Post Category → BigLaw

Why our lawyers work fewer hours

Background Reading:

When you hire a typical large high-end law firm, the lawyers you work with are generally required to work 60-80 hour weeks non-stop if they want to keep their jobs; and at the higher end of that range if they want to make partner (in 8-10 years).  This is considered totally normal among that tier of law, as a “price” for the privilege of working there. If you want to see the inevitable end-result of that kind of culture, read the NYT article I’ve linked to above. It may seem extreme, but that profile of life is far less rare in law than most outsiders would think.

On top of the work expectations, most non-partners take home about 25% of the revenue they generate from clients. The other 75% goes to firm overhead (infrastructure) and partners. So when elite BigLaw charges you $695/hr for a senior associate, maybe $175/hr goes to the associate, the rest goes elsewhere. Obviously, the big question becomes how much of that “other stuff” is really necessary; and the answer varies depending on the type of client.

The causal chain here is pretty straightforward: bloated overhead and bureaucracy -> lower take-home for lawyers (and higher rates for clients)-> elite lawyers work insane hours to make good money -> divorce, depression, therapy, drug addiction, etc. etc. This is why, as we’ve built and scaled out our leaner but still high-end boutique firm, people have often heard me speak of “bloat” as if it’s the next incarnation of satan. Because I know that, from having studied that causal chain very closely, the extra piece of bullshit technology, or administrative person who just over-complicates processes, is directly tied to why many lawyers’ marriages fall apart, or their kids end up in therapy; or why they can’t get married or build families/relationships in the first place.

If I generated a dollar, and you want to take a cut of it, you better believe I’m going to make you earn it. And I say “no” far more often than I say “yes.”

At E/N, our lawyers, including partners, work on average 25% fewer hours than their BigLaw counterparts, at rates about $200-300+/hr lower; and our credentials speak for themselves. Top-performers (on a number of metrics, not necessarily hours) actually out-earn what they’d expect to make in BigLaw, while everyone generally makes more than what they’d expect as a GC or in some other “lifestyle” lawyer-type job.

It hasn’t been easy to piece together – getting extremely intelligent (the 1%), highly-trained professionals to coordinate and integrate together into a new brand is way more complicated than most would think, and it’s why precious few boutique firms reach any meaningful level of scale before falling apart. It still takes quite a lot of scalable “infrastructure,” just designed very differently from how old firms build it. But ultimately it’s a great set up for clients and for lawyers; not just those at the top of the hierarchy. It works, and we’re growing, sustainably, by knowing what we’re building, and who we’re building it for.

I am 100% convinced that our emphasis on quality of life for lawyers translates to better service for clients, in terms of responsiveness, creative solutions, and ultimate value add for our time. When your lawyers aren’t forced to over-stuff their “plate” all day, every day, the clients they work with get better service. That’s demonstrated in our client testimonials.

Part of our focus on client satisfaction is in selecting for clients who, themselves, have a strong sense of balance. They want to build great things and make great money – and work hard, but they reject the toxic values, pervasive in so much of the market, that myopically celebrate the neglect of so many other important things in life in order to “win.” Trust me, we’re winning and our clients are winning, but at a much broader, more important game.

In my value structure and those of our lawyers, there’s no bigger “loser” than the guy with tons of money, but a failed personal life, horrible health, and nothing meaningful to come home to other than more work; and there’s no amount of spin that can get us to reframe that life as “crushing it” or “strong work ethic.”

I have no doubt that the hard-grinding culture of traditional elite law will continue, in the same way that it continues in big pockets of tech ecosystems. It has its place in the world. We see our role as simply building out an alternative, and letting people – both clients and lawyers – self-select for what they want and support.

 

 

 

Startup Law Pricing: Fixed v. Hourly

TL;DR: There are very natural reasons – inherent in the dynamics of complex, high-end legal services, including for startups – that explain why flexible time-based billing is still the most common pricing structure among law firms specialized in emerging companies (startup) law. And there are very real downsides and limitations to “fixed fee” pricing that founders all need to be aware of; including, most importantly, that flat fees reward law firms for reducing the quality and flexibility of their work (such as not negotiating key terms, and delegating to junior professionals) in ways that first-time entrepreneurs are often unable to detect. Aggressive investors particularly like promoting flat fees as a way to incentivize your lawyers to not negotiate.

