Post Category → BigLaw

Optimal Counsel

One career chapter closes, and another opens.

About 9 yrs ago I left BigLaw, very much against the advice of senior people around me (I was much too junior they said), and joined a very small boutique firm in Austin that was, at the time, relatively unknown in the broader ECVC market. As the youngest lawyer at a small shop, and breaking all kinds of conventional career advice, I saw it as an adventure to see what could be done – with some creativity and hustle – in a market dominated by traditional firms.

I’d also started a popular legal blog in which I wrote about problems I saw in the industry. That included how certain lawyers with deep relationships with VC firms were somehow also representing the companies those VC firms invest in; and acting as if there wasn’t anything wrong with inexperienced entrepreneurs relying on counsel with conflicts of interest. Articles got shared, word got around, people seemed to notice.

Over time we grew to, depending on whom you ask, one of or *the* top recognized boutique practice in emerging companies and VC (startup) law. We had phenomenal colleagues and clients, and a deep emphasis on early adoption of legal tech, work-life balance initiatives, and a remote-centric culture; long before distributed teams were “cool.”

We were recruiting from, and negotiating with, all of the top ECVC BigLaw brands 100x our size; and unlike most boutiques, we had a great recruiting pipeline with top law schools. We were thriving, while giving elite lawyers a refuge from the (in my opinion) dysfunctions of the broader industry. And we achieved all of this, profitably, at rates $300-400+ per hour below the firms right across the table from us.

Within the span of about 10 years into my career, at 35, I found myself leading, managing, and recruiting a nationally recognized elite ECVC law group I was proud of. In many (but certainly not all) ways it was a very fun run. The adventure was a success, not just in terms of helping change a segment of the legal industry, but in building lasting relationships with colleagues, CEOs, and other great people along the way.

A few weeks ago that chapter in the book of my career closed. I’m thinking about writing a separate blog post explaining in depth why and how it closed, given the numerous inquiring minds in my network who have reached out. There are definitely some lessons that could be drawn for the benefit of other lawyers, recruiters, and people in the market. But for now, I have bigger immediate priorities.

After the closing of this nearly decade-long chapter in my career, as I was contemplating new possibilities, several of my closest (and highly capable) Partner colleagues approached me with an idea: why not build a new pirate ship together – this time entirely our own – with trusted colleagues committed to the core vision? Why not take it all to the next level? And thus a new chapter begins.

I’m thrilled to have just recently accepted an invitation to help build out Optimal Counsel LLP (“Optimal” for short), as a Partner and legal CTO. I could not have imagined a more stellar set of Partners and associates to serve as the “founding team” of this new boutique firm that I am joining.

Lean, Modern, and Elite is our mantra. Unapologetically tech-driven, remote-first (I’m still closing top VC deals while hiking the mountains in Colorado), and with the high standards our clients have always expected from us. Loudly asserting that elite legal talent can deliver the goods while still having the autonomy, lifestyle, and top-of-market compensation it deserves.

This is not “BigLaw lite,” with a thin veneer of newness attached to the same stale operating model and backward firm culture. We are not a firm for lawyers who romanticize about industry tradition, “face time” in an overpriced office, and the good ol’ boys of the good ol’ days. The overwhelming loyalty of Optimal clients and lawyers is evidence that we are built for a different kind of lawyer, working for clients who are fundamentally tired of the legal industry’s baggage.

How far can we go with even more freedom and flexibility to push the envelope in the legal industry? My last chapter started with me taking a leap mostly on my own. This one starts with a tribe of extremely talented, ambitious lawyers with a unified vision and purpose. I’m looking forward to seeing what we can achieve in another 10 years.

Cheers to a new adventure,

J

Independent Counsel in an Economic Downturn

TL;DR: In all parts of an economic cycle, up or down, there is significant value in having independent (from investors) strategic counsel that you can trust to protect the common stock in navigating negotiations with investors who are 20x as experienced as the founding team. In a downturn, however, the number of “company unfriendly” possibilities in deal and governance terms goes up ten-fold. That means the value of independent, trustworthy counsel shoots up as well.

Background reading:

I’ve written multiple posts on the topic of how first-time entrepreneurs place themselves at an enormous disadvantage when they hire, as a company counsel, lawyers with deep ties to their lead investors. To people with good instincts, the reasons are obvious, but for those who need it spelled out:

A. First time entrepreneurs are regularly interacting, on financing and governance issues, with market players who are (i) misaligned economically with the common stock, and (ii) 20x as experienced as the management team and largest common stockholders. They rely heavily on experienced outside advisors to “level the playing field” in the negotiations.

B. One of the most impactful strategic advisors an early set of founders/management can look to for navigating this high-stakes environment is an experienced “emerging companies” specialized corporate lawyer (startup lawyer), who (if vetted properly) sees far more deals and board matters in any given month than many sophisticated investors see in an entire year.

