Post Category → Legal Tech

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.

Standardization v. Flexibility in Startup Law

TL;DR: Standardization reduces time and fees, but at the cost of increased inflexibility. And sometimes, flexibility matters more.

Related reading:

Imagine you’re about to have a baby. You start asking your OBGYN about the facilities, preparations, etc., and the response you get is: “don’t worry about it, it’s all standard.”

Ok…, but your family has a history of certain unique hereditary conditions. Things can go wrong. You try to prod further. “Don’t worry, everything is going to be standard procedure.”

Are all people “standard”? Well, are all companies?

Standardization has its place, and certainly has its benefits. Those benefits include:

  • Lower Costs (at least upfront);
  • Faster execution, often enabled by technology;
  • Easier review.

In short, standardization makes things cheaper and faster. As great as that is, for any high stakes situation, a half-intelligent person will step back and ask: are speed and low cost really my top priorities here?

The purpose of this post is to discuss why the general push toward standardizing all financing (and other) documentation for startups, while clearly lowering up-front legal fees, is not always as “founder friendly” as the automation companies, investors, and other parties who also benefit from standardization, would have you believe. Nothing is free.

As I’ve written before a few times: “don’t ask your lawyers about this” sounds sketchy, and potentially raises red flags. If you want a novice team to simply move on and not ask questions, a real chess player will say “let’s save some legal fees.”

We’re negotiating over millions of dollars with potentially tens or hundreds of millions in long-term implications, but great, let’s save a few thousand in legal fees now by “streamlining” things. Right.

Who chooses the “standard”?

By far one of the most over-used phrases I hear in financing negotiations is “this is standard.” Says who? Do you have data? When you personally close dozens of financings a year across state lines, and have visibility into hundreds, like our lawyers do, it is very amusing when someone who makes maybe a handful of investments a year starts trying to lecture you on what’s “standard.”

The other day I heard a VC say that not having an independent director on the Board post-Series A is “standard,” and virtually everyone else in the room could smell the manure.

If you are looking to adopt market “standards,” make sure they are actually standards. Work with advisors with broad market experience to verify claims, and triangulate advice from multiple, independent advisors. Don’t let anyone simply dictate to you what the “standard” is. 

Serial players benefit from standardization. It’s not about saving companies legal fees.

Investors have portfolio incentives; meaning that they have their bets spread around a dozen or two dozen companies, sometimes much more if they’re a “spray and pray” kind of fund. For investors who look for unicorns, they expect most of their investments to fail, and just need 1 or 2 grand slams to make their returns. Unicorn investors demand very high growth, because even if such an approach can increase the number of failures, it will also maximize overall returns across the portfolio by turning up the juice on the 1 or 2 unicorns.

Entrepreneurs and their employees, on the other hand, have “one shot” incentives. Their net worth is concentrated in one company, and therefore the specific details, and risks, applied to their specific company matter a lot more to them.

The emphasis on very fast, very cheap financings benefits, above all else, large investors with broad portfolios who are looking to minimize their costs on any particular bet. It is not something developed out of beneficence toward companies; who often stand to gain more from adopting structures better suited to their specific circumstances. 

Standardization necessitates inflexibility, and when you’re fully invested for the long-haul in one specific company, flexibility may matter much more to you than simply moving as fast and cheaply as possible.

So who is standardization really for? The people who work in volume.

Lies about fixed legal fees.

One of the worst lies spread throughout some startup law circles is that fixed fees somehow “align” incentives between clients (companies) and lawyers. The argument is that, if lawyers bill by the hour, they will simply bill endlessly without reason. Thus, fixing their fees “solves the problem.”

Except it doesn’t.

Assuming all lawyers are principle-less economic actors who will do whatever maximizes their profits (cynical, but the general argument here is cynical), fixing legal fees does not align incentives between a client and the lawyer; it reverses them.

If Mr. Jerk Lawyer will run up the bill unjustifiably when the economics are hourly, he will, once you fix his fees, reverse course and do the absolute bare minimum necessary to complete the work; pocketing the difference. Why put in that extra hour or two to discuss a few nuances with potentially very material implications to the team, if it just hurts my fixed fee ROI? “This is fine and standard” is a much easier answer. Trust me, the minimum professional standards to avoid malpractice are very low. Close the deal, and move on to the next one.