First-time entrepreneurs, who’ve usually never hired serious lawyers before, understandably get heart burn when thinking about the cost of legal services. The goal of this post is to provide some clarity on how legal billing for startups works in general, and to also bust a few myths circulating around ecosystems on the topic.

First, I strongly suggest reading: Lies About Startup Legal Fees. A few highlights:

  • Long-term, client-facing legal technology does not dramatically cut legal spend for startups.
    • As a legal CTO who regularly tests and adopts new legal tech for our boutique firm, I have a very clear understanding of what technology, including cutting edge machine learning/AI, is capable of accomplishing in high-end, high-complexity legal services. In the very early days, where complexity and cross-client variability is minimal (like formations) tech can and does play a key role in keeping costs down, but in startup law its utility breaks down fast. I am a very early adopter, but one thing I don’t adopt is techno-BS.
    • In the long-term, given the high, often irreversible cost of errors and the significant variability between clients, legal technology plays only a small role in cutting overall spending. This is, at the end of the day, a highly trained human judgment/skill driven business, with targeted technology in the background. Anyone trying to make this area “LegalZoom-y” will eventually crash right into the fundamental realities of the business.
    • While some techies will certainly tell you otherwise, the most “disruptive” developments in law aren’t in adopting software or technology, but in eliminating unproductive overhead, simplifying firm structures, and implementing project and knowledge management more consistently and deeply; enabled by off-the-shelf tech that is hardly earth shattering. These strategies cut the cost of legal by hundreds of dollars an hour, while improving responsiveness and quality; which exactly zero pieces of tech can even get close to doing. See: The Boutique Ecosystem v. BigLaw. Subtractive, not additive, innovation.

Sidenote: there are big market opportunities for AI/ML and other legal tech in serving very large clients with hundreds/thousands of related contracts and transactions, all on top of a single corporate structure. I call this “vertical” legal tech. It’s in “horizontal” legal tech (automation across companies) that much of legal tech’s promise has been overblown. After automating secretary/paralegal work, it hits a hard wall of customization, complexity, and high error cost that renders the most cutting edge technology virtually useless.

  • DIY almost always costs more in the long-run – “Legal Technical Debt” is real. The cost of fixing legal errors compounds over time, and saving $1 today will very often cost you $5-10 in a few months or years, no matter how many blog posts you’ve read or templates you’ve downloaded.
  • Compensation and institutional infrastructure drive legal quality and scalability, which controls costs. – Great lawyers, just like great software developers, expect to be compensated for their talent. Oh, and btw, Law School costs about $200-250k and 3 years of your life. Very large firms and smaller firms can both have high-quality lawyers if they pay them properly, with the real difference being the additional overhead on top of compensation. Larger firms have much higher overhead to pay for infrastructure needed to represent unicorns in very large deals. Boutique firms are lower-overhead, and better designed for “normals.” Solos are best for small businesses.

Second, another Startup Law myth worth busting is the idea that fixing legal fees (as opposed to more flexible hourly billing) “aligns” incentives between entrepreneurs and their lawyers. I touch on this topic a bit in Standardization v. Flexibility in Startup Law.

It’s become lazily fashionable to criticize the billable hour as the main source of inefficiency in law. But the reluctance in traditional law firms to adopt technology and improve processes is driven, at least among startup-focused firms, far more by the decision-making structure of the firms, and the inertia that creates, than the billable hour. Partners in those firms often have so much control over how their clients are served, that the firm as an institution is incapable of mandating large-scale change. The egos of partners hold back the profession far more than billing structure.