C. Because investors have contacts with/access to lots of potential deal work, and corporate lawyers need deal work, aggressive investors have come to realize that their “deal flow” is a valuable currency that can be leveraged with an overly eager portion of the “startup lawyer” community; shall we say, “nudging” them to follow the investors’ preferred protocols in exchange for referrals. By pretending that only a handful of firms have credible/quality lawyers, they also try to block law firms with more independent, but still highly experienced, lawyers from getting a foothold in the market.

D. Founders, because they lack their own contacts and experience vetting lawyers, often find themselves influenced into hiring these “captive” lawyers. As a result, they are deprived of some of the most strategic and high-value guidance that smarter teams are able to tap into for protecting the common stock.

For a deeper dive into how this game is fully played out in the market, read the above-linked posts. The point here is not to promote an exaggeratedly adversarial take on startup-investor relations, but to emphasize a simple reality of how things really work.

The main point of this post is: in an economic downturn, when company “unfriendly’ terms are going to be far more on the table than they were in years past, the value of independent strategic counsel is magnified ten-fold. In go-go times when competition for deals and excess amounts of capital shoot valuations up and “bad terms” down, deal terms gravitate toward a closer-to cookie-cutter, minimalist kind of flavor: good valuation, 1x liquidation preference non-participating, minimal covenants, and sign the deal.

That doesn’t mean there’s really a “standard” – I’ve also written extensively about how saying “this is standard” has become the preferred method for clever investors to trick startup teams into mindlessly signing docs that are against their company’s long-term interests. But, in good times deals do tend to start looking a lot more like each other in a way that makes negotiation a little easier.

But when there’s an economic shock like what we’re experiencing right now from COVID-19, and the investor community starts to improve in their leverage, it’s inevitable that you start seeing a lot more “creativity” from VCs with terms: higher liquidation preferences, participating preferred, broader covenants and veto rights, more aggressive anti-dilution, tighter maturity dates on convertible notes, etc. etc.

In this environment, it is incalculably valuable to have people to turn to, including independent deal lawyers, who can tell you what really is within the range of reasonableness, what to accept v. push-back on, and generally what is “fair” given the environment you’re fundraising in. Independent counsel will help you protect the common stockholders, while granting your investors some terms that you may not have needed to accept a year or two ago. Captive counsel, however, will know that his/her “good behavior” (for the investors) in structuring the terms will ensure more deal flow from their real clients. And because most startup teams are understandably lacking in market visibility, they have no way to quality-check the advice they’re getting. Trust is everything here.

Research and diligence your legal counsel just like how you’d diligence any high-stakes advisor. Importantly, ask them what VCs they (and their firm) represent and/or rely on for referrals. They may be great, very smart people, but if the answers you get make it clear that they are closely tied to people likely to write you checks, find someone with more independence. A muzzled corporate lawyer is ultimately an over-priced paper pusher.

 

Startup Legal Fee Cost Containment (Safely)

Given the COVID-19 crisis, every startup (every company really) is laser-focused on cost-containment. The below are some guidelines for getting legal work done efficiently, without relying on low-quality providers who will ultimately cost you far more in the long-run because of mistakes and missteps.

Related reading: Lies About Startup Legal Fees

1. Consider working with experienced, specialized lawyers in lower-cost geographies.

Bay Area and NYC lawyers have the highest rates, for obvious reasons like that the cost of living in those cities is much higher, and the firms in those markets tend to cater to unicorns with very large, multi-national transactions requiring extremely high-cost infrastructure. While it’s already been happening for years, I suspect more startups are going to realize that ECVC (Startup) lawyers in places like Seattle, Austin, and Denver have just as much visibility and specialization, but have rates that are more accessible.

In case it hasn’t already been made clear, there is nothing about corporate/securities legal work that requires you to meet in person with your legal team. You can usually shave a few hundred dollars per hour off your bills by simply using lawyers in smaller tech markets who still have the right experience.

2. Ensure your lawyers have the right specialization, and precedent/template resources for minimizing time burn.

While parts of the ecosystem have exaggerated the extent to which a “standard” startup financing really exists – stay away from Post-Money SAFEs – every serious Startup/VC lawyer has precedent and template forms they can use as starting points to avoid reinventing the wheel. A “Corporate Lawyer” is not good enough here. There are corporate lawyers who specialize in healthcare, energy, and other industries that will have no clue about ECVC norms. Read their bio, talk to clients, and/or ask about their deal experience. “Emerging Companies” and “Venture Capital” are key words to look for, unless you’re talking about an M&A deal, in which case obviously you want an M&A lawyer.

