Dancing with the Devil: A Founder’s Guide to Working with Legal

Dancing with the Devil: A Founder’s Guide to Working with Legal

In my experience, most founders and other business folks think of Legal as a cost center related to risk management, a line item under G&A, an operating expense. I think that’s completely wrong-headed–regardless of the accounting rules. Done right, Legal can be a powerful ally in scaling your business, one that’s better conceptualized as COGS. But you have to find the right lawyer(s) and engage them the right way.

Because of negative experiences or negative perceptions, most business people avoid engaging Legal as long as possible and reduce exposure to them as much as possible. I get it. We all shy away from pain. But that can bite you in the ass in the form of wasted legal fees and (much) worse in the form of lost business if your lawyer gets in the way of closing deals.

Plenty of lawyers advise clients to engage them early in whatever process so that the lawyers can implement good hygiene upfront, rather than cleaning up a mess down the road. That’s true, but it’s about as compelling and helpful as the dentist’s admonishment to schedule your teeth cleaning every six months.

The bolder claim is that lawyers can actually help you make money.

This post is intended to help founders (i) get off on the right foot with Legal so that they’re not wasting money upfront and (ii) use Legal strategically in a way that supports and extends efforts to scale their business–think quickly closing deals with persnicketty customers and efficiently navigating compliance roadblocks to open up new markets.

Unfortunately, effectively engaging and managing lawyers is not a skill most founders typically learn in school or even in prior business roles. Yet when you start a company, all of a sudden it’s up to you to select counsel and know when and how to involve them once you’ve signed an engagement letter.

Having been both a provider and a consumer of legal services I’d like to offer you some nuggets of info on (1) selecting your first firm or lawyer, (2) engaging with your lawyers on an ongoing basis, and (3) distinguishing between lawyers’ skillsets so that you’re using the right kind of lawyers for the particular job.

Selecting

Most startups engage counsel when forming the company and distributing founders’ equity. That’s a great opportunity to establish a relationship with a firm or lawyer. Among big firms competence generally isn’t going to be an issue, but this will be the lawyer or team who helps get you funded, attends your board meetings, and sends you crappy holiday cards. So you want to be on roughly the same wavelength. Law firms can also be very powerful networks working in your favor. So ask for referrals, do your homework, and interview potentials for personality fit. In other words, back-channel that shit to find a lawyer who’s a good fit for you and your team.

Personality aside, you want to find a lawyer or law firm that has deep experience representing companies like yours in the areas of law where you have the greatest need(s).
That breaks down across three areas: type of law; industry; and geography.

Type of law – Don’t hire an estates and trusts lawyer to do your corporate formation just because he’s your cousin. Don’t even hire a lawyer specializing in project finance to form your tech startup. There’s a reason I didn’t do my own estate planning and living trust formation. Forming a tech startup ain’t rocket science, but it gets super-specific, and unlike my living trust documents that hopefully won’t see the light of day until I no longer do, your startup’s formation documents will be scrutinized by the lawyers representing the very first investors you think about bringing onboard. And if your company hasn’t been formed in a way that looks like every other technology startup from Palo Alto to New York, they’ll just make you do it all over again as a condition to closing the financing–which is, in a word, painful.

Industry – Similarly, look for lawyers who have experience representing (or better yet, having worked at) companies in industries such as yours. To get the most relevant advice and help you make decisions that align you with your peers and competitors you need counsel who understands your technology and is reasonably aware of what’s happening in your industry. A firm or lawyer who focuses on biotech may not be the best fit for a consumer SaaS company–and vice versa.

Geography – Believe it or not, swing dancing is not the only thing that has an East Coast version and a West Coast version. Lawyering styles do too. At the risk of grossly over-generalizing, East Coast lawyers (and investors) tend to take a more adversarial approach, whereas West Coast lawyer (and investors) tend to approach deals from a more collaborative standpoint. This makes a difference when trying to get a deal across the finish line. Certainly transcontinental deals happen all the time, but it can be frustrating when your counsel is the only one at the table not operating from the same set of assumptions about the social context and what’s ‘market’ in your area.

Engaging

Once you’ve selected the picture perfect law firm/lawyer for your company, the work is only part way done. How you engage with your lawyers will impact the quality, consistency, and cost of the work you receive.

Keep it Simple– We all love to share stories about lawyers who over-complicate the issues, slow things down, and generally lose sight of the forest for the trees. But that door swings both ways, buckeroo. For instance, many-an entrepreneur has attempted to be The One who reinvents equity compensation for their employees with all sorts of cute merit-based bells and whistles. But there is a reason why basically the entire technology industry operates on varying shades of a four-year vesting schedule, with a one-year, 25% cliff. It’s simple. It works. You can put it in place and forget about it. And it more or less accounts for the typical employee tenure and hiring/firing dynamics.

You’re not a lawyer, so inventing new legal regimes is not where you’re going to distinguish yourself. Keep things simple as a general rule, and you’ll lower your legal spend and more quickly get onto the actual business you’re building.

Don’t be a Jerk – All the lawyer jokes in the world aside, lawyers are people too–with families, nervous systems, and physical limits. If you need a punching bag, go to the gym. Once you’re done, then come back to the office and email your lawyer with a request and ask for a reasonable turnaround time–maybe give them even more time than you’d prefer. Why? Because rest assured if you ask for something major the next day it’s going to be a junior or mid-level associate (who’s being billed out at mid-hundreds of dollars an hour) stumbling through the work at 3am. It’ll take him or her twice as long as it should because they’re exhausted, and it won’t be as good as it could be. We lawyers like to think we can burn the proverbial candle at both ends in order to game our revenue model, but that’s hogwash. I’ve been the guy literally falling asleep at his computer every few minutes convincing himself a ‘catnap’ between 2am and 3am is all he needs to get through. Riiiiiight. Our bodies don’t perform under that kind of treatment on a regular basis. And who loses? Well certainly the associate’s soul is slowly getting crushed, but economically-speaking you’re the one who loses because you overpay for shit work.

