The name of this article is intentionally meant to be provocative. Some will read it as legal counsel is “a Necessary Evil” while others will read it as “Evil” while others may read it as “Necessary.” The real intent is that legal counsel is necessary but be careful. Without a doubt, there are more lawyer jokes than any other profession. A good case can be made that there are more lawyer jokes than all others combined. As the saying goes, there is a little bit of truth in every joke. If jokes about corporate counsel were separated from all other specializations, the list of jokes would be very small. Corporate legal counsel serves a necessary and vital, not evil, service for every company and every entrepreneur as soon as they decide to start a business. You may hear horror stories about attorneys, but it is doubtful if they involve corporate lawyers.
The challenge is to select the appropriate legal counsel both in terms of their firm and the individual attorney that is best suited for your needs at the present time. In making the selection, you must keep in mind that lawyers and their firms are in business to make money - just like you. They sell their time. With that time, comes their expertise and experience - two separate but related items. Most, if not all, attorneys do provide pro bono (free services) for certain individuals or entities. However, after some introductory discussions, which they may view as marketing or sales expense associated with adding a new client, expect to pay for their time just as you expect customers to pay you for your offerings. Hourly rates, the most common type of service charges, vary from one firm to another. The range can be from under $200 per billable hour to well over $600. Higher fees are generally associated with larger firms, while individual attorneys may charge far less. For simple matters (which hopefully will remain simple), online legal services at a fraction of these rates are available. Like the online services, some law firms will take on tasks on a fixed fee basis. Under this arrangement, they are taking on the time requirement risk and may be reluctant to do so. Remember, you are the customer, ask for fixed fee engagements.
The question that every entrepreneur and startup company needs to answer is, “Which legal counsel approach is correct”, not “Should I retain an attorney?”. In deciding which legal counsel should be selected, the first easy decision is to focus on using a firm or attorney that specializes in corporate law. Real estate attorneys, divorce, attorneys, and criminal law attorneys all have incredibly specialized knowledge. Even if they are your brother-in-law, neighbor, or best friend, they will be the wrong choice. The nuances of corporate law are as challenging as any of these other specialties. Even with attorneys or firms that specialize in corporate law, focus on firms that deal with businesses of your size and stage. Although most of the same laws that apply to Microsoft, Apple, and General Motors will apply to your startup, the emphasis will be totally different. Finally, do not retain a firm, retain an individual attorney. The four most important attributes to assess (in order):
- Are they a good listener to you?
- How do you “feel” about working with them?
- Do they appear to be reasonable businessmen as well as attorneys?
- Have they worked with clients like you and businesses in your stage before?
Although the questions are listed in priority order, you must be convinced that they meet all four criteria otherwise do not engage them.
There is and probably always will be a raging debate about the merits of using large, prestigious law firms, smaller firms, or independent attorneys. There is a common saying that “the smallest companies need the best lawyers.” It is probably true, but “best” does not equate to size. Larger firms with their mahogany furniture and plush conference rooms and amenities, charge more than smaller firms. But typically have a much wider variety of resources available to them such as experts in patents and trademarks, international law, merger and acquisitions, licensing, third-party contracts and partnering, human resources, litigation, and stock ownership plans plus many more. Having all these specialists available to you with one phone call to your primary contact is reassuring until you receive a bill for $500 for one hour’s work reviewing a Non-Disclosure Agreement from a giant potential partner who will have no inclination to change one word of their standard NDA document!
Although not as obvious, if you are dealing with a large firm that takes a long-term view at your relationship, you will probably receive less self-serving advice. This is not an attack on any attorney’s integrity, but more of a comment on human nature. If you have an idea ABOUT a patent, a larger firm with an internal patent practice may be more willing to suggest that you do not pursue it based on their initial assessment, knowing that you are a “good customer” and are relying on them for all of your legal needs. If, on the other hand, you approach a separate patent attorney, although less expensive by the hour, they might be less likely to discourage you from pursuing the application and terminating the relationship. The patent example is representative of a quick, low-cost response that you could obtain from a larger firm.
The legal needs of startups are often quite modest, and smaller firms or independent attorneys can generally meet all normal activities. However, when a unique, potentially high impact event surfaces - such as a major licensing agreement, an equity financing, or a potential merger or acquisition - it will be in your best interest to make sure your attorney is experienced in that issue or retain another attorney. This is no time to worry about loyalty or hurt feelings. The stakes may be too high. Think of this situation as analogous to seeing your general practice medical doctor; you would not hesitate to consult with a specialist regarding potential heart or brain surgery.
