Buddying Up With Lawyers- Your Experiences?

David Gold

October 10th, 2013

Every Startup needs its counsel, not just for formation purposes, but feedback on the business model from a regulatory/legal standpoint.  I know every entrepreneur and their mother advocate some sort of equity agreement in exchange for legal counsel, but I've never been down this path and am assuming that finding top notch legal service, one must get their lawyer to believe in you first and foremost before even bothering with an equity play in exchange for services.

Does anyone have any best practices/experiences to reinforce or refute my assumption??

John Wallace President at Apps Incorporated

October 10th, 2013

I'm cautious about giving up equity for legal advice. First, I've found that it is relatively inexpensive to find good, occasional legal advice (formation, contracts, regulatory/compliance, patents). Secondly, the skill set for the expensive things like litigation are different than the more common day-to-day expertise that I can get at reasonable cost. Third (and maybe most importantly), I've worked with attorneys that looked good at the start but instead were better at deal killing that company building. I could see giving up equity to a lawyer for a product that played in a regulatory area provided the attorney was a recognized expert who could open up doors by leveraging their connections, in addition to their guiding the product design to satisfy that segments specialized needs. People with equity (and therefore control) need to be structurally essential to the business.

Anonymous

October 10th, 2013

This is a great question, David. We have an excellent relationship with our attorney (RK Adler, in case anyone is looking for a fantastic, flexible and very startup-friendly attorney in NYC). I personally have a huge bias *against* any sort of equity relationship with a law firm. Frankly I think it borders on unethical, so I flatly denied that to any attorney who asked. My relationship with Randy Adler is based on mutual respect, as opposed to their firm having an explicit financial interest in our success. That said, we were able to negotiate a really outstanding deferral deal with them, based on their belief in our market, solution, and chances for execution. Happy to discuss more offline if you wish.

Russ Wallace Managing Director, SF at Prolific Interactive

October 10th, 2013

I used to work at Gunderson, so I can give you the perspective of a Valley law firm. Here are the things they don't want you to know:

-It's a forms-driven practice. Most of what they do is change the names on pre-existing docs.
-They are all (Gunderson, Wilson Sonsini, Fenwick, Cooley, etc) willing to defer fees, usually up to $15k. This doesn't mean you don't have to pay, it just means you don't have to pay until you get funded.
-They'll all offer 10-20% discounts on fees for the first year
-Equity for legal work is definitely unnecessary. If a firm wants to invest, they'll ask for warrants. Up to you to give them.

That all being said, when you go out for fundraising, it really helps to have a well-known firm as your counsel. The docs you use, and your corporate book, will all look familiar to the VCs during diligence. Having a no-name small firm is likely to run up the legal bills on your financing and can sometimes kill the deal if your firm didn't know what they were doing. Or they can over-lawyer the financing docs because they don't understand industry standards. Basically, you want no surprises, so go with a firm everyone has heard of.

If you need legal advice because it's part of your business model, your best bet is to become an expert yourself. Second best bet is to get an attorney as a co-founder. You don't want to pay as you go for something that's essential to your business model.

Last comment: don't ask lawyers for business advice. They're terrible at it, because they're trained to be risk adverse. A lawyer understands rules and risks, not strategy and profit. No matter how much a lawyer says he can offer business advice, never pay for it; his hourly rate is only worth his perspective on things he's trained to understand.

Joseph Galarneau Founder and CEO at Mezzobit, creating transparency and control for Internet data

October 10th, 2013

I had a similar issue with a legally intensive business model, so I sought out a cofounder with a legal background who was interested in doing more than just being a lawyer. The best attorneys have good business skills, as well, and can help with business development, investment pitches, etc. It worked pretty well for me. Alternately, I know of some folks who are "virtual GCs" for start-ups at much lower rates than you'd get going with a brand name law firm. When you go to close a deal, it's probably best to bring in a Gundersen, Wilson Sonsini, Cooley, etc., but up until that point, nearly all work can be done internally. I'd be happy to connect you with my GC co-founder if you'd like to bounce some ideas off him.

Joseph Galarneau Founder and CEO at Mezzobit, creating transparency and control for Internet data

October 10th, 2013

I'd also add that FounderDating does a poor job of providing tools to connect founders with other potential cofounders with legal backgrounds. I asked for this feature and the request was rejected. You have to manually sort through people with JDs. I ended up locating my cofounder external to FD.

Rob G

October 14th, 2013

David, i would double Russ W's comments and add that if you don't have experience yet managing lawyers then try to find an advisor or team member who does.  Lawyers need to be managed and equity/ownership can make that more difficult.  By definition as an entrepreneur you are a risk taker.  Lawyers, as Russ pointed out, are risk averse, often to excess.  Also remember that for a top tier firm $15k will get burned in less than 50 hours of work and that is for a Jr. person. with someone on your team/board experienced managing lawyers you can work with fixed price 'projects' to better manage your costs. Don't forget, lawyers are trained and get paid to argue...

David Gold

October 10th, 2013

"People with equity (and therefore control) need to be structurally essential to the business."
- Great point John.  My product is in the securities/financial space, so the structure is largely based on regulatory compliance.

Alex Murray

October 10th, 2013

If you can sell your team and the vision of your startup, the top law firms should defer ~$15K in fees until you get funding. Perkins Coie will ask for 1% equity, but others won't. That's been my experience. Alex

Eugene Osovetsky Software Engineer and Technology Entrepreneur

October 10th, 2013

I can tell you my experience with lawyers in the Seattle area around 2008. Me and my cofounders met with all of the top corporate law firms in town that advertised themselves as catering to startups. We had little more than a plan and a very basic product prototype (but a reasonably strong team - ex-Microsofties, a founder with a successful exit, etc.) To my surprise, almost all firms offered some sort of a deferred deal after hearing our pitch, but Wilson Sonsini really stood out as the best choice for us. As a way of vetting us, they referred us to 4 top VCs in town to "get their opinion" (of course this established valuable VC relationships for later on), and then made us a really great deferral offer, substantially better than the other firms (we still had to give them equity of course). They continued to provide top-notch service throughout our relationship (not to mention an incredible number of further investor intros), and never put any pressure on us to pay. So I guess the lesson is - don't be afraid to go to the top legal firms, and do shop around. (I do think, though, that we over-used our deferred legal hours somewhat - if I had to do it again, I'd be much more careful about what I'd go to the lawyers with at the initial stages; In hindsight it seems that a lot of things could have been done with much less involvement from them, saving valuable hours for later on when they're truly needed for complex deals).

Mike Duchen Head of Business Development at Product School

October 10th, 2013

Hi David, Jason Mendelson and Brad Feld do a great job sharing their insights around working with lawyers in their book: http://www.feld.com/wp/archives/2011/07/venture-deals-be-smarter-than-your-lawyer-and-venture-capitalist.html Pretty sure they have an updated version but would definitely check it out, hope it helps! Mike