Categories: Startup Tips
Busting Myths about Startup Lawyers
Let’s be honest, if this is your first startup (or even your second, maybe your third?) your interaction with corporate lawyers may be limited to television shows like Suits, or The Good Wife, or Better Call Saul. All very entertaining, but not really a great primer for understanding your relationship with legal counsel.
Over the years we’ve come across a lot of misconceptions about what it really means for a startup to be working with a lawyer. Here are four myths ripe for busting:
I’ve Got this Friend that’s a Lawyer… (the Buddy Myth)
Looking to your personal network for different connections, insights and service providers can be a great and powerful tool. But one that should be used cautiously, as it is a double edged sword. Good personal relationships do not always lead to good professional relationships.
Before jumping in with both feet, consider whether that friend from high school actually has the skills and experience to provide you with the best legal advice. Do they practice in the area you need? Are they on their own, with a small firm of specialists, or at a larger firm with a broader practice to draw from?
Finding the right legal advisor is not always simple. While you may trust that old friend, or the lawyer that your mother worked with in her business, or the firm that handled your apartment purchase, that doesn’t necessarily mean they are well suited to provide you advice on protecting your IP, or preparing for a venture financing.
We have spent a good deal of time with many clients fixing issues created after they got a “deal” from a friend that was dabbling in an area outside of their expertise.
On the flip-side, don’t discount someone just because you have a previous relationship. Ask the tough questions, but if you have a good relationship with someone skilled in the area you need, that’s a powerful combination.
Do you have a Template for X? (the Precedent Myth)
Also file under, “I don’t need you to do anything, just send me the template.”
This is another complicated myth, as most (all?) lawyers do work from precedents, previous documents similar to the present needs that serve as a basis for the current work. Some firms will also have model documents or templates that they can start fresh each time a similar matter arises. Other firms (our included) even work on taking these model templates to the next level and automating the different variables that may go into preparing a more tailored first draft.
The myth is that these documents are plug-and-play ready, where the non-lawyer user need only drop in a few details and it’s off to the races. In fact, most precedents and templates (automated or not) require a lot more in the way of consideration in order to make sure that the document actually fits your specific needs. The precedent is a great starting point, but unexamined, uncustomized documents can lead to a rude awakening down the road.
As an example, you would never (of course you wouldn’t) simply download a random employment agreement online to use for your business without understanding it. You might accidentally end up with an employment agreement from California, which provides that your employees are “at-will”, terminable without notice, even though they’re employed in Vancouver where that arrangement isn’t legal. If you did, you might have a rude awakening when trying to terminate an employee down the road.
Likewise, taking a standard form shareholders’ agreement or option plan from your lawyer without discussing the provisions could leave you with a document that doesn’t actually do what you expect. I had one client that simply assumed that the template shareholders’ agreement they had put in place (before engaging us, as it happens) would allow them to drag along minority shareholders in a sale. It did not.
The legal advice that you receive with your document can be just as important as – if not more important than – the document itself. If all you’re expecting your lawyer to do is pass you a document from the precedent vault, you’re probably paying too much.
Hourly Rates are Indicative of Value (the Rate Myth)
It is often one of the first questions we’re asked when meeting with a new potential client: What’s your rate? Understandable; this an easy metric to compare and contrast any two different service providers. As a cost conscious startup, you will of course be concerned with how you spend your money, and don’t want to overpay.
But the hourly rate (as the name implies), is only one part of the equation. Until you know how long a project may take, the hourly rate actually tells you very little. The overall estimate is what you should really be concerned with; how efficient the legal team is that you’re hiring, not just the average rate. Hiring a lawyer that understands your business, is experienced in the area you need, and (very importantly) can provide trustworthy estimates, may yield much more financially efficient results than a lawyer at half the rate and a quarter of the experience. This can be true on a time x rate basis alone, without even considering quality and costs to fix mistakes down the road.
Our rates vary from one lawyer to another. Some lawyers are junior, just starting their careers, learning and exploring various areas and aspects of their legal practice, and their rates reflect this. Others are more seasoned experts in very specific, narrow fields, and their rates are commensurate with both the rarity and depth of their expertise. A good legal advisor can focus on billing efficiency to optimize rates and time spent.
When considering your costs from a value proposition perspective, it becomes clear that you’re not just paying for the piece of paper which is generated, but for the thoughtful legal advice (and enhanced understanding) you receive along with it.
Big Firms are Too Expensive (the Size Myth)
I know, this one seems like it’s bound to be true. But its often not.
One reason this myth is so pervasive is that it builds upon the Rate Myth. More than one of my clients has had a non-legal advisor tell them that at a very early stage they should avoid shelling out the big bucks for a large corporate firm, and instead use a one or two person shop for their early corporate work. “That’s all you need right now, wait to pay the big bills until later.”
Seems like a fair comment, except that it isn’t necessarily true. Size isn’t the best indicator of value. You may go with a small shop with lower rates, but if you do, be very careful to make very sure they have the right expertise. Have they been practicing in this area for a good period of time already? Or are they operating on a “take anything through the door”, jack-of-all-trades basis? What may at first seem like a deal can become much more expensive, both based on the Rate Myth noted above, but also on an experience basis. Fixing a problem later can be (and usually is) disproportionally more expensive.
What can happen?
As one example, a client was told a smaller firm would be cheaper, only to later find out that the hourly rate was exactly the same, but that none of the small shop lawyers actually had specific expertise in the project at hand.
In another example (repeated many times), a startup client aiming for a growth trajectory and wishing to seek venture funding had to spend a lot of time (and money) reorganizing their capital structure, because the small firm they originally used couldn’t differentiate between a growth-focused startup, and an small, operating, family business.
Remember, having good legal counsel is part of forming your team. Focus on building a relationship with an advisor that you can trust to provide you with the most efficient service, tailored to your actual needs. In the long run, efficient legal services can save you both headaches and money down the road, and not always by being the lowest sticker price.
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