Several misperceptions exist about the process of hiring and retaining lawyers in the startup world. As someone who has experience as an entrepreneur, a law firm shareholder and senior corporate lawyer, and a legal advisor in the area of IP, I’ve seen it all. I am frequently asked for a second opinion about advice that has been given by lawyers who are seeking to be hired (or who have already been hired) to represent startups.
Here’s 4 tips to save you from a headache and a financial misstep
1. There’s No Such Thing as “Free Time” from Lawyers
Startup entrepreneurs frequently tell me that they have been offered free time from lawyers. Don’t kid yourself–nothing is ever really free. Certainly, no business can survive if a good portion of its product is given away free. With service businesses like the law, it makes even less sense to assume that you are getting “free” legal service because their only product is lawyers’ hours. There is an old commercial that succinctly captures the business model of lawyers: you can pay me now or you can pay me later. Entrepreneurs must understand that your lawyers expect to get paid either now or in the future. Moreover, if the lawyer is willing to defer payment to the future, you must assume that there will be a “risk premium” built into the fee in some manner to ensure that the lawyer is able to generate her expected income.
2. Early Stage Startups May Not Need “Real” Legal Advice
We know from Lean Startup principles that a startup is an organization formed to search for a repeatable and scalable business model. It follows that the legal needs of a startup differ from those of an organization that has already identified its business model. Realistically, there is not much that a new startup can mess up from a legal perspective. Of course, you need to work with your co-founders to establish ground rules for ownership and the like, but there is plenty of advice online that will help you generate the basic startup documentation once you have had the hard conversations. There is also an increasing amount of peer-to-peer guidance available in incubators with mentors at ATDC, Atlanta Tech Village and the like.
3. Examine Your Lawyers Through the Prism of Lean Startup
We know from Lean Startup that if money is spent that does not go to validating and scaling your business model, it is wasted. Every hour you purchase from your lawyers (including discounted hours) includes a sum that goes to supporting expenses that do not provide direct value to clients. If you are OK with paying a premium price for things you don’t use, then go ahead and hire the name brand law firm. But, entrepreneurs seeking to preserve money for operations that create value for their business would be well-served by shopping around for legal services that are more in line with Lean Startup principles. Notably, the lawyers that do not market their services broadly–and, therefore, who can charge less per hour–are harder to find, but a little due diligence can save entrepreneurs substantial money over the long term.
4. Your (Senior) Lawyers are Just Not That Into You
In reviewing the work product of other lawyers, more often than not, I see that smaller clients (like startups) obtain sub-standard legal service from name brand law firms. There are a few reasons for this, all of which go back to the discussion of the law firm business model.
First, young lawyers need training. More sophisticated clients, which typically have in-house legal staff, know this and do not allow young lawyers to show up on their bills. The law firm could either give away the young lawyer’s time for training or find a client who does not object to the young lawyer’s working for them. This means that young lawyers are frequently assigned to startups or other “unsophisticated” clients and the supervising partner (that is, the lawyer you actually hired) does not know the specifics of your business. So even when the supervising partner does provide advice it is often without the context needed. Additionally, the partner who impressed you enough to sell you on their legal services also likely has bigger fish to fry. This means that larger clients get more attention because they result in greater billable hours. Finally, as a startup, your legal work, quite frankly, is likely not that interesting to an experienced lawyer. This is not to say that your business or product is not interesting, but the documents and advice required are old hat to the senior lawyer who has dealt with something similar on multiple occasions. Large clients typically have more challenging issues so once you are in the door of the law firm, the partner that impressed you and garnered your business likely will not be as enthusiastic to jump in to do your work.
I am hopeful that this insider perspective will allow startup entrepreneurs to make better decisions when hiring lawyers to represent them–or at least guide them to ask better questions. As noted in the introduction, these issues come up time and again, so there is clearly a need for someone to lift the veil of the legal service model for those entrepreneurs who are not part of the guild but who rely on the guild to provide them with services that are critical to their company’s success.