgage (about $200-225k for law school, all in) before it can hit the market, and it gets a whole lot more expensive.
Last time I checked a solid software developer will cost you six figures in salary; ignoring equity. And ‘coding’ mistakes are 10x more fixable, and potentially less costly, than legal mistakes. It is absolutely the case that a small portion of the tech community arrogantly believes that engineering talent is the only talent really worth paying for. Good luck with that.
I’m not trying to defend what lawyers make here (I don’t need to), but what I am saying is hiring lawyers has the exact same talent market dynamics of hiring any other kind of professional. So you say you’ve found a lawyer willing to work for a lot less. Congratulations, you caught lightning in a bottle; found a rupture in the space-time continuum.
Or you just found a lawyer completely lacking in the experience/skillset needed to actually replace the work outside counsel (including a set of specialists) is doing for you. There is definitely a time to hire a general counsel, but for it to actually make sense mathematically and not result in extremely expensive mistakes, it’s usually much later in the company’s history than you think. Past “startup” territory.
4. Flat/fixed fees don’t “align” incentives with your lawyers. They lead to rushed work and poorly negotiated deals.
Take two law firms that charge you the exact same amount to close a deal: one firm bills by the time they actually worked, the other on a flat fee. The flat fee firm is rewarded for (i) not negotiating deal terms, (ii) delegating to inexperienced staff who are “cheaper” (to them), and (iii) working off of rigid rules/checklists that can be automated, instead of flexibly assessing the context. In other words, flat fees incentivize lawyers to rush their work, which is dangerous for high-stakes legal issues where the “client” (often at early-stage an inexperienced entrepreneur) doesn’t know how to fully assess quality.
For more on this, See: Startup Law Pricing: Fixed v. Hourly. Flat fees don’t “align” incentives with your lawyers. They reverse them, often making them more dangerous. For low-stakes, highly standardized work (like formations), fixed fees can be generally benign. For high-stakes and high-complexity, don’t reward lawyers for cutting corners.
5. A few real truths about legal spend.
A. Compensation and specialization drive talent quality. Quality prevents errors, and therefore controls fees long-term.
Fundamentally, two things drive lawyer recruitment (I know, because I recruit for E/N): compensation and quality of life. Very large firms generally have terrible quality of life for their lawyers, for a number of reasons too complex to discuss here. But that’s why large firms have to pay their lawyers the most.
In-house positions and boutique firms are recruiting pipelines for what I call “BigLaw refugees”; talented lawyers looking to still get paid well, but take a moderate pay cut (sometimes) in exchange for the ability to keep their marriages in tact, and their kids out of therapy. But as discussed above, to get the full-time attention of those lawyers, even with great work-life balance, you still have to pony up in amounts virtually no true startup can afford. That’s why outside counsel (‘fractional’ lawyering) is valuable.
And working with lawyers who specialize in emerging tech/VC work will ensure you’re paying for talent experienced in the kind of legal work you actually need. See: Startups Need Specialist Lawyers.
B. Law firm “overhead” increases legal spend above base lawyer compensation, but enables scalability and quality.
On top of the money paying a particular lawyer’s salary, you have the ‘institutional overhead’ of the firm that employs the lawyer. For a deeper discussion of law firm overhead, see: Startups Scale. Solo Lawyers Don’t.
Companies who think only large firms with the highest rates have the best lawyers (compensation) are ignoring the interplay of overhead and compensation. If you cut overhead intelligently, you can still pay lawyers very well, but at lower rates to clients. The issue is how much overhead to cut out.
Institutional overhead, properly structured and right-sized, is not wasted money any more than the ‘overhead’ (on top of salaries) of any company is wasteful. In law, it enables recruitment, technology, training, staff, and other infrastructure that turns a set of lawyers into an integrated legal services provider, with bandwidth that can be optimized to keep work moving.
Think about what type of company you want to build long-term, or at least expect to be for the next 5 years, and ensure you engage a firm with the right institutional infrastructure (overhead) to serve that company. Very very large firms are designed for unicorns, and require the most ‘infrastructure,’ and therefore overhead. In fact, the majority of what you pay large firms is paying for infrastructure. Are you planning to be a unicorn?
We are quite honest in saying that, as a high-end boutique firm, our target client is looking to (realistically) exit at under $300MM. We don’t work for unicorns; nor do we try to. But we also don’t work for small businesses hoping to sell for a few million.
We pay our lawyers compensation that is highly competitive with large firms, which (again, a talent market) ensures quality. Our lawyers also bill about 25% fewer hours per year than BigLaw lawyers, which improves their quality of life (helps recruiting/retention). But because we have dramatically lower institutional overhead, our rates are lower; although nowhere near the lowest.
In my experience, the size of your Series A round is usually a pretty good indication of the type of company (exit size) you’re trying to build; companies truly going for unicorn status raise much larger rounds. Pre-Series A, the majority of serious tech companies require some accommodation to manage their legal budget; no matter how efficient their lawyers are.
If Post-Series A, your company’s legal bills still seem completely unmanageable, that’s often a good indication that the law firm you hired is too big for what you’re building (non-unicorn-track using a high-infrastructure unicorn law firm); assuming your expectations on what the bill should be simply aren’t unhinged. Remember, small firms can have very high quality lawyers, because they aren’t paying them less. They just have a leaner infrastructure designed for non-billion-dollar clients.
C. Flexible pricing / payment from a quality firm is 1,000 times better than “going cheap.” But be realistic about the budget.
If you get anything from this post, it is this: good, scalable legal counsel costs real money, like any talent. There is no magical software, recruiting strategy, or template on google that will get around that. Anyone who thinks they are cheating this rule, and have somehow found bargain-basement counsel that works, is just not yet hearing the ticking of the time bomb they’ve turned on in their company.
The absolute best strategy for engaging serious legal counsel, but not going bankrupt on legal fees is to ensure that:
- you’re working with lawyers who have the right specialization for what you need;
- at the right quality level, and with right-sized overhead for the scalability you need; and
- who will flexibly work with you on budget/payment at the very early stages.
Law firms who specialize in emerging tech work are not new to the challenges of very early-stage startups trying to manage a legal budget; at all. It is deeply engrained to each lawyer’s expectations. And there are a lot of levers that those firms can and will pull for clients they want to work with: fixed fees, deferred fees, equity arrangements, etc.
The key part is “clients they want to work with.” They are selective, because they have to be. Serious law firms are not in the game to work on mickey mouse fixed-fee or discounted projects to eternity; nor can they afford to be. They do that to scale down for valuable prospects with the right potential lifetime value (LTV) as clients, but who need help when the budget is slim. That’s why any early-stage, limited budget company that approaches a serious law firm should be ready to “pitch” their company to the firm.
For high potential companies, great tech/VC lawyers will be flexible on budget and payment as long as the founders are reasonable in their expectations. And the best way to be reasonable is to follow the points in this post. Accept that you need good legal talent, badly. Accept that it costs real money, and that you likely can’t afford the full cost up-front, and that’s normal. If you’re as good as you hope you are, you will find a way to navigate that reality.
Also published on Medium.