3. Unless you really are on a unicorn track, use boutiques instead of BigLaw.

“BigLaw” refers to the largest, multi-national law firms in the country; often with armies of staff and resources designed for the most complex and largest deals in the market. For the vast majority of the startup ecosystem, these firms are overkill. I’ve closed countless VC and M&A deals where the Partner on our side was $300 per hour leaner than the Partner on the other side of the table, and their bios were virtually indistinguishable.

Using a high-end boutique can dramatically lower your overall legal costs. The key issue is assessing the background/expertise of the boutique firm’s lawyers to ensure the drop in rates isn’t resulting in a drop in quality. Top-tier boutiques achieve their efficiency by eliminating infrastructure (overhead) that non-unicorn clients don’t need; not by recruiting B-player lawyers.

4. Leverage non-Partner staff (paralegals, junior and mid-level attorneys).

Some startups think they’re going to save fees by hiring a highly-seasoned solo lawyer, but this can backfire, because that solo doesn’t have any lower-cost staff. Maybe 10-30% of the legal work a typical VC-backed startup needs will require true Partner-level attention. The rest can be safely and far more efficiently handled by well-trained and monitored lower-level staff (paralegals, and non-Partner attorneys). You want a firm that has these resources available, while still having an accessible Partner that you can go to for the most high-level strategic issues.

Having a single lawyer with 10-20 years of experience do all of your legal work is like expecting a cardiologist to take your temperature, collect your insurance info, and treat your toddler for their sniffles. It’s inefficient and unnecessary.

5. For financings, opt for “simplified” deal structures if feasible.

I suspect that during the worst of the COVID-19 crisis, you’re going to see a lot more investors opting for convertible notes, because they’ll value the downside (debt) protection in case the outlook doesn’t improve in the mid-term. Convertible notes are also far simpler (lower cost) to negotiate and close than an equity round.

This is fine, and convertible notes are used hundreds/thousands of times across the country every year without problems. Just ensure you are working with specialized counsel who knows what to accept, and what to reject, in the terms. Maturity, conversion cap economics, and what happens in a down-round scenario are all key things they’ll need to pay close attention to.

If you’re able to convince investors to do an equity round, and it’s less than $2 million in total investment, you might consider a “seed equity” structure. Seed equity docs are much simpler than the classic NVCA-style VC docs, and are about 75% cheaper to close on, in terms of legal fees. They can include a provision that will allow your investors to get more robust “full” VC rights in a future round.

“Cost cutting” tips that don’t work

A. Solo lawyers won’t save you money. As mentioned above, using solo lawyers for corporate/securities (deal) work rarely results in that much efficiency. While the solo’s rates might be lower than a firm’s, the savings will be burned up by the absence of paralegals/lower-level attorneys. You also risk running into serious bottlenecks that will slow-down urgently needed work, because solos don’t have a team to help triage projects. See: Startups Scale. Solo Lawyer’s Don’t.

B. Fixed fees are more likely to result in mistakes/weak counsel than cost-saving. Fixed fees aren’t magical. Ultimately a firm has to charge a fee that aligns with what it costs to do the deal, and using a fixed fee won’t change that. But the real danger with fixed fees is that they incentivize lawyers to cut corners, because by rushing work (not negotiating/reviewing), the lawyers make more money. Ask for budget ranges, and you can talk with other founders to ensure the cost is aligned with what’s been delivered. See: The Race to the Bottom in Startup Law.

C. DIY work with fully-automated tools or templates found online will blow up in your face. Are you building a plumbing business or coffee shop? Great. Go use one of those $39.99 automated templates you can find online. Investor-backed startups are not cookie-cutter companies, and thinking you’re actually going to save money by using a fully automated template is delusional. You’re simply turning on a time bomb in your legal history that will eventually go off.

D. Do not let junior lawyers run your legal work. A huge mistake startups often make is hiring BigLaw (very high-cost firm) but thinking that by using a junior lawyer for virtually everything, they’re saving money. You do not want a junior negotiating your financing, or giving you high-stakes advice. They are great for doing checklist-oriented tasks while a Partner oversees things and interacts with the client, but not as the main legal contact. Their inexperience will cost you 10x in the long-run of whatever you think you’re saving today. If you’re struggling to cover BigLaw’s rates, the answer is to use a high-end boutique where you can still access senior lawyers but at leaner rates; not to use the most inexperienced person on BigLaw’s payroll.

There are a lot of good strategies for getting lean, but still high-quality legal counsel. The key thing is to ensure you are trimming fat from your legal budget, but not muscle.