Instead, give your lawyer(s) a reasonable amount of time to do good work for you in the ordinary course. If you do, I guarantee that when you really do need something on a same-day or next-day turnaround, yours will be the work that gets prioritized and done before the witching hour strikes.

Be Specific – Sure don’t be a jerk, but be specific about what you need when you call your lawyers. You’ll get better work product out of them, and what they deliver will be right-sized for what you need. If all you need is a gut-check on a customer contract or a potential compliance issue in a new market, be really clear that you’re not looking for a fully-negotiated contract or an exhaustive analysis of a new regulatory regime. List out the things you care about. Or ask them to give you only the top three most important business/legal issues if you don’t know–and scrap the rest. A great way to do this is to give them a small budget for the work. Anything sub-$5,000 is “small” to a big firm lawyer so if you say, “Hey I can only pay you $1,500 for this,” then you’re incentivizing them to give you the level of detail that you actually need–and only that level.

But if you send them a markup of your standard EULA that you received from a customer’s lawyer, and ask them to help you with the negotiation, then they may inadvertently take you on a nightmarish ride through the Land of the Limitation of Liability, the War of Warranties, and the Isthmus of Indemnification for the mere cost of half the amount the customer is actually going to pay you. Not fun. And not entirely your lawyer’s fault. Be specific.

Distinguishing

Last thing to keep in mind is that not every lawyer or firm is the right tool for the job. Some work really and truly needs to be done by a firm, but there’s a lot of work for which a big firm is like bringing a meat cleaver to open heart surgery. Know what you need and choose the right kind of lawyer.

Big Firms – Big law firms do a fantastic job of attracting a huge pool of smart, talented lawyers across a wide range of subject areas and training them to be experts in a particular area of law. So use firms for work that leverages this value-add, like the following:

Venture financing
Capital markets (i.e. your IPO)
Big M&A
Big litigation (securities, IP, employment)
Big licensing deals
Project Finance
International deals

With work in these areas, you need both deep expertise and often just warm bodies to throw at the problem. With big M&A deals, for instance, you need both an experienced practitioner who doesn’t do much other than M&A (because M&A is a highly technical, ever-changing area of law) and a team of literally at least a dozen lawyers to manage all the issues, do all the due diligence, and prepare all the documentation and filings. No small task, and it’s all gotta happen basically overnight so bring in the big guns.

Similarly, a lot of international work needs to be done by an international law firm with offices around the globe. Good ones will provide you with a single point of contact and then manage engagement with their distributed network of attorneys to get you the expertise you need. International employment law is a great example (i.e. when you start making your first international hires or open your first international office).

Boutique Firms and Solo Practitioners – But notice the “big” qualifier in the Big Firm list, above. You need to beware when the economics of the issue you’re facing don’t merit paying big firm rates. There is a growing number of small firms and solo practitioners (myself included) who are big firm refugees and bring much the same experience to their clients but for somewhere around 1/3 to 1/2 the price. Here’s a non-exhaustive list of where these practitioners can be a great fit:

Corporate formation
Seed/angel financing
Commercial deals (customer, partner, and vendor contracts)
Compliance
Ops
Patent prosecution, and
the ‘small’ kinds of big firm work mentioned above (M&A, litigation, etc.)

The commercial deal–my favorite place NOT to use big firms. Any competent big firm licensing lawyer could do this work effectively–if they had the time to get to know your business and were willing to cut their rates in half. But they don’t, and they usually won’t. Negotiating these kinds of contracts–whether it’s your standard EULA with a potential customer or a service contract with a key vendor–requires someone who can take the time to really know your business, your technology, and your priorities and who can give you the scrappy advice. You want a lawyer who understands that the greatest risk is losing the deal and who can therefore tell you the three things to care about and the twenty you shouldn’t in order to just get the deal done.

Similarly, compliance may seem like an area that requires a team experts to help you stay on the straight and narrow. But it’s not–at least not as an initial matter. Most startups need to figure out whether they can even sell into a certain market before understanding the extent to which they’re subject to applicable regulations. So you need legal advice that will help you with the ‘good enough’ analysis before you spend a huge amount of time and money on a full blown compliance program. Mind you, this doesn’t mean enlist an attorney who has never heard of the regulations before, but plenty of former big firm lawyers and former in-house lawyers have done this stuff and can help you right-size your initial approach.

And a note on patent prosecution. It’s a world unto itself, and generally the best practitioners aren’t necessarily at big firms or big firm refugees. They’ve been practicing at patent boutiques their whole career where the entire firm is set up around the needs and the cadence (and often one specific industry) of patent work. Those are the folks you want.

The key here is knowing what you’re trying to accomplish and what kind of legal services will get you there most efficiently.

That’s a Wrap

I wish hiring legal support was a no-brainer. It’s not. I wish the big firm lawyers who did your Series A financing could be your exclusive go-to’s. They can’t. As you work to become a sophisticated consumer of legal services be curious about the skill sets you’re acquiring when you hire a lawyer or a firm, make sure they’re the right tool(s) for the job(s) you need, and be smart about how you deploy them.

When managed correctly, I firmly believe that Legal can be more than a cost center that manages downside risk; it can be a resource that helps you build your business.

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