Oh, but wait, the fixed fee proponent would retort: the fixed fee lawyer will still do a great job because he’s concerned about reputation. Response: (i) isn’t the hourly billing lawyer also concerned about reputation? (ii) you often don’t find out whether the lawyering you got was “good” or “bad” until years later. The difference between great counsel and bad counsel is in nuanced, long-term details not visible at closing. A-players and C-players can both close deals. I’ll let you guess which ones more often agree to fixed fees. 

There is a place for fixing legal fees when the work being done really is commoditized, and not of high strategic significance to a company in the long-term.  But anyone who thinks that fixed fees are some kind of magical solution to long-term lawyer-client relationships is, to put it bluntly, full of sh**. In attempting to solve one problem, they create other ones. So let’s all please stop pretending that when investors insist that you cap your legal fees when negotiating against them that they’re doing it to save you money. It’s a way to get your lawyers to stop talking to you. 

Our view is that clients definitely deserve some level of predictability in their fees, and we provide that by crunching data across our broad client base, and providing clients budget ranges based on that hard data. We also keep clients regularly updated on accrued billings, to avoid surprises. I promise to deliver transparency and data-driven predictability within reason, but I need, and smart clients want me to have, the flexibility to address unforeseen issues that, in my judgment, are material enough to fix, even if I could get away with ignoring them without anyone noticing for years.

Reputation plays a huge role in keeping legal fees reasonable. You’ll go much further diligencing a set of lawyers, asking their clients whether they feel they keep their bills honest, instead of adopting some nonsense idea that fixing/capping fees will magically produce the outcome you really want.

Standardization and Flexibility need to be balanced.

All good startup lawyers adopt some level of standardization, as they should. There is a lot of room for creating uniform practices that save time and money, without damaging quality and flexibility. But any attempts to pretend that complex, high-stakes law can be “productized” should raise serious skepticism, at least from entrepreneurs who view their company as something more than just another cookie-cutter number in someone else’s portfolio.

If I refuse to fix all of my legal fees, it’s because the reality of serious startup law does not fall along some neat bell curve; not when you represent a diverse client base, with diverse goals beyond simply getting as big as possible as fast as possible. There is far more qualitative nuance to strategic lawyering than there is even in healthcare, where the goals are much cleaner, quality is more easily evaluated, and the base structure of each “client” (biology) is more uniform. Business goals are subjective, and the right outcome for one client may look totally different for another, requiring totally divergent, and unpredictable, levels of work. That requires flexibility, both in process and pricing.

Where the final outcome really matters, speed and low cost are not the top priorities. Leave room for flexibility and real strategic guidance, or you’ll move very fast and very cheaply right into a brick wall.

Lies About Startup Legal Fees

It usually takes experience in the market for business people to truly understand the realities of hiring and working with lawyers. I can’t tell you how many times I run into first-time founders who’ve been fed absolute nonsense from ‘advisors’ ‘mentors’ or similarly named people about their ‘secrets’ for managing legal spend. The truth is that unless you’ve taken a company from seed to Series A, Series B, Series C, to an exit in which a serious party on the other side actually diligenced the legal history your ‘secrets’ put together, your theories about lawyers are hot air.

Failed companies never pay the price for poorly managed legal; unless the failure was the result of the legal problems, which does happen. Successful companies, however, pay deeply for legal mistakes. It’s  just a question of timing. There are definitely steps you can take to prevent legal spend from getting out of control, but it requires separating reality from delusion. The below is my attempt at doing that.

1. Software automation (or free templates) will not replace your lawyers, or dramatically cut legal spend.

See: Luddites v. Tech Utopians. New market entrants in technology have a tendency to come out with guns blazing, promising their ability to cut out enormous amounts of waste as reason to adopt them. Sometimes they’re telling the truth. Other times it’s well-calculated hyperbole.

Virtually every serious automation tool that has emerged with “cut huge amounts of legal spend” as its primary selling point has evolved into a tool for lawyers. Why? Because, contrary to some popular opinion (and marketing talk), good lawyers really aren’t charging hundreds of dollars an hour to just fill in numbers or check off boxes. Good tools are very helpful for making lawyers/firms more efficient, and you want lawyers who use those tools, but a piece of software isn’t going to replace your lawyers any more than a piece of software will replace your software developers.

Yes, there is form-filling and box-checking ripe for automation, but it’s not nearly as large of a percentage of legal spend as some let on; and the low-hanging fruit is already eaten by software like Clerky or Ironclad.