The Race to the Bottom in Startup Law

TL;DR: There is a long-standing race to the bottom occurring in startup law, led by certain firms who’ve chosen to ignore the ethical standards of the profession in order to maximize revenue; including by flouting rules on conflicts of interest through aligning themselves with influential investors and “power brokers” in the market. The end-result of that race is damaged startups who are being led to believe that they’re getting “efficiency,” when what they’re really getting is biased garbage advice and a time bomb.

Background Reading:

Regulated professions are regulated for a reason. In the case of law, much like healthcare, you are dealing with significant information asymmetries on very high-stakes issues where decisions have permanent consequences; where malpractice or bad ethics can seriously and irreversibly damage a “client.” That is undeniably the case in high-growth Startup Law, where you very often have inexperienced business people (founders, early employees) navigating very complex and high-dollar issues; and to make it even harder, on the other side of those issues are often misaligned money players who are 30x as experienced at the entire game than founders/employees are.

The world of early-stage startup businesses is quite unique in this respect from the rest of the business world. In most high-dollar business contexts, there’s an equal balance of experience and influence on both sides of the table. Company A has seasoned execs, and Company B has seasoned execs. But not so in early-stage. Company X often has entrepreneurs who are doing this thing for the first time, and have very few connections to the broader business ecosystem. Investor Y, whom they are negotiating with and who influences decisions on their Board, has been in the business for 10-20+ years, has done 50-100 deals, and has spent all of that time becoming fabulously networked with other investors, accelerators, serial executives, lawyers, advisors, mentors, etc.

This imbalance presents an opportunity; an opportunity to use the experience/power inequality to push deals and high-level business decisions in the direction that the money players want, often without the inexperienced players really even understanding what is happening. Now, what is the role that lawyers (counsel) are supposed to play in this game? Lawyers serving as company counsel are supposed to take their broad level of experience and market understanding – surpassing that of most investors – and use it to “level” the playing field for the common stock (founders and early employees). Experienced, talented corporate lawyers are supposed to be the “equalizers” that early-stage companies (particularly common stockholders) rely on to ensure no one takes advantage of them on deals and corporate governance. Great for the common stock. Not so great for the clever money; which would obviously much prefer to keep the field slanted in their favor.

So let’s say I’m a very smart money player, and if I can find a way to neutralize the role of independent company counsel, to maximize my leverage, what should I do? Negotiating very aggressively against the lawyers and startups is a failed strategy. It’s too visible. Early-stage capital has become more competitive, and money players rely on personas of “friendliness” for deal flow. Angrily pounding the table would quickly shatter that persona. You need to me much smarter than that at this game.

You start with asking yourself: what do these lawyers need in order to fully do their job as strategic advisors? The answer is two-fold: (i) clients, and (ii) time. Without clients (referrals), lawyers can’t stay in business. And without time to study issues and negotiate, and ability to charge for that time, they can’t advise companies properly. That’s where the strategy lies. I often refer to this strategy as the “Race to the Bottom” in Startup Law.

Buy counsel’s favor with referrals.

As a repeat player with “access” to lots of deals and potential clients, investors can “buy” the favor of law firms by simply channeling referrals to them. First-time entrepreneurs have absolutely no counter-balancing resource in this area, because they just aren’t that well-networked or influential. Pay close attention in startup ecosystems and you’ll often realize how many of the most prominent lawyers built their practices by riding referrals from a few repeat players. Doing a great job for companies certainly can get you business, but doing a great job for investors (so that they refer companies and deals to you) can get you 20x that, because of the volume they touch.

So Step 1 of the Race to the Bottom is to make it clear to law firms that those who “behave” (by biasing the advice they give to inexperienced startups) will get business, and those who don’t won’t. The lawyers/firms most motivated by maximizing their business, and most willing to flout conflicts of interest in order to get that business, start competing at how far they can go to win the favor of these juicy referral sources, while minimizing the visibility of this game to inexperienced outsiders.

Squeeze counsel’s time.

For a company lawyer to do their job in advising a startup, they need time. Answering questions, explaining issues, and negotiating all take time, especially when the executives you’re working with are completely inexperienced (which in early-stage startups, they often are). Seasoned investors, however, don’t need nearly that much time from lawyers, because they’ve played the game 30 times already. So startups need a lot of lawyer time, but investors don’t. Opportunity? You bet.

But again we reach the “visibility” problem. If an investor simply tells the founders, “stop talking to your lawyers,” that’s too easy to read into. A far more successful narrative is: “let’s save some legal fees.”

“Your lawyer is just over-billing. Their request isn’t “standard” and is a waste of time.”

“This deal is all standard/boilerplate. Let’s move quickly to close without lawyer hand-waiving.”

“We really don’t have the budget to get lawyers involved on this Board issue.”

“I’m saving you some legal fees. Cap your legal bill at X.”

“Here, just sign this template (that I created). It’ll save you fees.”

