Post Category → BigLaw

Why I left a big law firm, but not BigLaw.

While I’ve devoted the majority of this blog to providing free resources on startup law and finance to startup entrepreneurs, I occasionally take the time to write about the economics of law firms and why entrepreneurs would be wise to understand it at a high-level.  This post will start out with a historical summary of positions I’ve taken on the subject, with links to applicable posts, and then branch into my decision to move my own practice and clients to a new type of firm – not BigLaw, but not quite traditional BoutiqueLaw.

  • The Economic Deflation of Startup Law – Early stage startup law, much to the benefit of entrepreneurs and top-tier lawyers, has become increasingly automated and commoditized. The end result is a form of “freemium” law practice, where (i) entrepreneurs can obtain quality representation for very little money, and (ii) quality lawyers can, thanks to automation, engage entrepreneurs early on without having to discount fees, defer, or any of the other old-school ways of obscuring the cost of legal services. Low-quality or narrowly focused “cottage” lawyers will struggle because their bread-and-butter work will have little to no margin, while higher-tier lawyers will thrive on their pipeline of later-stage, funded clients, which cross-subsidize early-stage work.
  • In Startup Law, Big Can Be Beautiful – Breadth and scalability are absolutely essential to the proper representation of a startup, and large firms have historically been where to get that.
  • Integrated Startup Law – Specialists Matter – Technology startups do not need and should not want unscalable, narrow “small business” legal representation. By their nature, they will need a broad set of legal specialties – Tax, Labor, IP, Regulatory, etc. – along the course of their business cycle, and failing to choose a firm at the beginning that can efficiently coordinate all those specialists will become a big problem. The analogy to healthcare is important. Also see – The Cost of “Staging” Your Startup Lawyers.
  • The Ad-Hoc Law Firm – The ability of networks of small law firms to coordinate efficiently will allow for (i) the replication of BigLaw’s breadth and experience, without its overhead and inflexibility, and (ii) the scalability that boutique firms alone can’t provide.

Nutshell Summary: BigLaw offers experience and breadth, but is largely over-priced and inflexible. Boutiques are cheaper, but often narrow and incapable of truly scaling, and their work is being commoditized.

BigLaw Beginning

So in my own career, I started out at a big firm with a group of fantastic lawyers whom any startup would be well-served by, but I increasingly butted heads against the firm’s (separating the lawyers from the institution is important) policies, including (i) IT policies with respect to new technology that needed to be adopted, (ii) billing policies around how to charge startup clients, and (iii) personnel that simply didn’t want to do things differently and weren’t incentivized to care anyway.

Your Boutique Can’t Scale

I watched the market, and had some overtures from boutiques in the area, but every time I came away underwhelmed:

  • Lower Pay, Lower Lawyers – Often the boutiques had very low rates, but their lawyers made a lot less income.  True innovation is about doing more for less while earning more – it should be win-win economically on both the client and the lawyer’s end. That’s why the most disruptive startups aren’t in it to make less money, they’re in it to make more money, but on a model that makes the end-price lower by cutting out fat, not muscle. If your firm is built on paying lawyers less – guess what? You’re just going to attract lower-quality, less ambitious lawyers. Surprise, surprise. Anyone can lower their price tag.
  • Where are the partners? – A lot of BoutiqueLaw firms will advertise that their attorneys offer “partner-level” service.  The reality is that most boutiques are run by senior “associates” (never made partner) from large firms who started their own firms and donned the partner label.  Early-stage clients might not care about this because their interactions are usually with associates anyway, but a lack of true partner experience within a firm can mean (i) your late-stage company is effectively funding on-the-job training, and (ii) that training can lead to mistakes.  A scalable firm needs true partners with the credentials and experience to actually provide partner-level service, otherwise top clients will have to go elsewhere.
  • Where are the specialists? – No one had a good answer for how to efficiently provide full service legal representation to clients. Asking them to engage a dozen firms on a piece-meal basis and manage a dozen different bills is not the right answer.
  • Where’s the technology? – If you think a lot of law firms haven’t joined the 20th century with respect to technology, check out some boutique law firms.  A lower rate is often used as an excuse for being inefficient and taking longer to do something.  Smart clients realize that their legal bill is a two-part equation: rate * time spent.  And if their lawyer is taking forever to do basic stuff, the lower rate is a mirage.  Startup law is for technologists, not cottage industry practitioners.

