| Upfront disclosure: I am one of the founders of LawGives, an online legal marketplace focussed on fixed fee services. I used to work at DLA Piper as a tech / IP lawyer. Opinions are my own. As part of our work with LawGives we've helped hundreds of entrepreneurs find legal help with business and immigration matters. In my experience, there are basically three ways in which companies go about dealing with their legal work at the startup stage: 1. Do it yourself Many founders start out using a service like LegalZoom to take care of basic legal needs. The price point is attractive but the process is completely automated. While DIY solutions may be a good option for some people, there are a couple of caveats to be aware of: - The actual cost, once you finish going through the automated process, is typically higher than advertised. (For example, a LegalZoom incorporation is marketed at $99, but the actual cost once you are done is usually much higher.) - Many of the documents are not tailored to the typical startup situation. (For example, typically the number of units / shares authorized in the corporate formation documents is by default set to a low number, which becomes a problem when the company raises money.) This leads to problems down the road, often forcing companies to redo (part of) the incorporation work, at significant cost and at an inconvenient time (when fundraising). - No lawyer is involved throughout the document automation process. As a result, the founders remain unaware of key risks (often depending on the specific activity the company is engaging in) which would have been easily picked up by a lawyer. Examples include picking a corporate name that is already trademarked, pursuing a business model that has significant implications from a regulatory perspective, and choosing the wrong kind of legal entity type. 2. Use a big law firm At the other end of the spectrum, there is the option of going with a big law firm. Many of the companies that we have interacted with end up going this route: - You are dealing with well-trained lawyers who have deep expertise in their practice area. These lawyers will be able to identify key risks easily, and will typically flag them early. We've interacted with lawyers at DLA Piper, Cooley, Fenwick, Wilmer Hale, Dorsey and several of the other big firms out here, and quality is generally high. - These firms will often offer deferred fees. This means that you do not pay your legal bill until a certain trigger happens, usually raising a certain amount or doing a priced round. This option is attractive for clients who have yet to raise money. - However, deferment comes at a cost: we've seen big firm legal bills for incorporation and basic documents that range in the 10 to 20k dollar range. This may not matter for companies that raise significant amounts of money following a deferment. Other companies prefer to pay upfront, and often end up paying less than a quarter of the aforementioned price. - Big law firms will often ask for equity in the company. We’re not fans of this model, as it may affect (or seem to affect) the independence of the firm in relation to the client. In addition, it is costly to give up equity, and there are enough big law firms out there who will proceed (and offer a deferment) without requesting equity. However, it is fairly typical for big law firms to ask for this, so it’s good to be aware of it. You should feel free to push back, if asked. 3. Use a solo attorney / small law firm A middle ground between the do it yourself approach and going with a big law firm is to look for a good solo attorney: - Many big law firm attorneys leave their firms for one reason or another, and start offering their services to clients directly, at rates that are significantly lower then the big law firm rates. - The client still gets the benefit of big law firm expertise, given that the lawyer was trained there and saw a wide range of legal issues, from the complex to the mundane. - Solos usually do not have the financial capacity to offer deferred fees, which means that the client pays immediately. This may be a showstopper for some companies. If the company has the capacity to pay, it is generally much cheaper to pay upfront (in our experience, often 25% of the big law firm rate). - Solos are more amenable to alternative billing models: flat fee services gives a high degree of price certainty, which many clients prefer over the more uncertain hourly billing model. Not all services can be priced like this, but many of the services that you are likely to need at this point can be. - Solos can also - in a later stage of the business - act as an interface with a big law firm. For example, we've seen many companies work with solos, and engage a big law firm at Series A. At this point, the solo acts almost as an in-house counsel, making sure everything goes smoothly and keeping an eye on the bill. -- Recap: - Doing it yourself is tricky; thread carefully.
- Big law is attractive if you can get a deferred fees, but you will end up paying more. Avoid giving up equity.
- A solo or small firm with startup experience is a great way to start building your legal team and keeping cost down. These are some quick thoughts which I hope are helpful. In case it's useful: LawGives: https://www.lawgives.com/l/5p
LawGives startup packages: https://www.lawgives.com/l/5q
LawGives guide on starting a business: https://www.lawgives.com/l/36
My twitter: @digitallawyer |
If that should happen to you, simply refuse. That's not worth it no matter what. You're basically asking for having a conflict of interest just when you need your lawyers most, which means you'll have to bring another set of lawyers in.
And nothing will increase the bills faster than two sets of lawyers haggling over different ways to split the same hair.
I agree with all your advice, this is one of those comments that you should print out and nail to the wall over your desk if you plan on incorporating in the near future.