I’ve often found it very amusing how certain aggressive investors, happy to write you large checks for funding talent wars and expensive bay area offices, suddenly have lots of (air quotes) “insights” to share when discussion turns to the legal budget. Increasing your burn rate makes you more dependent on the money, which they often like; but heaven forbid you spend capital on a service that reduces their influence/leverage. Thank goodness they’re ever so generously “looking out” for the bottom line.

If an experienced investor knows the lawyer across the table needs time to explain to inexperienced founders why the terms or decisions such investor is pushing for should be resisted, and such investor prefers that the lawyer stay quiet, the answer is not to explicitly tell the lawyer to shut up. Too visible. The investor instead gets the founders to do it themselves, by suggesting that they should focus on minimizing their legal bill. Nevermind that the issues a great (and independent) lawyer will bring up are 10-20x+ more consequential long-term than the rate the lawyer is charging. By getting founders to myopically think that legal advisory is just empty hand-waiving, and therefore be unwilling to pay for real counsel, investors are able to silence counsel by making it unprofitable for them to speak up. With no one else at the table who actually knows the game, the money then gets free rein to set the rules.

One particularly clever strategy here is worth highlighting: fixed or subscription fees. Most high-end lawyers bill by time, and for good reason. See: Startup Law Pricing: Fixed v. Hourly. The highly contextualized needs of varying businesses are simply too diverse for high-end outside corporate counsel to set broad standardized costs for legal work. High-growth businesses across diverse industries and contexts are far more diversified in their legal needs than the medical needs of patients (fixed fees in healthcare can work), and so there’s just no neat bell curve to enable a viable general flat fee system without setting serious (and dangerous) constraints on what a corporate law firm is able to do.

Investors who push company lawyers to work on fixed/subscription fees know exactly what the end-result of that fee structure’s incentives will be: staying quiet about negotiation points, rushing work, and delegating to cheaper, inexperienced people who just follow standardized checklists/scripts. Market competition sets constraints on how much law firms can charge while remaining competitive, but in an hourly rate structure a law firm still has to at least do the work to get paid. Under a flat or fixed subscription fee, the incentives are reversed. Every extra minute of advisory or customization is lost margin, so cut every corner imaginable, as long as the client can’t see it. And because in the case of early-stage startups the client is often led by an inexperienced founder with no in-house general counsel to vet work product or know what questions outside counsel should be asking, hiding all the shirking/corner-cutting from the client is quite easy.

Firms who simply don’t care about ethics and quality are happy to have you pay them for doing the absolute bare minimum of work, via a flat or subscription fee; and clever investors will happily reward their weak company-side advisory with continued referrals.

The Race to the Bottom.

So what is the predictable end-result of this race to the bottom in startup law, where massive conflicts of interest with the investor community are conveniently overlooked, and lawyers are incentivized to keep their mouths shut and rush work in a standardized assembly-line built to the specifications of unethical investors? In terms of a law firm’s operating structure, it looks like this:

A. The law firm has deep ties to, and referral dependencies with, very influential money players in the startup ecosystem, including VC funds and high-profile accelerators; rendering it completely uncredible to suggest that those investors don’t influence the firm’s advisory. A significant portion of the firm’s business comes from investor referrals, ensuring the firm follows the investors’ preferred protocols.

B. Highly experienced, true Partners and Senior Lawyers are virtually non-existent at the firm, with minimal contact with early-stage startups. It’s only lawyers with many years of specialized experience and vetting who know how to navigate significant high-stakes complexity. Juniors – like lawyers who’ve only practiced for a few years, or paralegals – are only able to safely handle legal work that fits within narrow parameters. Often referred to as “de-skilling” in professional circles, this ensures that when a startup is negotiating against a highly experienced player, the person advising the startup is minimally skilled (and cheaper to the firm). They’ll basically check boxes and fill in forms. Investors will love it. The most highly experienced and talented lawyers (Senior Partners) are the most expensive people on a law firm’s payroll. By eliminating them, a firm can improve margins under a flat or subscription fee model, while torpedoing quality and flexibility. Firms that care most about growing revenue, whatever the impact on quality/ethics, are OK with that.

C. The firm vocally touts the purportedly enormous benefits of standardization, inflexible automation technology, speed, and fixed/subscription fees. By pushing a message that founders should just focus on minimizing legal bills and fixing their costs, the firm hopes they’ll overlook the quality issues with their weak, cookie-cutter counsel. This firm is happy to pretend that it’s in startups’/founders’ best interest to just handle legal work as quickly and automatically as possible. The fixed/subscription fees ensure that the firm is rewarded for cutting corners, delegating work to inexperienced people, and just filling in templates with minimal negotiation or advisory. They’re happy to peddle the templates/form documents, and follow the protocols, that certain aggressive investors (falsely) claim are “standard,” particularly those investors whom the firm depends on for referrals.