So why did I move my practice to a smaller firm (Miller Egan)?  Addressing the above issues in order:

  • The compensation structure is designed to attract top talent lawyers, not people who are looking for semi-retirement.
  • The firm is built and run by partners who were partners at the country’s leading law firms, but got fed up with the bureaucracy and inflexibility.  This means the firm can truly provide the “partner-level” counseling that is traditionally found only in BigLaw and that large, late-stage clients will require.
  • The firm has a well-developed network and process for coordinating specialist counsel for clients when needed, so clients can get the full service representation they’d receive at a big firm, but under a far more efficient model.
  • Technology? I’m CTO. #Howyalikedemapples

The above post should be read as a clear message to both traditional BigLaw and traditional BoutiqueLaw. Big can be important, and boutique can be cheap, but small, flexible, and scalable may eventually eat your lunch.  And let me tell you, that lunch is delicious.

The Deflation of Startup Law Continues: Clerky

Almost exactly a year go, I wrote a post (The Economic Deflation of Startup Law) in which I (i) documented how the rapid adoption of technology and standardized contract language in early-stage startup law was dramatically deflating the cost of quality (crappy law has always been affordable) very early stage legal services available for founders, and (ii) made a few predictions about how this might affect the segment of the legal market that serves early-stage tech entrepreneurs.

Background

  • Contractual Changes – Standardization of contract language within law firms  & the emergence of universally standardized documents like the NVCA model docs, Series AA, and Techstars Docs, to name a few.
  • Technological Changes – Proofing software, Document Automation, Electronic Closing, etc. – reducing the amount of lawyer time required to complete a formation, bridge financing, etc.
  • Operational Changes – Technology and standardization simplify the labor input required to complete a transaction, allowing less trained, less expensive professionals to perform more of the back-end work.
  • Deal Platforms – Technology is moving from being merely a tool within the traditional law firm process to a bilateral platform that allows parties on both sides of a transaction to close, from beginning to end, with significantly less lawyer time required.
  • Freemium Startup Law – Very early-stage legal work (formations, bridge/seed financings, routine forms), once the bread-and-butter of solo lawyers and boutiques serving entrepreneurs, will no longer support those practices, no matter how efficient they try to be.  The margins will be too thin.  Those attorneys able to serve higher-quality, later-stage clients (those that make it to Series B, C, exit) where legal work will remain much more high-touch, high-margin will dominate the market and cross-subsidize their work for premium early-stage clients.  In short, Startup Law will move closer to a freemium model, where standard work is significantly cheaper, and being able to attract “premium” clients is essential for profitability.

The point of this post is not to comment on the accuracy of my predictions. One year is too short a time-frame to judge (we’ll see in 3-4 more years), though I will say that in Austin’s legal market I’ve seen a definite trend of solo and almost-solo lawyers attempting to expand their practices into multi-specialty firms, suggesting their desire (or need) to move up-market. Nationwide, I’ve also encountered a few small firms with much higher-caliber partners/associates, broad networks of specialists, and low-overhead platforms to compete head-on with BigLaw: this is where things will get very interesting.

Deflation 2.0 – Clerky

Instead, I’d like to talk about how the above developments have manifested themselves in the form of a Y-Combinator startup called Clerky. Details:

  • Founders are UPenn and Harvard (represent!) JDs of Orrick pedigree, and the head partner of Orrick’s Emerging Companies Group is an advisor; lest you question the quality of the drafting.
  • Appears to have handled formations for several Y-Combinator classes (note: classes – hundreds of companies) over the past several years; lest you think they haven’t been vetted and won’t get traction.
  • For formations, founders fill out online questionnaires very similar to those used by startup-focused law firms, and documents are automatically populated with the appropriate names, numbers, vesting schedules, etc.
  • There is a “reviewer” option where the founders can designate a person (an attorney) to review the final documents pre-execution to give a thumbs-up.
  • Execution is handled electronically on the platform.
  • Delaware filings and registered agent registrations are handled by Clerky.
  • Final executed documents are stored online.
  • Currently Available: Simple Incorporation (no equity, IP docs, etc.) – $99. Full formation (equity docs with vesting, IP assignment, bylaws, etc. – option plans and indemnification agreements coming soon) – $398.
  • Coming Soon (In Private Beta): Employee Offer Letters, Consulting Agreements, Advisor Agreements, NDAs, Convertible Notes., LLC to C-Corp Conversion

So what exactly has Clerky done? Once they get option plans and indemnification agreements up and running, they will have taken what would cost $5K-10K in legal fees at an inefficient law firm (or $2.5K-$5K at a more efficient one) and reduced it to $398 by going one step past building tools for lawyers to developing a platform that effectively replaces them – or at least ~95% of the work they do for early-stage clients. LegalZoom prices, but for premium, startup-focused documents.