The idea that time-based billing means lawyers are just going to maximize how much they charge clients, and never optimize, is economically ridiculous and ignorant. The lawyer-client relationship is very long-term, and smart entrepreneurs can easily get info in the market if they feel their lawyers are over-charging. Switching to more efficient firms is not that difficult.  Costs in Startup Law have been going down significantly over the past decade, with hourly billing still being the norm. There is a very short feedback loop on law firm pricing, which incentivizes firms to reduce truly unnecessary costs. A team can very easily take an invoice and ask other founders/startups whether it is inflated relative to market norms. The feedback loop on qualitative issues, like poor negotiation or errors, is far longer and more opaque, because those issues often aren’t discovered until years later, and even then its hard to compare apples to apples between companies. 

If you (cynically) think that hourly billing gives your lawyers a strong incentive to over-work, then fixed billing gives your lawyers an even stronger incentive to under-work. By guaranteeing a law firm a price on a transaction, regardless of how long it takes, you’ve tied their ROI to how little time they spend on it; narrowing optionality, delegating to less trained people, and rushing through material issues all become drivers of profitability. In the world of serious legal services, where speed/cheapness are hardly the only concern of clients, and there are very material, difficult-to-detect qualitative variables in service output, the idea that this is “aligning” lawyers with their clients is nonsense. Fixed fees do not align incentives; they reverse them.

Fixing fees, when the circumstances for “fixability” aren’t really in place (more on that below), therefore raises serious quality concerns. In healthcare, a botched job is almost always quickly noticeable to the patient. In law, especially startup law (where the client often isn’t seasoned enough to detect errors/rushed work) big quality issues can, and often do, take years to surface, since they’re tucked away in docs that sit unused until a major event, or the inexperienced founders simply never realize that an option their lawyer could have brought up, wasn’t. This, by the way, is why the most experienced players in any market are always deeply skeptical of new legal service entrants promising low prices, even if they’re early adopters in many other areas. It takes real effort and quality signaling to get them off of reputable legal brands. That reluctance is logical, given the opaque and high stakes nature of the service; very different from most fields.

If your law firm has agreed to a fixed fee, and suddenly you find yourself spending a lot more time interacting with paralegals working off of checklists (instead of lawyers), now you know what “alignment” really means.  Fixed fees are not magical, and they come with very real tradeoffs. You can have the exact same end-price for a transaction between time-based lawyers and flat fee lawyers, and the flat fee lawyers will be rewarded for minimizing the work they perform, and reducing quality; especially when the client isn’t fully capable of assessing that quality, which is often the case with new entrepreneurs. 

In a high-stakes deal, guess who would love to see your lawyers rush and under-negotiate? Investors. Watch out for law firms with deep ties to the investor community. If they’re peddling fixed fees, it’s because their real clients (investors) are incentivizing them to.

The predominance of the hourly billing model among high-end law firms is, first and foremost, a reflection of the significant variability among client needs and expectations, and the fact that flexible hourly billing is the most effective way to tailor work for each client, without reducing quality standards.

  • Need a reseller agreement? We’ve drafted them for $1.5K, $5K, and over $20K. Unpredictable variables: strategic importance of the deal, dollar value, size of the company, location, who the reseller is, who the reseller’s lawyers are, industry, and a dozen others.
  • I see “seed stage” startups who spend nothing on legal for a full year, some that spend $10K, others $25K, and a few that spend $100K, all due to widely varying needs.
  • I’ve seen “Series A” financings close for $15K, $30K, and over $100K, and everywhere in-between, and all for perfectly logical reasons understood by the client in the context.
  • M&A deals are totally all over the place in terms of time and costs.
  • In short, companies are not like medical patients. Biology and medical science produce very clear “bell curves” that enable things like health insurance pricing and fixed-fee medical procedure costs. There is no underlying DNA/biology constraining variability among companies, and therefore far less rhyme or reason across a legal client base.  The drivers of legal cost variability are far wider, subjective, unpredictable, and randomly distributed, which makes fixed-fee pricing not feasible for many broad-scope firms and clients.
    • Name another field in which, on top of there being significant variability of the working environment (the legal/contract ‘code base’ for each company), there are also subjective drivers of cost on both the client side (your client’s preferences heavily drive time commitment) and also the third-party side (the counterparty/lawyers on the other side can dramatically increase time commitment). The level of structural uncertainty and variability is much higher than healthcare, construction, manufacturing, consulting, and many other industries.
  • Given the above, the only way to make fixed-fee pricing work economically in corporate law is to “tame” this variability, and that “taming” results in downsides that are often unacceptable both to firms and to clients.

