This post is part of our new “Lifecycle of a Startup” series where I will, together with my colleagues, write about issues affecting startups at all stages of their lifecycle. There is no better place to start than at the beginning of the lawyer-client relationship, where I pull back the curtain on law firms and tell you how to get the most out of this important relationship. Here are five important questions that any startup should ask a prospective law firm.1) Do you work extensively with startups?
It is critically important to a startup that the law firm (and the particular lawyer) works with startups. The law we apply is the same, but the way we work with startups is fundamentally different than with large companies. Startups require that lawyers respond quickly, work efficiently, and deliver answers that balance risk and cost in a manner that makes sense for a startup. And unlike large companies with in-house legal staff, we must become “part of the team” to understand the business so that our answers make sense from a business perspective. Finally, you don’t want your lawyer “re-creating the wheel” and trying to draft form documents. Lawyers that work extensively with startups have “off the shelf” forms that either work in most situations or can easily be adapted.
2) Are you a “full service” law firm? (You’ll be surprised to find out why you should care.)
“Full service” means that the law firm has lawyers working in all the practice areas where a startup is likely to need help. For startups, that normally means corporate, intellectual property (including licensing/commercial transactions and the ability to write patents and trademarks), immigration, tax, employment/labour, employee benefits and litigation. Make sure that the law firm covers these areas.
This is important for a couple reasons. The first lawyer you engage with is likely to be a corporate lawyer. But soon after you will have more needs, even needs that might seem remote now. For example, although most startups have no intention of suing anyone and think they don’t need litigation expertise, there is always a possibility that someone else will threaten to sue you. As a startup, you are going to want to dispose of this as easily, quickly and cheaply as possible. I just walk down the hall and ask one of my litigation partners and get a quick answer. But if your firm doesn’t have this experience, you’re stuck with either having to rely on your current lawyer (who is not a specialist) or having to consult with another firm, which is time consuming, expensive and they’re not likely to care too much about disposing of your issue “as easily, quickly and cheaply as possible.”
Also, law firms are a business and volume matters. The more work I do for a startup, the more flexible I can be on billing. The law firm you called in my litigation example above is not going to be flexible because they know this is the only work they will do for you, so there is no long term alignment of interests.
There are a lot of great lawyers at boutique law firms, and this solution works for some people. But in my experience, after having worked at many different types of firms (big and small), startups benefit from a full service firm.
3) Are you the partner that will be doing my work?
Some partners at law firms, especially Silicon Valley law firms, are really full-time business developers that do not practice law. As someone said to me once, as a startup you meet these partners twice – first at the initial pitch meeting, and second when you are about to fire the law firm and they want to take you out for lunch.
If you meet a law firm that trots out one of these big name partners, ask the person “Will you be the person doing my work? When I have a question, will I be calling you directly?” The answer invariably will be “no” or some carefully crafted variation of “no.” Make sure you know and are comfortable with the partner who will actually be doing your work and get references for that person (see below).
On a related note, if you want to get the best legal advice in the most cost efficient manner, make sure you have a bat phone to the partner. You want to have partners (or senior lawyers) answering your questions and doing more of your work than junior lawyers. This is inside baseball folks: It does not lower your cost to have most of your work done by junior lawyers, no matter how many times people tell you otherwise.
At a law firm this is called “leverage.” Law firms with high leverage tend to have 3+ associates for every partner. This means the partners can bring in lots of business and farm it out to all of their associates. These law firms tend to be more profitable (and consequently have higher layoffs during down times, which is bad for consistency on your team). Law firms with lower leverage tend to have more partner and senior lawyers handling the work, and tend to be less profitable (and consequently have lower turnover during down times). Ask your law firm what their leverage ratio is – lower is better for you.
There are many things that can and should be done by junior lawyers and paralegals, but if a junior lawyer is negotiating your term sheet with investors, call Houston because you have a problem.
4) How much will this cost and are you flexible on billing?
Cost is obviously of paramount importance to a startup, but the pricing is somewhat opaque because lawyers bill by the hour for most things. This is an area where startups need to make a judgment call and talk to other clients who work with the particular lawyer/law firm.
Cost generally is a function of two variables: hourly rate and efficiency.
For hourly rates, ask the partner for his or her firm’s rate sheet. Remember that the highest hourly rate does not equal the best lawyer, and conversely the lowest hourly rate does not equal the worst lawyer. You need to strike a balance – find a full service law firm that has lots of resources and works extensively with startups, but one that won’t bankrupt you.
Efficiency is harder to gauge. Remember that more important than hourly rate is the total cost of a particular task, which is hourly rate x amount of time is takes to do something. Generally speaking, things will take less time if you work with more experienced lawyers rather than junior lawyers, and work with lawyers that specialize in working with startups and early-stage companies. The best way to get a sense of this is to call references and ask the question directly.
Also, many law firms will defer billing for some period of time. Make sure to ask if the law firm requires equity to defer billing (plug: we do not). Deferred billing can be dangerous, however, because it gets a startup locked into a law firm with high billing rates, and the bill will always come due at some point. So it’s much better in my opinion to find efficient lawyers at reasonable rates.
5) Can I call your references?
This should go without saying – if you are hiring a lawyer other than on a personal referral, call or email references (or at the very least read references on LinkedIn or other posted references). Ask about all of the things I listed above. You’ll be surprised what you learn. Be sure to talk to their entrepreneur clients (it’s also a great networking opportunity for you). Ask how responsive the attorney is, what kind of work they’ve done for them, and what kind of strategic and business insight the lawyer has in addition to technical legal knowledge.
Matt Bartus is a Silicon Valley-based lawyer who represents startups and emerging growth companies. This post was originally published on Matt’s blog, A View from the Valley. It is republished here with permission.
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