D. The firm attracts lawyers who are less interested in actually practicing high-stakes law for the long-term, and the quality accountability that entails, and instead care more about finding future job opportunities with high-growth startups or VC funds. The fact that the firm’s incentive structure totally constrains their ability to actually practice high-level law (and properly advise clients) doesn’t bother them, as long as they get paid and have access to good networking opportunities.

I’ve seen different law firms reach different levels of this race to the bottom. Without a doubt, Silicon Valley culture, with its historical “move fast and break things” approach to raising as much money as possible as quickly as possible in hopes of being a unicorn, has reached some of the most extreme points. Entrepreneurs who fully understand the implications of this race to the bottom, and want to avoid them completely for their business, should read: Checklist for Choosing a Startup Lawyer.

To be crystal clear, I am a big believer in efficiency, and the thoughtful use of well-applied technology to stay “lean” on legal. It’s why I left BigLaw years ago to build out an unapologetically high-end boutique firm, where top-tier lawyers’ rates are hundreds of dollars an hour lower than the conventional firms they left. Their lives are also far healthier because they bill fewer hours. Legal technology is a part of our model, and we are definitely early adopters, but I’m not going to over-hype its significance. The truth is at the top tier of emerging tech/vc law, there’s too much complexity, contextual diversity, and massively high error cost for software to make a huge dent; with deep non-apologies to the software engineers hell-bent on “disrupting” lawyers with an app. We’re talking about highly complex, highly unique companies navigating serious decisions and 8-10+ figure transactions involving very sophisticated players; not a coffee shop or plumbing company.

We’ve grown profitably and sustainably every year since I got here, with 2019 being our best year yet. But I also care deeply about professional ethics, and doing the actual job that inexperienced and vulnerable clients pay me to do. That means cutting out fat from the legal industry, but not muscle. It means delivering highly experienced, specialized strategic counsel capable of flexibly addressing clients’ varying needs as they come up, while leaving out the many other layers of unproductive overhead that traditional firms are often burdened with. See: When Startup Law Firms Don’t Sell Legal Services. Top-tier law can be made leaner and more accessible, but it requires leadership/stakeholders that take professional ethics and quality standards seriously, rather than treating legal work like just another product to recklessly hack and market your way into maximal growth.

We’re in an extremely exciting time for the legal industry. While BigLaw will always serve the largest and most complex deals, I believe the future of the industry (at least the segment that serves non-billion-dollar “happily not a unicorn” clients) is a diversified ecosystem of lean, specialized firms operating far more flexibly and efficiently than traditional mega firms; enabled by technology and operating structures that cut costs without cutting corners. That is the kind of innovation clients, including startups, need and deserve. Blatant flouting of conflicts of interest, and massive dilution of the quality of legal counsel, is not innovation. It’s a race to the bottom, in which the losers (inexperienced teams) are being taken for a ride.

How Paralegals and Junior Lawyers Can Hurt Startups

TL;DR: In engaging startup law firms, founders need to pay close attention to the differences between inexperienced junior legal professionals, like paralegals and junior attorneys, relative to experienced senior attorneys and partners. In order to fit their high-cost structures into tight startup budgets, some law firms significantly water down their services by forcing startups to regularly engage mostly with inexperienced junior people; many of whom are advising founders on issues they simply lack appropriate experience and judgment for. For high-stakes, complex issues, many of which come up in the early days of a company, this can lead to costly missteps for which startups end up paying a very high price.

Because of their inexperience, first-time founders often get tripped up in engaging their first legal services providers. Very often, they think they just need “a lawyer,” without understanding that, just like doctors, law has dozens of specialties and sub-specialties; and they need lawyers who specialize in emerging technology companies. But even if they narrow down the options of firms they are talking to, founders often lack an understanding of the differences in how various startup law firms/practices are structured in terms of senior professionals v. junior, and how that has a very material impact on the kind of service the company is going to receive.

In What Partners in Startup Law Firms Do, I walked you through what the different titles and levels of expertise at law firms mean. Partners at serious, respected firms have gone through extremely strict vetting and training processes, ensuring that they’re capable of delivering very high-stakes (very high-cost of errors) and flexible legal expertise in complex, multi-variate contexts that fast-moving startups often find themselves in. The process of moving away from Partners toward more junior-level attorneys and paralegals is often referred to as “de-skilling.” It requires adding rigidity and uniformity to work (checklists, templates, standardization, automation), so that less-capable professionals are able to handle limited-scope projects without blowing things up.

De-skilling is an important and very useful part of building up any law firm, because it allows firms to make highly-specialized and trained Partners accessible to companies when they’re needed (which is often, but certainly not all the time), while also handling lower-stakes and simpler work more efficiently and at lower cost.  While every law firm that works with startups offers a level of de-skilled work, it’s clear that firms vary dramatically in how far they go with it.

