Post Category → Startup Lawyers

The Race to the Bottom in Startup Law

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

Background Reading:

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

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

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

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

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

Buy counsel’s favor with referrals.

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

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

Squeeze counsel’s time.

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

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

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

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

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

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

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

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

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

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

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

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

The Race to the Bottom.

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

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

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

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

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

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

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

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

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

A Convertible Note Template for Startup Seed Rounds

TL;DR: We’ve created a publicly downloadable template for a seed convertible note (with useful footnotes), based on the template we’ve used hundreds of times in seed convertible note deals across the U.S. (outside of California). It can be downloaded here.

Note: If you’d like to discuss this template or Notes generally, try Office Hours.

Additional Note: this post references a pre-money valuation capped convertible note. For a post-money valuation capped note, see here.

Background reading:

I’ve written several posts on structuring seed rounds, and how for seed rounds on the smaller side ($250K-$1MM) convertible notes are by far the dominant instrument that we see across the country. When SAFEs had pre-money valuation caps, they gained quite a bit of traction in Silicon Valley and pockets of other markets, but outside of SV convertible notes were still the dominant convertible instrument. Now that YC has revised the SAFE to have harsher post-money valuation economics (see above linked post), we’re seeing SAFE utilization drop significantly, though it was never close to the “standard” to begin with; at least not outside of California. For most seed companies, convertible notes and equity are the main options. 

For rounds above $1-1.5MM+, equity (particularly seed equity) should be given strong consideration. We are also seeing more founders and investors who really prefer equity opting for seed equity docs for rounds as low as $500K. The point of this post isn’t to get into the nuances of convertibles v. equity. There’s a lot of literature out there on the topic, including here on SHL.

What this post is really about is that many people have written to me regarding the absence of a useable public convertible note template that lawyers and startups can leverage for seed deals; particularly startups outside of SV, which has very different norms and investor expectations from other markets.

Cooley actually has a solid convertible note available on their Cooley GO document generator. I’m a fan of Cooley GO. It has strong content. But as many readers know, there are inherent limitations to these automated doc generator tools; many of which law firms utilize more for marketing reasons (a kind of techie signaling) than actual day-to-day practical value for real clients closing real deals. Your seed docs often set the terms for issuing as much as 10-30% of your company’s capitalization, and the terms of your long-term relationship with your earliest supporters. Take the details seriously, and take advantage of the ability to flexibly modify things when it’s warranted.

The “move fast and mindlessly sign a template” approach has for some time been peddled by pockets of very clever and vocal investors, who know that pushing for speed is the easiest way to take advantage of inexperienced founders who don’t know what questions to ask. But the smartest teams always slow down enough to work with trusted advisors who can ensure the deal that gets signed makes sense for the context, and that the team really knows what they’re getting into. Taking that time can easily pay off 10-20x+ in terms of the improved cap table or governance position you get from a little tweaking. The investor trying to rush your deal isn’t really trying to save you legal fees. They’re trying to save themselves from having to negotiate, or justify the “asks” in their docs.

As a firm focused on smaller ecosystems that typically don’t get nearly as much air time in startup financing discussions as SV, I realized we’re well-positioned to offer non-SV founders a useful template for convertible notes. The fact that, to avoid conflicts of interest, we also don’t represent Tech VCs (trust me, many have asked, but it’s a hard policy) also allows us to speak with a somewhat unique level of impartiality on what companies should be accepting for their seed note deals. There are a lot of players in the startup ecosystem that love to use their microphones to push X or Y (air quotes) “standard” for startup financings, but more often than not their deep ties to certain investors should raise doubts among founders as to biases in their perspective. We’ve drafted this template from the perspective of independent company counsel. 

So here it is: A Convertible Note Template for Seed Rounds, with some useful footnotes for ways to flexibly tweak the note within deal norms. Publicly available for download.

