Hacking Legal Fees

Startup life often boils down to a few key moments. From incorporation to first hires, securing investments, key partnerships and hopefully a big pay day down the road. What all these moments have in common is that they involve lawyers.

I have worked with some great lawyers over the years but I have never once enjoyed paying a legal bill, even reasonable ones. Since legal bills are unavoidable here are some tips for hacking them down to size:

Choose the right lawyers: while your cousin Vinny might have a small practice and charge a low hourly rate, he’s not the person you want as legal counsel. Only work with firms that have a specialty in technology (especially VC-backed) businesses. Only work with firms known in the industry. Ones that have lots of recent deal experience.

Often these firms are not the smallest or cheapest in terms of hourly rates but they will save you boatloads vs more generalist firms because they know how things work and they know the people on the other side of whatever deal you are trying to close.

Set yourself up properly: while you can incorporate yourself, don’t. Get it done right. You’ll save fees in the long run since your structure and minute books will be subject to diligence in any financing or sale transaction.

Join an accelerator: many accelerators have arrangements with law firms to offer free or cheap legal services. We have this at Founderfuel. Many others do too.  Dine out on this to find the right lawyers and get some free services.

Don’t reinvent the wheel: pre-financing shareholder agreements, employment agreement templates, terms of services, NDAs, etc, etc are all fairly standard.   Beg, borrow and steal the basic templates you need to get you started.

Use Series Seed docs for your first external funding: This is structured mainly for US companies but I recently used them for a Canadian deal and it was the fastest, cheapest deal I have done.

Delay the clock: don’t get lawyers on the clock until you have a business deal worked out. Yes, it is often advisable to have a pre discussion with lawyers to get their input before making a deal. After all they see so many of them. But here’s the thing: lawyers are there mainly to manage and allocate risk, not make business deals. That’s your job!

Adult supervision: on any complex transaction never allow your lawyers to speak with the other side’s lawyers without you being present. If business decisions and trade offs need to be made, a party to the actual transaction needs to be the one making them.

No parties: on a similar note, lawyers have this strange habit of showing up in groups. I regularly get on calls that have two or more lawyers per side where the bulk of the lawyers are doing no talking, yet still billing.

The partner on the file will defend this saying the associate is the one doing the work. While that may be true make it clear you don’t like party calls and want this reflected in the bill.

I guarantee if the associate is senior enough to be doing the talking then it’s a good bet the partner will be clearing email while billing you (and billing whoever he or she is responding to).

Get quotes: self explanatory. Get quotes from your counsel and investor counsel.

Be organized: this goes back to my earlier point about getting set up properly in the first place. If you have your s#*t together and all your docs are organized you can get reasonable quotes. If not, well you reap what you sow.

Approve research: ironically the most expensive (and experienced) lawyers can be cheaper because they have seen everything. If your lawyer needs to research something make sure they clear it with you. It may be appropriate for that research to be on their dime, not yours.

Team up: on small, straightforward deals consider using the same counsel as the VCs. Yes, some folks don’t like this. But we have done it a few times at Real. It works well when the company is organized (yes, that keeps coming up). It does not when you’re not as investors, especially VCs, tend to use more expensive lawyers than you do.

Also on the team up topic, financing rounds these days tend to have more investors. Don’t enable each of them to retain counsel (unless it’s them paying for it, even then you should discourage it).

Stop turning: Every new draft of an agreement is called a turn. When I was less experienced (before my hair started turning grey), I used to push my lawyers to bang out drafts every time we had feedback from the other side. I thought this would make things move quicker.

All this does is hike the fees. Every turn generates more hours on both sides. Instead, after a first draft is issued get all comments and business issues sorted before doing another turn.

Give up control: I also used to get my counsel to lead drafting thinking since I was driving the process I would keep fees lower. The fact is, all VCs have a standard set of docs. Better to let their lawyer lead the process and comment rather than the other way around.

Do business: I have a saying: good lawyers are there to do business. Bad lawyers just protect their clients. Your lawyer should be an enabler for you. Lawyers don’t make the deals, you do. Still your lawyer should be right behind you and should be focused on the key business issues not the minutiae.

Finally, since legal fees will always be high, make sure you are getting full value from your lawyers. That means more than free lunches. Make those lunches count by briefing your lawyers on company status, issues and priorities and seeing how you can tap into your lawyer’s vast network.

I’ve probably missed some hacks, but if you follow these you will be in good shape, though likely still not happy with your legal bills.

  • http://www.chicagolawblogger.com Clint Costa

    Along your lines of "get quotes" I recommend not just a quote but a comprehensive estimate. If the lawyer is experienced and the start-up's management team has worked out the business terms, then it should be pretty simple for the lawyer to foresee all of the steps required to get to the finish line and give a good estimate of the time, cost and personnel used at each step.

    One other thing would be to ask for some work to be done on a fixed-fee basis. Very difficult to set a fixed fee for a negotiated financing. Very easy to negotiate a fixed-fee on an organization of business entity and preparation of corporate minute book and stock records.

    • http://startupcfo.ca Mark MacLeod

      Great suggestions Clint. Thanks!

  • http://abdallahalhakim.tumblr.com/ Abdallah Al-Hakim

    very good post on a topic that is often ignored by entrepreneurs at startups in the early stages. Here is another excellent post about the importance of getting legal advice (posted by Innovation factory in Hamilton) that I tweeted about a few weeks ago http://bit.ly/ItS7Zs

    • http://startupcfo.ca Mark MacLeod

      Thanks for the link. Definitely some common advice.

  • Mark Evans

    Mark,

    Excellent advice. For startups, I think navigating the legal waters can often be the most challenging because it's so far outside their domain of expertise or networks. A big part of the problem is the lack of a "directory" that startups can rely on that provides good insight into who's good and their areas of expertise.

    • http://startupcfo.ca Mark MacLeod

      Thanks Mark. Knowing who's who comes down to referrals, rather than directories. Like so much in the startup / vc World, it comes down to who you know