Some firms keep partners and senior-level attorneys highly involved with a startup from Day 1, while delegating periodically to paralegals and juniors. Other firms go so far as to make paralegals and junior lawyers the main point of contact for early-stage founders. To a first-time founder, the difference between these two approaches can seem subtle, but in terms of what is actually being delivered by the firm (and long-term outcomes), the differences are the opposite of subtle. In fact, we constantly see fast-growing startups make extremely expensive legal mistakes (or poorly thought-out strategic decisions) because the founders were relying on paralegals and juniors – as a “cost saving” mechanism – when those junior professionals were totally out of their league in the advice they were giving.

When paralegals and junior lawyers are made the main legal contacts of a startup, it’s the law firm’s way of saying “You’re little right now, and therefore just a number to us. But if you become something more significant, we’ll allocate our real expertise (senior level) to you.” The problem with this mindset is that many of the decisions made in the very early days of a startup are setting up the foundation and relationships that the company is going to live with throughout its trajectory. The company may be small at the moment, but actions being taken can be extremely high-impact and permanent, and therefore often require experienced judgment. This is especially true if the company doesn’t fit into a cookie-cutter context that can be distilled into a linear, simplified template for a junior to follow.

High-cost firms with weak(er) brands often over-delegate to inexperienced paralegals and juniors.

While a number of variables can play into it, the single largest driver of how much startup law firms rely on paralegals and junior lawyers is the interplay between the firm’s overall cost structure and the budget that startups engaging that firm are willing to accept. I emphasize that it’s the interplay of those two factors, because while some very high-cost law firms could stretch the amount of junior delegation that they throw onto startups, their reputation is sufficiently strong that founders who engage them are willing to pay the high cost of staying closely in contact with partners and seniors.

The very top of the top-tier of high-cost startup “BigLaw” – the top 3-5 firms, what I often refer to as the “Ferrari” tier – often doesn’t have to play games with excess de-skilling. They’re expensive, founders know they’re expensive, and yet they stay very busy anyway because if you’re legitimately on a Unicorn track (>$15MM Series A, clearly gunning for a 10+ figure long-term valuation) you’re a fool for using any other firm outside of that category. Companies on this track usually don’t struggle to pay their legal bills, even if they’ve engaged a Ferrari firm, because the size of their financings can more than accommodate a large legal budget.

It’s often the second tier of the very high-cost firms that I’ve seen start playing games with over-delegation to juniors. These firms also have extremely high operation costs, including all of the pricey infrastructure of the Ferrari tier, but they don’t have the brand credibility to command appropriately sized budgets from their early-stage clients. How do you make the math work in that case? You offer founders lower-priced fixed-fee projects, while putting in the fine print that the founders are going to spend 99% of their time talking to paralegals and juniors incapable of offering effective advice outside of very narrow contexts. Some of these firms will also throw in some half-baked automation software (cue the “machine learning” and “AI” buzz words) to make over-dependance on juniors seem “cutting edge,” when it’s actually a playbook that firms have been using for some time; and smart entrepreneurs know to avoid it.

The true Ferrari tier of Startup BigLaw often doesn’t need to play games with over-delegation to juniors, because founders who engage them know exactly why those firms are so expensive, have accepted it, and are willing to pay for experienced, senior-level attention. It’s more… OK let’s stick with the car analogy, the “Jaguar” tier of BigLaw (high-cost, but not the top of the top tier) that most often follows the junior-driven playbook. Their operating costs are the same as (or very close to) the Ferrari firms, but they have to offer discounts and lower budgets to attract startup clients (weaker brand); necessitating a watering-down of the actual offering to make the math work. What you end up with is still far from cheap, but requires you to stay within a very rigid, narrowly defined path for everything to not fall completely off the rails.

The point here isn’t to come down hard in saying that one approach or the other is right for every startup, but to simply ensure founders are aware of it, and use their judgment rather than being duped by clever marketing. Companies on what could truly be called “cookie cutter” trajectories can be OK having paralegals and inexperienced junior lawyers be their main legal contacts via what amounts to a “LegalZoom with a little extra” type of legal service offering. But experience has shown me that many entrepreneurs over-estimate how much of their legal work is (air quotes) “standard,” which can result in a blow-up once the legal technical debt comes due.

For negotiation-oriented issues, like structuring the subtleties of financings or serious Board-level discussions, there may also be ulterior motives behind investors pushing their portfolio companies to lean on inexperienced advisors (law firms that push startups to use junior people), with fabricated “standards” as an excuse. If it’s all just templates and standards, then what’s the harm in having your investors pick your law firm, right? Watch incentives and conflicts of interest. See: Negotiation is Relationship Building and When VCs “own” your startup’s lawyers.