A few additional, important points to keep in mind in using this note:

First, make sure that the lawyer(s) you are working with have deep (senior) experience in this area of law (emerging companies and vc, not just general corporate lawyers), and don’t have conflicts of interest with the people sitting across the table offering you money. When investors “recommend” a specific law firm they are “familiar” with they’re often trying to strip startup teams of crucial strategic advice. See: Checklist for Choosing a Startup Lawyer. Be very careful with firms that push this kind of work to paralegals or juniors, who inevitably work off of an inflexible script and won’t be able to tailor things for the context. You want experienced, trustworthy specialists; not shills or novices.

Second, be mature about maturity. You’re asking people to hand you money in a period of enormous uncertainty and risk, while getting very little protection upfront. As long as maturity is long enough to give you sufficient time to make things happen (2-3 yrs is what we are seeing), you shouldn’t run away from the most basic of accountability measures in your deal. Think about how bad of a signal it sends to investors if a 3 year deadline terrifies you.

Third, do not for a second think that, because you have a template in your hand, it somehow means you no longer need experienced advisors, like lawyers, to close on it. Template contracts don’t remove the need for lawyers any more than GitHub removes the need for developers. The template is a starting point, and the real expertise is in knowing which template to start from, and how to work with it for the unique context and parties involved. Experienced Startup Lawyers are incredibly useful “equalizers” when first-time entrepreneurs are negotiating with experienced money players. Don’t get played.

Fourth, pay very close attention to how the valuation cap works, particularly the denominator used for ultimately calculating the share price. We are seeing more openness among investors to “hardening” the denominator at closing, either with an actual capitalization number, or by clarifying that any changes to the option pool in a Series A won’t be included. These modifications make notes behave more like equity from a dilution standpoint, allowing more clarity around how much of the company is being given to the seed money.

Finally, don’t try to force this template on unwilling investors. It can irritate seasoned investors to no end to hear that they must use X template for a deal because some blog post, lawyer, or accelerator said so. There is no single “standard” for a seed round. There never has been, and never will be, because different companies are raising in different contexts with investors who have different priorities and expectations. We’ve used this form hundreds of times across the country, but that doesn’t mean there aren’t other perfectly reasonable ways to do seed deals.

Have a dialogue with your lead money, and use that dialogue to set expectations. See: Negotiation is Relationship Building. If they’re comfortable using this template, great. If they need a little extra language here or there, don’t make a huge fuss about it if your own advisors say it’s OK. And if they prefer another structure, like seed equity or even more robust equity docs, plenty of companies do that for their seed round and it goes perfectly fine, as long as you have experienced people monitoring the details.

If any experienced lawyers out there see areas of improvement for the template, feel free to ping me via e-mail.

Obligatory disclaimer: This template is being provided as an educational resource, and is intended to be utilized by experienced legal counsel with a full understanding of the context in which the template is being used. I am not responsible at all for the consequences of your utilization of this template. Good luck.

When Startup Law Firms Don’t Sell Legal Services

TL;DR: Law firms inflate their costs when, instead of selling legal services, they’re actually selling prestige, luxurious offices, fun social events, fundraising connections, and all kinds of other things that aren’t legal services. The emergence of the lean boutique ecosystem is driven by pragmatic clients who just want to pay for highly experienced and specialized legal counsel, not all of that “other stuff.”

Background reading: Startup Lawyers – Explained.

If you want to understand the economics of law firms down to its most essential form, including “emerging companies” law firms that play the startup game, you can look at it this way: the main “costs” of law firms are (a) lawyers/legal talent, and then (b) literally everything else.

Analyzing the direct compensation cost of lawyers/legal talent makes it clear why no serious law firm is ever “cheap.” Serious lawyers with the rare intellectual horse power and experience (Partners and senior lawyers, not juniors) to manage massive non-routine complexity while avoiding expensive “bugs” that can’t be fixed unilaterally (the way code can be), and who’ve gone through 3 years of an over-priced education (did I say that out loud?) costing over $200K all-in, do not work for middle class compensation. Especially not the Partners who keep the whole thing together and manage the highest-level issues.