What about free options?

Major law firms have attempted to address the large portion of the founder population for which even $2.5K-$5K is too high a formation price tag by offering documents online for free. I even wrote this post offering my own checklist for forming your own startup and issuing equity, lawyer-free, via publicly available documents.  But $398 is close enough to free that founders in this same category will be willing to pay for peace-of-mind, knowing that their docs are filled-out and filed properly, and that a reputable service is helping them maintain them. Plus it’ll save them hours of having to read the forms themselves.

Curmudgeon Criticism 1: Founders will want more customization than Clerky Offers

Yes, there will always be a segment of the founder population that wants high-touch, more flexible lawyering from the very beginning and will pay for it.  But the reality is that for the large portion of the pre-funding founder population that just wants to “get the job done” and focus on their product, Clerky, with its 80-90% discount on even the most efficient startup lawyers, will be a viable option. I don’t see Clerky taking up 90% of all startup formations, but it absolutely will be chosen by the most cash-strapped portion of the founder population for which a barebones formation makes sense.  Instead of relying on bottom-of-the-barrel lawyers peddling cheap prices, those founders will get a solid legal foundation.

Also, I think it’s well understood by many that there is a period of time during the very early stages of a company, before third-parties or circumstantial nuances have creeped in, and before the company has a larger budget, where serious automation is considered a very viable path, notwithstanding the inflexibility it introduces. Long-term, complexity and diversity of legal needs tend to grow exponentially, and automation becomes far less viable; but that doesn’t necessarily harm the value proposition of something like Clerky. They are a way to “fill the gap” between when many startups can only afford the bare minimum legal services, but need some security that it will be done properly, until their needs, and ability to pay for those needs, allows them to step off of the assembly line.

Curmudgeon Criticism 2:  Good lawyers will never accept a third-party service’s drafting language for their own clients.

After an inevitable phase of whining, kicking, and screaming, smart lawyers will accept whatever good clients and the market dictate, or they’ll just leave the space.  As stated above, there will always be clients who are willing to pay a premium for ensuring that all of their lawyering is 100% airtight.  And you can certainly expect a chorus of lawyers poking through the Clerky docs with a laundry list of ways their own documents are better. But like many disruptive innovations, it’s about the ratio of quality to cost, not absolute quality. At $398 for documents based on those used by one of the country’s leading tech firms and delivered by a YC company run by Ivy-League JDs, the value for the most price-sensitive founders is unquestionable.

Clerky will allow founders to engage quality, scalable lawyers earlier on.

Clerky’s “reviewer” option and its clear intent to incorporate lawyers in their processes shows that the goal here is not to completely replace lawyers, which would clearly be silly and reckless. The nuances of individual circumstances, the need for sound professional judgment that can’t be reduced to an algorithm, and the general realities of running a company will always require good, human legal counsel.

What a service like Clerky does is allow founders with very low legal budgets to stop having to settle for low-quality, mismatched lawyers who end up costing a whole lot more money (in mistakes) than founders expect. As I wrote in a previous post, a lot of founders know they need a lawyer, but can’t afford a good one, so they take the “staging” approach of going cheap up-front with plans to “upgrade” later. The consequences of this approach can be very expensive, and often disastrous.  Founders need lawyers that can serve them at all stages of development, not just when they’re tiny and the stakes seem low.

With Clerky, the “cost” of hiring a good lawyer at the very early stages of a startup can be the time it takes to quickly review some Clerky docs and answer any questions a founder might have about non-standard matters. For quality startup lawyers who stop pretending that all document drafting, no matter how routine, needs to occur in private silos, this is liberating. They can focus their practices on more complex matters that are far more profitable and interesting from a professional standpoint, while still maintaining relationships with early-stage clients who might one day require their skills. It also means the need for deferring fees will be dramatically reduced.