When you, as a first-time entrepreneur, don’t know what you don’t know about high-stakes legal and financing issues, and you’re interacting with extremely seasoned and smart (but misaligned) business players, the last thing you want is to be relying on advisors who are only marginally more experienced than you are; or worse, are also “owned” by the money across the table.

High-end Boutique Law Firms are leaner and can offer lower costs, without over-reliance on inexperienced juniors.

Excess amounts of de-skilling and delegation to paralegals/juniors is not the only way that the legal market has attempted to lower legal costs for startups. An alternative, which we are a part of, is the emergence of high-end boutique law firms. These firms can offer regular access to true Partners and Senior Lawyers, but at rates equivalent to what the Ferrari tier charges for junior lawyers (hundreds less per hour); because they’ve cut out a lot of the overhead infrastructure that tends to inflate the cost of BigLaw. If your clients are Apple, Uber, and companies on that track (Ferrari tier of BigLaw), the way you build and market your firm will by necessity look very different from firms who deliberately target clients that, while serious and building important products/services, rarely make it onto the headlines of the NYT or WSJ (boutique firms).

This “lower overhead” (lean) boutique approach to law is not without its trade-offs, and I make that clear in my writings on the emerging boutique ecosystem. Every firm structure ultimately still has to follow math, and there simply is no magical wand that you can waive to deliver (again with the car analogies) Ferrari performance and resources at Acura/BMW prices. The very highest-end law firms that cater to marquee billion-dollar companies (and aspiring Unicorns) are extraordinarily expensive to grow and run, and there are very smart people running them who are well aware of how to safely trim costs within the constraints of what it takes to serve their clients. Boutiques offer a fundamentally different cost structure, because they are designed for a fundamentally different kind of client that doesn’t need a lot of the resources of the Ferrari class.

And please spare me the vaporware marketing suggesting that some new whiz-bang-pow piece of automation technology fundamentally changes the math of law firm economics. At the tier of corporate legal work that we are discussing (scaled, high-complexity and variability, high cost of errors, contextualized subjectivity), the amount of work even within the realm of possibility of being automated away with AI and data is a microscopic portion of what serious firms do. With apologies to the soylent-sipping lawyer haters out there (I see you, Silicon Valley uber-engineers), Siri isn’t going to negotiate your financings, or navigate your corporate governance, any time soon. We love legal tech and have adopted a lot of useful new tools, some of which are still in private beta; but nothing in the next 5-10 year horizon is going to fundamentally re-make law firms. Not at this level of complexity.

Properly structured high-end boutique law firms can and do offer significantly lower costs than BigLaw, without denying startups regular access to Partner-level, flexible strategic expertise. But the savings come from removing costs and resources that are required only if you are trying to serve the very highest end of the tech market; and boutiques don’t.

I tell founders all the time, “If you legitimately think an IPO or billion dollar valuation is on your visible horizon, please hang up and call the Ferrari tier of BigLaw.” We don’t do IPOs, and we’re not going to do your 10-figure cross-border merger involving 5,000 employees, 500 stockholders, and four tax jurisdictions. Hard pass.

At E/N, our Partners are perfectly happy letting the Ferrari firms compete for and serve Ferrari clients, while we work with a segment of the tech ecosystem that has been badly underserved.  Our clients tend to exit between $50MM and $250-ish MM, and obviously at lower sizes if it’s an earlier-than-expected sale. Their legal needs and financings are sufficiently large and complex to pay rates high enough to support serious lawyers and right-sized infrastructure for scalability, but the founders also have an instinctive understanding that their trajectory isn’t going to be anything you’d call “cookie cutter,” nor are they aspiring to be a Unicorn.

High-end boutique startup law firms thus offer a balanced compromise and useful value proposition for founders building companies that clearly need credible, highly-trained and specialized senior-level expertise (without reckless over-reliance on paralegals and juniors, or half-baked automation software), but for whom the Ferrari tier of the tech legal market is clearly overkill. Boutiques cannot and do not scale like the very top-tier of BigLaw, but the fact is that an important segment of the tech ecosystem doesn’t need them to.

Founders exploring the legal market should, at a minimum, ensure that they understand not just the varying cost structures of law firms, but also the varying levels of expertise/service those firms are offering within their cost structures. Two firms might look like apples to apples on the surface, but what your budget actually gets you ends up being wildly different. Firms promising low fees in exchange for inexperienced junior professionals (who can’t navigate significant complexity/flexibility safely, and offer poorly-fitted rigid advice) are selling something that – to experienced players who aren’t easily fooled – looks far less like efficiency, and far more like a time bomb.