The core cost of serious legal talent sets a hard floor on the bare minimum a law firm can charge just for delivering the A-players.  Firms lacking the credibility to charge above that floor simply can’t hire the right people, and therefore can’t safely manage the kind of legal work that the top-tier handles. Those firms I refer to, lovingly, as “B-players.” The best software developers don’t work for cheap, and neither do the best lawyers. Some firms try to play games by pushing clients to work mainly with juniors and paralegals in order to save on their compensation costs – called “de-skilling” in the professional world – but the smartest clients see what’s happening and don’t trust their most high-stakes, strategic legal matters to less-skilled people operating on checklists and scripts.

Analyzing the “everything else” in the typical law firm cost structure starts to highlight just why many law firms charge prices that are dramatically higher than the cost of their legal talent. Some law firms, including many who market themselves to startups, are actually selling many things other than legal services. Those “other things” include:

  • Prestige – “We represented Apple and Uber. Using us signals your intent to be the next Apple or Uber.”
  • Extremely expensive real estate (offices), where you can feel amazing about working with lawyers who have such great taste in architecture.
  • Extremely expensive marketing events where you can mingle with other “exclusive” people and signal how amazing you are for working with such prestigious lawyers with great taste in architecture.
  • Support staff who purportedly are there to hold your hand to fundraise, work on pitch decks, talk to investors, etc.
  • Other staff building and managing things that many clients simply don’t need.

How can some law firms charge $750+/hr, and yet at the end of the day only generate “comfortable” professional services margins – nothing remotely close to the kinds of margins that draw in VCs? After paying for their extremely expensive legal talent, they also pay for this “other stuff.” You might say that firms are being wasteful, but eliminating these costs is far easier said than done for the largest firms. At the very highest end of every market, clients expect an enormous amount of polish and velvet rope. Those law firms are status symbols. Ferrari law firms are effectively selling a luxury service, and it takes money to deliver a luxury experience.

When clients ask us what we mean at E/N by a “lean” boutique law firm, we point to the above list. Lean means not paying for all of that other stuff, because many pragmatic clients know they don’t need it from a law firm. What do clients hire us for? Legal services. Highly specialized emerging companies, commercial, and M&A legal services delivered by highly experienced legal talent. When clients peruse our bios, they understand very fast that this is not a roster of B-players. They want to hire that, and not:

Prestige? No client I work with has ever suffered from the delusion that they are the next Uber, and they therefore have no desire to embarrass themselves by trying to use a law firm to signal that they’re a Unicorn. See: Not Building a “Unicorn.”

High-end offices? Please. My clients don’t give two sh**s about what my office looks like, as long as I deliver the goods (legal services).

Fun events? There are enough startup events being thrown by enough people who actually know how to throw events. Too many, some might say. Hard pass.

Fundraising connections? We negotiate and close deals, and help clients avoid being taken advantage of by the money. But there are plenty of other people and resources in the market who are far better, and more cost/time-effective, at helping with the non-legal side of fundraising than a law firm. Smart entrepreneurs know that (i) relying on a law firm to connect you to money sends a really bad signal (paid intros are weak intros), and (ii) more often than not, law firms just connect you to other VCs that they themselves work for and have long-standing relationships with, which means dangerous conflicts of interest. See: How to avoid “captive” company counsel.

We’ve told our clients for some time that they shouldn’t ask us to connect them to investors, for the above reasons; and, remarkably, somehow they still find funding without a law firm holding their hand. Apparently there are other ways to get warm intros to investors than through a law firm. Who knew? Maybe someone should write a blog post (or 30) about it.

The law firm that is super close to your money (investors) is the last firm you want representing you in taking that money, because between you (a single company) and them (a fund with lots of deals/investments and connections) their loyalty will always be owned by an influential repeat money player. Law firms that over-play their connections to investors are unethically spinning a blatant conflict of interest into a marketing ploy, so you’ll ignore the fact that they’re not actually that good at what you should really be hiring them for: high-stakes legal.

