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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.

Comparing Startup Accelerators

Related Reading:

Over the past several years, accelerators have emerged as a powerful filtering and signaling mechanism in early-stage startup ecosystems, allowing high-potential young startups to connect with investors, advisors, and other strategic partners far faster and more efficiently than before. While it definitely feels like the accelerator “bubble” has somewhat burst, and their numbers are normalizing, I’m still often asked by CEOs for advice on how to assess various programs. The below outlines how I would approach the decision:

Cash and Equity.

Very simply, what are you giving and what are you getting in return in terms of cash and equity for joining the program?

Re: cash, the more “unbundled” types of accelerators (less formalized) tend to not provide any cash upfront, but also typically “cost” less in equity, often just 1-2% of your fully diluted capitalization. More traditional and comprehensive programs often require 5-8% of common stock, but often provide between $20K and $100K up-front as well.

Anti-Dilution.

See: Startup Accelerator Anti-Dilution Provisions; The Fine Print.   Most accelerators, with a few exceptions, have much more aggressive anti-dilution provisions than a typical seed or VC investor would get, and the “fine print” can dramatically influence the total equity requirement depending on your circumstances and fundraising plans. This is something you should walk through with an experienced advisor, lawyer or otherwise, to prevent surprises.

Pro-Rata / Future Investment Rights.

See: The Many Flavors of Pro-Rata Rights. Some accelerators will require you to “make room” for them in future financings up to a certain amount. This is not necessarily a bad thing, and it’s very reasonable given that the ability to make follow-on investments in “winners” is virtually essential for very early-stage startup investors (angels, accelerators) to make good returns. However, for the most in-demand startups, over-committing on future participation rights can become a problem because it can require you to raise more money than you really need to.

Fundraising / general success of past companies.

See: Ask the users.  If fast-track access to investors is not at the top of your priority list, then this may not be as big of a deal for you. But 95% of founders I’ve worked with have viewed “cutting in line” to speak with investors as the main reason for entering an accelerator. And don’t rely solely on numbers reported by the accelerators themselves. There are lots of ways of fudging the figures, including by “annexing” already successful companies into the accelerator (in exchange for free help) and using their brand/fundraising numbers to puff up the accelerator; neglecting to mention that the accelerator had nothing to do with those numbers.

Entrepreneurs often celebrate faking it until you make it. Know that some accelerators do the same. When an accelerator says “our companies have raised an aggregate of $200 million,” they may be neglecting to mention that a huge chunk of that was raised before some of the companies (the top ones) ever “entered” the accelerator. 

Ask specific founders, off the record. Without a doubt, the overall “prestige” of the accelerator’s past cohorts will have a dramatic impact on the accelerator’s ability to deliver on its “benefits” to you. There’s a heavy snowball / power law type effect with accelerators where the best ones attract the best companies, which then attract lots of capital/great mentors, which then attracts more great companies, further improving the accelerator’s brand, and so on and so on. And the same is true in reverse: accelerators with poor reputations and bad averse selection (they are just getting the companies everyone else rejected) can actually make it harder to raise money, and are best avoided.

Time commitments and Geography.

Many accelerators involve a substantial time commitment (including travel time) in terms of going through the “program” of events, meetings, training, etc. Feedback (given privately) varies on the ROI of those obligations, depending on the accelerator, type of company, etc. Some entrepreneurs find it invaluable. Others find it a necessary cost to getting access to the accelerator’s network, which is what they’re really there for. In any case, travel and time commitments are a real cost, so take that into account.

Market Focus.

One of the most common complaints I’ve heard from entrepreneurs, after having gone through an accelerator, is that it wasn’t helpful for their “type” of business. Some accelerators are very up-front and overt about their market focus: biotech, energy tech, transportation, etc.  Others are more generalist, but if you dig deep you’ll realize that all or most of their cohort is slanted in one direction, which will mean the accelerator’s network of investors and mentors will be as well.

An example: a heavily hardware-focused startup may not find as much success in an accelerator where the vast majority of companies are SaaS based. The same goes for a health tech startup entering an accelerator full of consumer or B2B startups.

Culture.

In much the same way that entrepreneurs’ own personalities set the culture for their companies, the creators and managers of accelerators heavily influence both their “online” and “offline” culture. Personalities, ages, lifestyles, and values will vary. Some accelerators are well-known for being extremely friendly, generous, and community-oriented. Others are known for being more competitive and “eat what you kill” in their approach. I’ve seen more aggressive entrepreneurs feel that their particular accelerator was a bit too “kumbaya,” while those with opposite personalities felt right at home. 

Do your diligence before entering any accelerator, and make sure you assess its offerings in light of your company’s own priorities and needs. I’ve seen companies emerge with polar opposite opinions of the same accelerator, even within the same cohort.  In many cases, it’s less about the program being good or bad in an objective sense, and more about whether it was a good or bad “fit” for that particular startup. 

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.