Independent of the size of the firm that you select, there are several things that you can do to minimize your legal expenses. Below is a representative list. The two common threads to consider are 1) spending your time instead of theirs and 2) providing them with specific guidance as to what you want them to do. Remember, you and your attorney almost have the same goals; provide or receive guidance and protection. The difference is that you need it done reasonably and with most cost-effectively.
- Non-Disclosure Agreements: NDAs probably represent the largest area of unnecessary legal expenses. NDAs essentially help keep honest people honest. Are you aware of any small company that actually received a large settlement from a large company due to a violation of their NDA? How many years did it take and how much time and energy were consumed from the company in pursuit of a legal remedy? Large companies rarely change provisions in their standard NDA to accommodate the request of a small company. Why even ask?
Some startups that insist on prospects and potential partners signing their NDA before initial meetings are held. This is a silly practice. It is analogous to asking a blind date to sign a prenuptial agreement before spending any time together. The alternative is simple - focus on what you do during initial discussions and not how you do it. Also, assume that your presentation material or comments will be shared with a competitor within 24 hours of your meeting. As discussions progress and a serious business relationship is likely, use an NDA if you feel it is important. Another good test is to listen to what the other party says. Are they sharing other people’s confidential information with you? If so, isn’t it highly likely that they will share yours with others?
The bottom line recommendation is to not overuse NDAs and ask for a legal review only after you review them yourself and find any obvious draconian terms.
- Contracts: Ask for legal reviews last, not first. With any potential contract, review and come to an agreement on the business issues first. If at all possible, separate business issues from the legal boilerplate and ask your attorney to focus on the legal portion of the contract only. Equipment lists, schedules, division of responsibilities, and similar supply and operational issues could change as negotiations proceed and have little or no impact on the legal issues. Also, with a separation of the business and legal issues, the legal review can proceed while the business issues are finalized. You will be in a far better position to judge the reasonableness of the business issues than your attorney will.
As a first pass, look for major showstoppers that must be eliminated before any arrangement can be objectively considered and an attorney to get involved. Most of these are business, not legal issues. Resolve issues such as those listed below.
- Rights to design documents, source code, or other intellectual property
- Rights to review internal financial statements and product cost information
- Lifetime guarantees or upgrades
- Non-complete clauses
- Unreasonably long payment terms
- Large Company Contracts: Large companies typically have very large legal staffs that are used to dealing with other large companies. Their “standard” 200-page contract might be perfectly acceptable when a Fortune 100 company is dealing with a peer. Make sure that your business contact is aware of the burden that could be placed on you if you are treated like a giant company. When asked, many large companies have methods to streamline their legal process when dealing with small companies. Be sure to ask. If the answer is no, think carefully about pursuing the opportunity and the costs associated with finalizing a deal. Your legal costs could consume all gross margin dollars generated by the sale.
- Standards Compliance: There are compliance standards that every company must meet. However, large companies and virtually all government agencies may have many more compliance demands that they regularly expect all business partners to meet. Carefully understand these standards and the cost of compliance. For many government regulations, small companies are exempt. However, certain compliance requirements “flow-through” to all government subcontractors independent of any contract language. This is an area that you should rely on an attorney for guidance. Your business partner may simply be applying all of the same standards to you as they would a major vendor. It is sad but true; many companies have given up trying to sell to the government because of the onerous requirements.
- Reasonable Risk: Your attorney may want to protect you from virtually all risks no matter how unlikely they are. Use your judgment and do not spend time and resources to protect yourself against the most unlikely what-if scenarios. This subject, by the way, is an excellent method to determine if your attorney is also a practical businessperson, something you definitely want.
- Term Sheets and Financial Instruments: This is one area that you must have expert guidance from a highly experienced attorney. Term sheets and the associated investment purchase agreement will have a major impact on who owns and controls your business. Ownership of the business and actual control of the business can be very different based on the terms of the agreement. A seemingly simple statement in those agreements can cost you your business. There are many areas in which you can “save a buck,” however, this is definitely not one of them.
- Keeping Records: As discussed in the article in this series, “Prepare for an Exit When You Start,” keep your own records, starting on Day One instead of relying on an attorney. Follow the practice “if you signed it, keep it.” This practice, which is easy to implement, will save untold hours in preparing for due diligence later.
There is no question that you will incur legal fees. By carefully considering what you want your attorneys to do and working closely with them, you can save thousands of dollars. You can’t ignore this cost. The only decision that you have to make is should you pay a little now or pay a lot later including losing your company.