Other staff? The other day I heard about a group of lawyers dropping millions of dollars building proprietary software, and after 2 years what do they have to show? Something that looks a whole lot like Clerky, Gust Launch, or Carta. My clients aren’t going to pay me to build something that I can buy for far less money from someone else. We sell legal services. We buy (not build) software. Try to run a professional services business like a VC-backed startup, and you’ll either burn enormous amounts of money, or never ever generate a profit for your Partners, which means you won’t actually have (real) Partners, so you’re a firm of B-players. There are no VC returns in high-end legal. The margins aren’t there. Math.

Do lean boutiques have overhead? Of course. It’s what makes them more scalable and coordinated than solo lawyers. Docusign (we’re paperless), Box (all of our clients get a Box folder to access their files), Knowledge and Project Management systems, and other off-the-shelf tech tools that smart law firms know how to integrate and use, all cost money; so do recruiting and training resources. But not that much. Any serious business has overhead, but boutiques focus on overhead actually required to deliver (guess what?) legal services; not “other stuff.”

I spend a good amount of my time talking to legal tech entrepreneurs, and adopting new tools into our firm. But I don’t burn our fees on rube goldberg tools that offer more techno-BS than actual value to our clients; and therefore aren’t worth their cost.  Come at me with some nonsense about how (air quotes) “machine learning” or analyzing the “data” in contracts (is it “big data” or smaller artisanal data?) is going to DISRUPT highly complex, highly contextualized legal services from top-tier lawyers, and the bucket of water I splash in your face will be ice cold.

That lean focus on not burning money on things that don’t directly promote our end-service is what allows us to take, just as an example, a Partner who was $750/hr in BigLaw and drop their rate to $425, without changing their aggregate compensation, and while allowing them to have far better work-life balance. A win-win for both lawyer and client.

On the work-life balance point, lawyers tend to become much more skeptical of the “other stuff” their firms are paying for once they realize that all the extra overhead is directly tied to why they have to work themselves into the ground (so many hours), instead of being able to go home at a reasonable hour. More overhead means a smaller % of fees going to the actual talent, which means that talent has to work far more hours to make their comp. Again, Math. Lawyers who care about their personal lives don’t tolerate their firms burning money on nonsense. This “rationalizing” (cutting out fat) in the legal market is producing a thriving ecosystem of lean, high-end boutique law firms in various specialties; of which we are one.

We have very close relationships to many lawyers in the “Ferrari” tier of big TechLaw, in many cases because we see them on deals. Most of them intuitively understand that we are not really competing with each other. The highest end unicorn-track clients able and willing to drop $800/hr for lawyers really do expect prestige, gorgeous offices, fun events, and all kinds of other miscellaneous things from their law firm. Ours don’t. We are really selling to different people. There is no way they could run their firm like ours, and there’s no way we could run our firm like theirs. The future of the legal market is a broad ecosystem of varying firm structures catering to a broad diversity of clients with different needs, expectations, and price-points.

Our clients are very pragmatic about what they’re building, and what they want from a law firm. They’re not unicorns or even aspiring unicorns, so they see no need to use law firms that manage billion-dollar deals and IPOs. Selling for $75MM, $150MM, or $250MM is a “win” for them. They also understand that it takes real money to get serious senior lawyers and Partners who can deliver specialized and experienced high-stakes legal services for a scaling tech company. They’re willing to pay for that, but not for “everything else.”

Trust, “Friendliness,” and Zero-Sum Startup Games

Background reading: Relationships and Power in Startup Ecosystems

TL;DR: In many areas of business (and in broader society) rhetoric around “positive sum” thinking and “friendliness” is used to disarm the inexperienced, so that seasoned players can then take advantage. Startups shouldn’t drink too much of the kool-aid. Smile and be “friendly,” but CYA.