2. Handling it yourself won’t save you legal fees.

I could write an entire book listing all the “hold my beer” moments I’ve encountered with someone on a management team thinking that they were wisely saving legal fees by taking an issue into their own hands, and it then predictably blowing up in their faces.  Part of it boils down to simple sloppiness. Other times it’s a clear case of someone not knowing what they don’t know.

There’s a related dynamic here to the first point about technology companies overstating their ability to cut legal spend. Anyone selling anything (a product, a service, themselves) has to justify it somehow, and “those damn lawyers” are a great bullseye. A COO / CFO wants to justify his salary, and an easy way to do that is by claiming to ‘save’ you legal fees via DIY legal work. You’re not saving anything. You’re magnifying your fees (cleanup is $$$), but deferring them temporarily.

3. Quickly hiring an “in house” lawyer won’t save you a dime.

CEO: “We’re thinking about hiring an in-house lawyer to save some legal fees.”
Me: “Great. What’s his/her starting salary?”
CEO: “$95K”
Me: “Going to be complete shit, and will cost you 10x more long-term.”
CEO: “What? That’s more than some of our execs make.”
Me: “Senior lawyers worth having won’t even talk to us if we’re recruiting with less than $200K. And our lawyers have fantastic work-life balance. You’re recruiting in the same legal talent market I’m in. You really think you found some magic button that cuts the market rate in half?”

Look, I get it. Good lawyers are expensive. Really good lawyers are even more expensive. Fact: Talent is expensive. Everywhere. Make it incur three years of opportunity costs (law school) and a small mortgage (about $200-225k for law school, all in) before it can hit the market, and it gets a whole lot more expensive. 

Last time I checked a solid software developer will cost you six figures in salary; ignoring equity. And ‘coding’ mistakes are 10x more fixable, and potentially less costly, than legal mistakes. It is absolutely the case that a small portion of the tech community arrogantly believes that engineering talent is the only talent really worth paying for. Good luck with that.

I’m not trying to defend what lawyers make here (I don’t need to), but what I am saying is hiring lawyers has the exact same talent market dynamics of hiring any other kind of professional.  So you say you’ve found a lawyer willing to work for a lot less. Congratulations, you caught lightning in a bottle; found a rupture in the space-time continuum.

Or you just found a lawyer completely lacking in the experience/skillset needed to actually replace the work outside counsel (including a set of specialists) is doing for you. There is definitely a time to hire a general counsel, but for it to actually make sense mathematically and not result in extremely expensive mistakes, it’s usually much later in the company’s history than you think. Past “startup” territory.

4. Flat/fixed fees don’t “align” incentives with your lawyers. They lead to rushed work and poorly negotiated deals. 

Take two law firms that charge you the exact same amount to close a deal: one firm bills by the time they actually worked, the other on a flat fee. The flat fee firm is rewarded for (i) not negotiating deal terms, (ii) delegating to inexperienced staff who are “cheaper” (to them), and (iii) working off of rigid rules/checklists that can be automated, instead of flexibly assessing the context. In other words, flat fees incentivize lawyers to rush their work, which is dangerous for high-stakes legal issues where the “client” (often at early-stage an inexperienced entrepreneur) doesn’t know how to fully assess quality.

For more on this, See: Startup Law Pricing: Fixed v. Hourly. Flat fees don’t “align” incentives with your lawyers. They reverse them, often making them more dangerous. For low-stakes, highly standardized work (like formations), fixed fees can be generally benign. For high-stakes and high-complexity work where the “client” doesn’t have the experience to assess quality, don’t reward lawyers for cutting corners.

5. A few real truths about legal spend. 

A. Compensation and specialization drive talent quality. Quality prevents errors, and therefore controls fees long-term.

Fundamentally, two things drive lawyer recruitment (I know, because I recruit for E/N): compensation and quality of life. Very large firms generally have terrible quality of life for their lawyers, for a number of reasons too complex to discuss here. But that’s why large firms have to pay their lawyers the most.

In-house positions and boutique firms are recruiting pipelines for what I call “BigLaw refugees”; talented lawyers looking to still get paid well, but take a moderate pay cut (sometimes) in exchange for the ability to keep their marriages in tact, and their kids out of therapy. But as discussed above, to get the full-time attention of those lawyers, even with great work-life balance, you still have to pony up in amounts virtually no true startup can afford. That’s why outside counsel (‘fractional’ lawyering) is valuable.