So what are the variables that help “tame” client work enough to make fixed fee pricing viable in Startup Law?

A. Very early work – There is a reason that formation documents are the most heavily automated and price-fixed in startup law: the number of unknowns and idiosyncracies are minimized. When a startup has decided on a “standard” VC-track C-Corp structure (which, btw, we see this becoming a less obvious decision for founders – see More Startups are LLCs), there are no outside parties to negotiate with, or other lawyers to deal with. The scope is clear, and the circumstances in which costs could go off the rails are minimized. Most of our clients are incorporated/formed on a fixed fee.

  • Anyone who observes the heavily tech automation / fixed-fee driven nature of startup formations and extrapolates that across the full spectrum of legal work is incredibly naive as to how complexity and client variability increase exponentially immediately after formation; as circumstantial differences start to creep into the legal “code base.” The low hanging fruit for legal automation has been eaten (see Clerky), and people who understand both technology and law are rightfully skeptical re: what even the most advanced, cutting edge AI can really do for high-complexity corporate law for the next decade, outside of very *very* narrow applications.

B. Narrow the scope – Remember the point that fixed fees don’t align incentives, but instead reverse them? Fixed fees make it costless for the client to demand more work. This logically means the law firm has to start drawing hard boundaries over what is acceptable for the client to ask for (inflexibility). We recently started our Alpha Program offering a limited scope of early-stage work on a fixed monthly fee. While there’s definitely been interest, a lot of our best clients opt out simply because they prefer maximal flexibility in terms of what work gets done, and how it gets done. In their mind, the whole point of hiring serious lawyers, just like hiring serious software developers, is to not get boxed into a narrow approach.

C. Narrow the client profile – I know a decent number of firms that have built successful practices on heavy fixed fee utilization. The almost universal way they’ve accomplished this is by dramatically narrowing the type of client they take on. Specific industries, specific geographic locations, specific sizes or growth trajectories, etc. Pick a narrow niche, and own it. If you can make your clients look and act far more alike by limiting the type of client you take on, you can more easily create that healthcare-like “bell curve,” and then start pegging prices. But for many law firms that have a diverse client base with diverse needs – including firms that represent startups with varying industries, growth and funding trajectories, subjective preferences, etc. – this is simply not feasible. I have never seen a firm or lawyer successfully utilize fixed-fees at scale without significantly narrowing their target client profile; the economics otherwise don’t work.

  • Note: I have made the argument many times that part of “BigLaw’s” problem is that it simply does too much, and that the “subtractive innovation” brought about by lean boutiques with more specialized practice areas that can collaborate ad-hoc is a meaningful transformation of the legal market. But virtually every specialized high-end boutique we work with still heavily utilizes time-based billing, for all the reasons described here. For fixed-fees to work, you need far narrower specialization than by practice area; like “small businesses under 40 employees” or on the opposite end “very high-growth SaaS companies raising top-tier traditional venture capital.”
  • The need for very narrow specialization driven by fixed fees will create problems for clients who engage a firm that isn’t a 100% good fit. They will inevitably find themselves pushed to mold their company to the rigid capabilities of the narrow firm, which will feel like putting the cart before the horse. What this means is that the decision to keep many law firms more generalist, with more flexible time-based billing, is for many clients a feature; not a bug. 

