A startup’s 10-point guide to using lawfirms
I met with my attorney, David Holstein, managing partner of Bousquet Holstein PLLC, yesterday. The meeting reminded my how important it is to have a good business lawyer, particularly as a startup. Bousquet Holstein offers StartFast portfolio companies mentorship sessions (pro bono advice) during the program, as well as a fixed-price menu of discounted legal services. This is a godsend for the cash-strapped startup relative to the normal lawfirm’s legal fee-per-hour regardless of outcome. David is a great attorney and has added immeasurable value over the years as I’ve started, funded, built and exited my various ventures. In reflecting on how well this relationship has worked over the years, I put together these 10 points which will let you, as a startup cofounder, get the most out of your relationship with your attorney.
- Don’t wait. Get a good startup attorney before you create a mess. That means, before you agree to a structure with your cofounders. Starting a company without a good cofounders’ agreement can lead to some really frustrating times. Check this out. Generally messes just grow with time. It’s always easier to avoid a mess in the first place than to try to clean one up later.
- Selecting an attorney. Have an initial meeting with your prospective attorney. Ask questions and be specific. What background does the attorney have in the subject area of your startup? Do they specialize in business transactions? What is their relevant startup experience? As you discuss your startup, does the attorney lean in to learn more (indicating sincere interest), or fold his/her arms or check the time? How comfortable do you feel in their presence? Do you feel like adding them to your team? Here, here, and here are some more good points to consider and questions to ask.
- Learn the basics yourself. Not to do it yourself, but rather so that you’re not asking the attorney to give you a tutorial. Is your startup making hundreds of dollars per hour for your time? Probably not yet. Well then read a book! If you’re getting started, read StartFast! If you’re raising money, read Venture Deals. Save yourself the embarrassment and expense of walking into your attorney’s office unprepared. Do your homework, have your specific questions ready and know what you’re asking the attorney to do for you.
- Billing. Most attorneys operate on the “billable hour” system. Clients sign an Engagement Letter, authorizing the attorney to charge clients hundreds of dollars per hour regardless of the outcome of the work. Startup-friendly law firms offer a variety of payment options including capped, deferred, discounted and fixed fees. Some may be interested in taking a small equity stake in their clients in lieu of cash some or all of the legal bills. These firms hope that the startup will use them for lucrative venture financing deals or a merger, acquisition, intellectual property transaction, litigation, or IPO. Startup law is like venture capital – the rare wins pay for majority of clients that don’t pay off. Do they offer a fixed price menu for common transactions? Be clear up front on what you will and will not pay for, how much, and when you’ll pay. Most of these are open to some negotiation.
- Use published documents. There are several law firms that have open-sourced the documents that startups need for most basic legal transactions. Sites like TechStars, Y-Combinator, SeriesSeed.com, Cooley GO, WHLaunch, Founders’ Workbench, Start-Up Forms Library and others enable entrepreneurs to incorporate, secure early-stage financing, hire employees and compensate them with stock options. StartupCompanyLawyer.com answers many frequently asked questions. Use these resources to educate yourself, and then work with your attorney with the templates as a starting point.
- Don’t get hung up on big names. I’ve known several founders who did most of their own legal work because their lawfirm charged $700 per hour. They chose a big name firm because of the prestige (perhaps the ego-trip) of being represented by a firm on one of the startup short-lists. Is their legal work any better than a smaller firm? Are they providing introductions to clients, investors, or are they just your lawyer? Wouldn’t you be better off spending that money on getting more customers?
- I am a human. There are startups in the space that try to replace the attorney entirely. Shake is a mobile platform for simple legal agreements like freelance consulting contracts. Clerky provides forms for incorporations, convertible notes and employee agreements and such. Docracy crowd-sources legal documents,while Rocket Lawyer provides documents with instructions plus the option to consult remotely with an attorney. I recommend using these sites much like other sources of published documents, as education and a starting point. There’s still no replacement for a live human lawyer who understands your business and has your back. Don’t be the legal equivalent of a patient who tells his doctor what he learned on the internet about the treatment needed.
- Deal Maker. Make your attorney a deal-maker, not a deal breaker. Attorneys get a bad rap. They’re always getting blamed for making a transaction take longer than it should. In reality, many times the root cause of the delay is that the clients get the lawyers working on a deal before they have a meeting of the minds on the terms. Consult your attorney to help you come to a deal with the other party – before you start papering over the transaction with documents. A non-binding Term Sheet can be useful to communicate what you intend with the other party. This in turn becomes the architecture for the legal contracts culminating the deal.
- Avoid Litigation. Many disagreements can be predicted. Attorneys are great resources at structuring agreements so that there is a way out without litigation (one party suing the other). Lawsuits cost time and money in quantities most startups can’t afford. A lawsuit will stall your financing, and is a common cause of death in startups. Avoidance of future regret – a great reason to work with a qualified attorney on every deal – especially with cofounders, investors, partners, and contractors.
- Specialists. You need a good business lawyer with startup experience. There are also times you’ll need specialists, like intellectual property lawyers, labor lawyers, litigators, and subject matter expert attorneys as well. If you’re a drone, medical device, or bitcoin company, you’ll need a lawyer with knowledge of the evolving regulations in your field. If you need venture capital introductions, you’ll need a firm that does a lot of venture deals. In you’re doing a merger, you may need a lawyer that does a lot of M&A. Don’t expect your generalist attorney to be the expert in every specialty. They should be able to refer you and promise not to double-bill hours looking over the other attorney’s work.
I hope that helps. Have a happy holiday and a brilliant New Year!
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