And working with lawyers who specialize in emerging tech/VC work will ensure you’re paying for talent experienced in the kind of legal work you actually need. See: Startups Need Specialist Lawyers.

B. Law firm “overhead” increases legal spend above base lawyer compensation, but enables scalability and quality. 

On top of the money paying a particular lawyer’s salary, you have the ‘institutional overhead’ of the firm that employs the lawyer. For a deeper discussion of law firm overhead, see: Startups Scale. Solo Lawyers Don’t. 

Companies who think only large firms with the highest rates have the best lawyers (compensation) are ignoring the interplay of overhead and compensation. If you cut overhead intelligently, you can still pay lawyers very well, but at lower rates to clients. The issue is how much overhead to cut out.

Institutional overhead, properly structured and right-sized, is not wasted money any more than the ‘overhead’ (on top of salaries) of any company is wasteful. In law, it enables recruitment, technology, training, staff, and other infrastructure that turns a set of lawyers into an integrated legal services provider, with bandwidth that can be optimized to keep work moving.

Think about what type of company you want to build long-term, or at least expect to be for the next 5 years, and ensure you engage a firm with the right institutional infrastructure (overhead) to serve that company. Very very large firms are designed for unicorns, and require the most ‘infrastructure,’ and therefore overhead.  In fact, the majority of what you pay large firms is paying for infrastructure. Are you planning to be a unicorn?

We are quite honest in saying that, as a high-end boutique firm, our target client is looking to (realistically) exit at under $300MM. We don’t work for unicorns; nor do we try to.  But we also don’t work for small businesses hoping to sell for a few million.

We pay our lawyers compensation that is highly competitive with large firms, which (again, a talent market) ensures quality. Our lawyers also bill about 25% fewer hours per year than BigLaw lawyers, which improves their quality of life (helps recruiting/retention).  But because we have dramatically lower institutional overhead, our rates are lower; although nowhere near the lowest.

In my experience, the size of your Series A round is usually a pretty good indication of the type of company (exit size) you’re trying to build; companies truly going for unicorn status raise much larger rounds. Pre-Series A, the majority of serious tech companies require some accommodation to manage their legal budget; no matter how efficient their lawyers are.

If Post-Series A, your company’s legal bills still seem completely unmanageable, that’s often a good indication that the law firm you hired is too big for what you’re building (non-unicorn-track using a high-infrastructure unicorn law firm); assuming your expectations on what the bill should be simply aren’t unhinged. Remember, small firms can have very high quality lawyers, because they aren’t paying them less. They just have a leaner infrastructure designed for non-billion-dollar clients.

C. Flexible pricing / payment from a quality firm is 1,000 times better than “going cheap.” But be realistic about the budget. 

If you get anything from this post, it is this: good, scalable legal counsel costs real money, like any talent. There is no magical software, recruiting strategy, or template on google that will get around that. Anyone who thinks they are cheating this rule, and have somehow found bargain-basement counsel that works, is just not yet hearing the ticking of the time bomb they’ve turned on in their company.

The absolute best strategy for engaging serious legal counsel, but not going bankrupt on legal fees is to ensure that:

  • you’re working with lawyers who have the right specialization for what you need;
  • at the right quality level, and with right-sized overhead for the scalability you need; and
  • who will flexibly work with you on budget/payment at the very early stages.

Law firms who specialize in emerging tech work are not new to the challenges of very early-stage startups trying to manage a legal budget; at all. It is deeply engrained to each lawyer’s expectations. And there are a lot of levers that those firms can and will pull for clients they want to work with: discounted fees, deferred fees, equity arrangements, etc.

The key part is “clients they want to work with.” They are selective, because they have to be.  Serious law firms are not in the game to work on mickey mouse fixed-fee or discounted projects to eternity; nor can they afford to be. They do that to scale down for valuable prospects with the right potential lifetime value (LTV) as clients, but who need help when the budget is slim. That’s why any early-stage, limited budget company that approaches a serious law firm should be ready to “pitch” their company to the firm.

For high potential companies, great tech/VC lawyers will be flexible on budget and payment as long as the founders are reasonable in their expectations. And the best way to be reasonable is to follow the points in this post. Accept that you need good legal talent, badly. Accept that it costs real money, and that you likely can’t afford the full cost up-front, and that’s normal.  If you’re as good as you hope you are, you will find a way to navigate that reality.