An underlying theme of much of my writing on SHL is that first-time founders and employees of startups, being completely new to the highly complex “game” of building high-growth companies and raising funding, are heavily exposed to manipulation by sophisticated repeat players who’ve been playing the same game for years or even decades. There are many important tactical topics in that game – around funding, recruiting, sales, exits – all of which merit different conversations, but the point of this post is really a more “meta” issue. I’m going to talk about the perspective that should be brought to the table in navigating this environment.

A concept you often hear in startup ecosystems is the distinction between zero-sum and positive-sum games. The former are where there’s a fixed/scarce resource (like $), and so people behave more competitively/aggressively to get a larger share, and there’s less cooperation between players. In positive-sum games, the thinking goes, acting competitively is destructive and everyone wins by being more cooperative and sharing the larger pie. Sports are the quintessential zero-sum game. Someone wins, and someone loses. Capitalism is, broadly, a positive-sum game because in a business deal, both sides generally make more money than if the deal had never happened.

The reality – and its a reality that clever players try to obscure from the naive – is that business relationships (including startup ecosystems) are full of both positive and zero-sum games, many of which are unavoidably linked. It is, therefore, a false dichotomy. In many cases, there are zero-sum games within positive sum games. In fact, rhetoric about “positive-sum” thinking, friendliness, trust, and “win-win” is a common tactic used by powerful players to keep their status from being threatened.

For a better understanding of how this plays out in broader society (not startup ecosystems), I’d recommend reading “Winners Take All: The Elite Charade of Changing the World” by Anand Giridharadas, who deep-dives into how, in many cases, very wealthy and powerful people (i) on the one hand, fund politicians/legislation that cut taxes and funding for democratically solving social problems while (ii) simultaneously, spending a smaller portion of the saved money on “philanthropic” or “social enterprise” initiatives aimed at addressing those same social problems, but in a privatized way where they are in more control. The latter of course comes with a hefty share of feel-good messaging about “giving back” and helping people.

The net outcome is that those powerful players direct discussion away from the full spectrum of solutions that may require addressing some unavoidable zero-sum realities, and instead get society to myopically focus on a narrower segment of purportedly “win-win” options that don’t actually threaten the power and status of the elite priesthood. There is much room to debate the degree to which Giridharadas’ perspective is an accurate representation of American philanthropy/social enterprise, but anyone with an ounce of honesty will acknowledge that it is definitely there, and large.

Sidenote: Anand is a clear hardcore socialist, and I’m not exactly a fan, but life is complicated and I’ll acknowledge when someone makes an accurate point. An enormous amount of “save the world” rhetoric is just kabuki theatre to maintain power and keep your money.

While the details are clearly different, this dynamic plays out all over startup ecosystems. They are full of influential market actors (accelerators, investors, executives) acting as agents for profit/returns driven principals, and in many cases legally obligated to maximize returns, and yet listen to much of the language they use on blogs, social media, events, etc. and an outsider might think they were all employees of UNICEF. This is especially the case in Silicon Valley, which seems to have gone all “namaste” over the past few years; with SV’s investor microphones full of messages about mindfulness, empathy, “positive sum” thinking, and whatever other type of virtue signaling is in vogue.  Come take our money, or join our accelerator, or both. We’re such nice people, you can just let your guard down as we hold hands and build wealth together.

Scratch the surface of the “kumbaya” narratives, and what becomes clear is that visible “friendliness” has become part of these startup players’ profit-driven marketing strategies. With enough competition, market actors look for ways of differentiating themselves, and “friendliness” (or at least the appearance of it) becomes one variable among many to offer some differentiation; but it doesn’t change any of the fundamentals of the relationship. Just like how “win-win” private social enterprise initiatives can be a clever strategy of the wealthy to distract society away from public initiatives that actually threaten oligarchic power, excessive “friendliness” is often used by startup money players to disarm and manipulate inexperienced companies into taking actions that are sub-optimal, because they lack the perspective and experience to understand the game in full context.