Our approach to pricing legal services for our startup clients is the result of sitting down and talking to founders about what their concerns really are. What we’ve found is that, more than fixing prices (with all of the downsides that entails), clients just want to prevent surprises, and to not feel like they overpaid. If something takes longer for very good reasons, it’s OK for it to cost more. If it can be done faster, while fulfilling all the client’s goals, then cost-savings should go to the client. Happy clients generate more work and referrals. When combined with transparency and open dialogue, there’s a symmetry and fairness in this approach that is often much more aligned with the “partnership” nature of the long-term lawyer-client relationship than the inflexible dynamics of buying a hardened product. 

So we’ve implemented a number of processes to accomplish that – including regular (more frequent than monthly) billing reports, transparent budget ranges based on our historical client data, and flexible payment options. We’ve found that these go very far toward helping startups get comfortable with their legal bills, without deluding anyone into thinking that you can somehow universally fix the costs of services that are inherently unpredictable to everyone. Our Net Promoter Score (NPS) as of today is 77.

Tying this all together, entrepreneurs should understand that there are very logical, client-centric reasons for why the billable hour remains the dominant billing model for serious law firms working with diverse clients; notwithstanding what lazy arm-chair commentators say about the billable hour. Law is hardly the only industry that utilizes “cost plus” billing, which is what the billable hour is. Occasionally I run into founders who struggle to grasp this, and then I’ll find that they’ve engaged a software developer as a contractor who, lo and behold, is paid by the hour. Many startup lawyers refer to their job as “coding in Word.”

That developer didn’t go to Stanford to practice cookie-cutter programming, and I didn’t go to Harvard to practice cookie-cutter law.  Fixed fees are not – at all – a magical panacea that suddenly smooths out all the challenges of engaging serious lawyers. To the contrary, they create their own major problems.  Open dialogue between client and law firm will keep costs reasonable, and minimize surprises, without getting stuck with all the downsides of productizing something that fundamentally isn’t a product.

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.

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. 

Checklist for choosing a Startup Lawyer

A friend mentioned to me the other day that, as much great content as there is on Startup Law, there isn’t a simple list of things a founder team should assess in choosing their own company counsel. So here it is, leveraging past SHL posts in a distilled form.

Background Reading: Startup Lawyers – Explained.

Are they actually a “startup lawyer”?

The number of lawyers over the years who have attempted to re-brand themselves as startup lawyers – meaning corporate lawyers with a heavy specialization in emerging technology and venture capital – has gone up significantly. Law has numerous specialties and subspecialties, much like healthcare, and you want to ensure that, if you’re building an early-stage technology company looking to raise outside capital, your main lawyer(s) has deep experience in exactly that.

See: Startups Need Specialist Lawyers. The last thing you want to end up with is a litigator, patent lawyer, or small business lawyer who thinks that, because he stayed at a Holiday Inn Express, he suddenly knows startup law.

If you’re unsure, ask for a list of deals they’ve led and closed in the last 6 months.

Are they sufficiently experienced (Senior Level)?

See: How Paralegals and Junior Lawyers Can Hurt Startups. 

Some firms use what’s often referred to as “de-skilling” to significantly water-down the services they offer to early-stage startups. That means literally connecting you with advisors who are less skilled; making your main legal contacts junior professionals or automation software. Having junior and non-legal staff as the main legal contacts for a founder team can be extremely problematic, and will go off the rails the moment the startup runs into a complex, high-stakes context where they need fast senior-level advisory; which often happens in the early days.

Talk to a Partner or Senior Attorney with at least 5+ years of experience with complex transactions, and non-cookie-cutter contexts. Make sure they, as a person, feel like a good fit (personality, values, experience) for your company and team; not just the firm broadly. Paralegals and junior lawyers are great for “routine” items, and every good firm has them in the background, but you do not want them as your main legal contacts. If a firm puts layers of junior staff and other support professionals in-between you and senior legal help, that’s a red flag. We’re talking about your closest legal advisors on your most high-stakes issues; not the purchasing of a piece of productized software. The individual people matter.

Do they have access to other specialist lawyers that you’ll need?