For lawyers who’ve built their practices on charging clients thousands of dollars for basically filling in forms and doing some cutting-and-pasting, the future looks increasingly grim. For those of us who love working with entrepreneurs and tech companies, but find cookie-cutter legal work utterly boring and a waste of our intellect, life is getting a whole lot better.

The Cost of “Staging” Your Startup Lawyers

An unfortunately common problem that successful startup entrepreneurs have to deal with is outgrowing their first law firm or lawyer.  The reason for this is two-fold:

  1. High-Growth – Unlike traditional “small businesses,” startups that seek angel/venture capital are by their nature meant to be very high-growth oriented: they start out simple and small with tiny legal budgets, but within a matter of a few years (sometimes months) they can be raising capital from sophisticated parties, striking complex commercial deals, developing valuable intellectual property, and otherwise requiring serious legal advice.
  2. Short-sightedness – Because startups start out so small and often with non-existent legal budgets, founders will often plan to go with an attorney or firm that markets itself as serving “small businesses” at very low rates. The problem, of course, is that a “startup” and a usual “small business” are not the same thing, because of the first point above.

My thoughts on the “go cheap at first” attitude are already articulated in another post. In a nutshell, I’m of the mindset that because of the high-quality DIY resources available online for startups, founders might often be better off going it alone, until they can afford real lawyers, instead of relying on a mis-matched provider whose mistakes can cost serious money to fix as the company scales.

But the goal of this post is really to emphasize a different, but related point: switching law firms can be a lot more expensive than you think.  Put differently, you might think you’re saving money by going with a “starter” attorney, knowing you’ll just “upgrade” if you’re successful, but make sure you understand the full cost of staging your legal providers in this way. It’s likely substantially higher than you expected. Here’s why.

Diligence Cost – What’s in that “other lawyer’s” contracts?

Startup-focused legal practices, particularly at large firms built to serve startups at all growth stages, will have their own set of contract/agreement templates that they regularly work with.  All of the attorneys at a particular firm will have deep experience working with those templates and know, without having to review them every time, what they do and don’t contain.  So if a new transaction ever comes up and an attorney ever has to make a decision or answer a question that depends on what a historical contract does or doesn’t contain, they won’t have to fully review (and hence you won’t be billed for) having to re-diligence all of the Company’s history.

Naturally, when you switch firms, you bring with you all of the legal foundation that you’ve built on someone else’s contract forms, but are now using attorneys who have no idea what those forms contain.  This means your new attorneys will need to fully review the work you’ve done in the past to be confident that the documents are kosher. On top of the cost of fixing any problems, this review process alone will carry a sizable bill.

Drafting Cost – Making everything fit.

On top of having standardized forms, properly run startup law practices draft their forms to integrate with one another. Defined terms, section references, and contract provisions are in sync between sets.  Formation docs -> Seed Docs -> VC docs -> Acquisition Docs, etc. This integration saves a startup money by allowing an attorney to pick up a set of, for example, venture capital deal forms knowing that it it’s designed from the get-go to sync with the Company’s previously signed contracts.  She can focus on the core deal terms instead of having to tinker with what should be standard language.

Introducing a foreign firm’s contracts into this “legal chain” produces a serious disturbance in “the force.” Everything on a going-forward basis will need to be tailored to fit the foreign legal docs that the Company executed with another firm.  And, unfortunately, that tinkering won’t be pro-bono.

Conflict Risk – Something lost in translation.

It’s also worth mentioning that by requiring your attorneys to engage in all this diligence and custom drafting that they otherwise wouldn’t have needed to do if you’d used them from the beginning, you are automatically taking on the risk that something will be messed up.  A provision in your old contracts might be missed (because your attorneys were working quickly to try to keep the bill low), or the “tailoring” to your old docs might not have been done perfectly (for similar reasons), and a straight conflict within your contracts will arise.  Hopefully it’s a small one. But it might not be. Just know the risk is there.

Think Ahead in Hiring Your Startup Lawyers

So how much can all of these “transition” costs add up to? It depends.  The longer you spend with your “starter” lawyer, the higher it will likely be, but it can easily reach 5-figures.  Keep that in mind when making decisions about how to provide for your startup’s legal needs.  For a successful startup that inevitably has to switch firms, the transition costs of staging, along with those of fixing the mistakes of “starter” lawyers, will likely eclipse what the startup would’ve paid if efficient and scalable legal counsel had been engaged from the beginning.