With enough inequality of experience and influence between players (which is absolutely the case between “one shot” entrepreneurs and sophisticated repeat player investors) you can play all kinds of hidden and obscure zero-sum games in the background and – as long you do a good enough job of ensuring no one calls them out in the open – still maintain a public facade of friendliness and selflessness. 

As startup lawyers, the way that we see this game played out is often in the selection of legal counsel and negotiation of financings/corporate governance. In most business contexts, there’s a clear, unambiguous understanding that the relationship between companies and their investors – and between “one shot” common stockholders v. repeat player investors – has numerous areas of unavoidable misalignment and zero-sum dynamics. Every cap table adds up to 100%. A Board of Directors, which has almost maximal power over the Company, has a finite number of directors. Every dollar in an exit goes either to common stock (founders/employees) or investors. Kind of hard to avoid “zero sum” dynamics here. As acknowledgement of all this misalignment, working with counsel (and other advisors) who are experienced but independent from the money is seen, by seasoned players, as a no-brainer.

But then the cotton candy “kumbaya” crowd of the startup world shows up. We’re all “aligned” here. Let’s just use this (air quotes) “standard” document (nevermind that I or another investor created it) and close quickly without negotiation, to “save money.” Go ahead and hire this executive that I (the VC) have known for 10 years, instead of following an objective recruiting process, because we all “trust” each other here. Go ahead and hire this law firm (that also works for us on 10x more deals) because they “know us” well and will help you (again) “save money.” Conflicts of interest? Come on. We’re all “friendly” here. Mindfulness, empathy, something something “positive sum” and save the whales, remember?

Call out the problems in this perspective, even as diplomatically as remotely possible, and some will accuse you of being overly “adversarial.” That’s the same zero-sum v. positive-sum false dichotomy rearing its head in the startup game. Are “adversarial” and “namaste” the only two options here? Of course not. You can be friendly without being a naive “sucker.” Countless successful business people know how to combine a cooperative positive-sum perspective generally with a smart skepticism that ensures they won’t be taken advantage of. That’s the mindset entrepreneurs should adopt in navigating startup ecosystems.

I’ve found myself in numerous discussions with startup ecosystem players where I’m forced to address this false dichotomy head on and, at times, bluntly. I’m known as a pretty friendly, relationship driven guy. But I will be the last person at the table, and on the planet, to accept some “mickey mouse club” bullshit suggesting that startups, accelerators, investors, etc. are all just going to hold hands and sing kumbaya as they build shareholder value together in a positive-sum nirvana. Please. Let’s talk about our business relationships like straight-shooting adults; and not mislead new entrepreneurs and employees with nonsensical platitudes that obscure how the game is really played.

Some of the most aggressive (money driven) startup players are the most aggressive in marketing themselves as “friendly” people. But experienced and honest observers can watch their moves and see what’s really happening. Relationships in startup ecosystems have numerous high-stakes zero-sum games intertwined with positive-sum ones; and the former make caution and trustworthy advisors a necessity. Yes, the broader relationship is win-win. You hand me money or advice/connections, and I hopefully use it to make more money, and we all “win” in the long run. But that doesn’t, in the slightest, mean that within the course of that relationship there aren’t countless areas of financial and power-driven misalignment; and therefore opportunities for seasoned players to take advantage of inexperienced ones, if they’re not well advised.

Be friendly, when it’s reciprocated. Build transparent relationships. There’s no need to be an asshole. Startups are definitely a long-term game where politeness and optimism are assets; and it’s not at all a bad thing that the money has started using “niceness” in order to make more money. But don’t drink anyone’s kool-aid suggesting that everything is smiles and rainbows, so just “trust” them to make high-stakes decisions for you, without independent oversight. Those players are the most dangerous of all.

How Paralegals and Junior Lawyers Can Hurt Startups

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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