In line with the above, the first lawyer you’ll need is a startup lawyer, but once the business gets going, you’ll quickly need others, including commercial/tech transactions lawyers, tax lawyers, data/privacy lawyers, patent lawyers, trademarks, litigation, etc. They do not need to be under the same firm (and you often benefit if they aren’t), but a serious startup lawyer who represents scaled companies must have direct access to these kinds of specialists to provide responsive counsel to their clients.

A simple “yes, we have access” is not enough. Ask for names, info on how they normally engage, and do your diligence.

Is their infrastructure / cost structure right-sized for what you’re building?

Be realistic about what your company will look like over the next 5 years if things go as planned, and hire a lawyer/firm that can serve that company, without scalability problems. Are you building a narrow app for which a successful exit would be a few million dollars? A solo lawyer would probably be a good fit for you.

Do you legitimately see yourself as on a potential IPO or >$500MM exit track, and targeting a $15-20+MM Series A in a year or two? Law firms that represent “unicorns” may be a good fit for you, even if they’re much more expensive. Don’t go cheap, and don’t trust upstarts claiming to be able to handle hyper-growth startups. You need a trusted marquee brand with infrastructure already built and validated for hyper-growth.

Are you realistically on more of a $3-10MM Series A, and $50-300MM exit path; or maybe you’re more interested in scaling on revenue alone? You’re going to get too big for a solo, fast, but “unicorn” firms are overkill for you and will potentially (i) not prioritize your needs, given you’ll be small potatoes, and (ii) shorten your runway significantly because of their high rates. Try a high-end boutique law firm.

See: When a Startup Lawyer can’t scale and Lies about startup legal fees.

Are they familiar and aligned with the norms / expectations of your likely investors?

In line with the idea of hiring a right-sized law firm, if you’re not on the unicorn track, you will run into problems if you hire lawyers who generally represent (and target) companies who are.

We see this often when, for example, law firms from Silicon Valley represent a tech startup raising local money in, say, Texas or Colorado. Ecosystems of different sizes often have very different norms and expectations, and you can run into cultural or even process conflicts when your lawyers simply don’t speak the same language as your investors, or other stakeholders. The largest deals in the largest tech ecosystems – SV and NYC – have much closer market norms, and smaller/mid-size deals in smaller ecosystems like Austin, Boulder, Seattle, etc. often behave similarly among themselves.

See: The problem with chasing whales.

Are they not “captive” to investors you’re likely to raise money from?

Entrepreneurs, and especially first-time entrepreneurs, lean heavily on their startup lawyer(s) for core strategic guidance in navigating negotiations / issues with their main investors. Experienced, independent counsel can be a young startup’s most important “equalizer” when dealing with people who are 50x as experienced as the founding team on deal structuring and corporate governance; which is why aggressive VCs will often go to such great lengths to convince, or force, a set of founders to use their preferred (captive) lawyers as company counsel.

Don’t use lawyers with any dependencies on the money across the table, or you’ll compromise one of your most strategic assets in navigating all the high-stakes complexities of fundraising and board management. In fact, if your lead investors seem very interested in you using a particular firm or set of firms, now you know exactly which firms you should not use. Talk to other specialized, experienced firms except for those.

See: How to avoid “captive” company counsel or Relationships and Power in Startup Ecosystems. 

Finally, do they “not suck”?

After all of the above, do these folks actually answer their damn e-mails quickly enough? Do they have good technology / processes in place to make your life easier and work efficiently? Do they give real strategic advice, and not make tons of costly mistakes that you end up having to pay for in the long run?

See: Lawyers and NPS.

There are lawyers who will check all of the above boxes, and yet after you talk to their clients, you’ll find that they just suck to work with. Do your homework / research on the more objective checklist items, but in the end never forget to choose lawyers who actually care about doing all the subtle human-oriented things that result in good service.

post-script: A few questions that don’t belong on the checklist:

  • Is the lawyer in my city? – Nothing about local city law applies to startup lawyering. Think regionally, or focus on their client base resembling what you’re building.
  • Can they introduce me to investors? – See: Why I (still) don’t make investor intros.  There are far more effective ways to get connected to investors than through intros from a law firm.