Jeremy Liew of Lightspeed Venture Partners posted recently on five things that startups should not scrimp on. I agree with most of his recommendations, but one area where I have no equivocation is around securing good, competent legal counsel…and doing so as early as practicable.
This seems fairly common-sensical, I’ll grant you. However, I am endlessly amazed at how many startups mishandle this critical step. As any experienced entrepreneur will tell you, building a startup is inarguably front-loaded and all-consuming. Things are bound to slip by the wayside. Family vacations and anniversaries get postponed, clothes remain at the dry cleaner for weeks, the cleaning lady quit three months ago and you just noticed, that carton of Szechuan Shrimp with Snow Peas in the back of the fridge now looks like something in the bar scene from Star Wars. Many of us have been there.
However, the decision and the timing for engaging a law firm can have deep and lasting implications for a young company. Many startups, in an admirable concern for being cost conscious, make the false economy of putting off engaging with competent legal counsel until an issue arises that requires immediate attention. Unfortunately, by that point precious time may have been lost and the company may already be in a disadvantaged position.
It’s fair to say most startup CEOs don’t jump at the idea of bringing on an outside law firm. The costs can seem outrageous for a startup team having to make do with using old doors as desks and living off a steady diet of double espressos and Pop-Tarts. There is also the inbred culture in many startups of wanting to be intimately involved with every aspect of the company and not to outsource such an essential element as the company’s legal and documentation requirements until absolutely necessary. This has the effect of fostering procrastination when it comes to selecting corporate counsel.
When that decision to bring on counsel is made, however, I find that too often it falls into one of two buckets: Throw money at the problem; or, go for the cheapest counsel you can find. Not surprisingly, both scenarios can bring poor outcomes.
Going the cheap route, as Jeremy explains well, can often result in less-experienced counsel that are not as current on market terms as a more established, recognized firm. This can cause unecessary bickering among attorneys over points that will eventually be negotiated away or are not meaningful to the matters at hand. Another aspect that I have witnessed first hand is that attorneys at smaller firms sometimes bring with them a bit of an inferiority complex. This sometimes means they feel the need to argue more than is constructive in order to demonstrate that they are ‘looking out’ for their clients. In my mind, this equates with ‘make work’ and can unecessarily poison the atmosphere between the parties concerned. The sign of a successful negotiation (and good attorneys) is that both sides feel their interests were suitably represented without unecessary rancor.
Throwing money at the problem, on the other hand, has its drawbacks beyond simply the cost argument. Prestige has a role to play in this industry as in most. For a start-up management team there can sometimes be enormous pressure to bring on a name-plate law firm to represent it. Having a marquee name doing your company’s legal work can sometimes have intangible benefits in terms of credibility for the company itself and imbue a sense of confidence that the prestigious firm knows what it is doing and can avoid costly mistakes. There is also the implied belief that a renowned firm will help with investor introductions, though this belief is too often misplaced.
One common misperception among first-time entrepreneurs, however, is the idea that the charismatic partner at Big Name Law Firm that initially wooed them will be handling their day-to-day needs. Not very likely. As is common at many professional services firms (law firms, consulting firms, investment banks, etc) senior partners often take on a more business development role, not a day-to-day management one. While it’s true that many senior partners (especially those specializing in arcane areas like tax or patent law) are still actively involved in client matters, often times as a partner’s seniority increases his or her direct compensation becomes tied to bringing in new clients, managing those client relationships, and on other affairs not tied to the dry, quotidien legal work that goes on at the lower rungs at a large law firm.
For this reason, a startup CEO should expect that, while a partner may oversee and sign off on key documents, most of his company’s legal work will be executed by Associates and Principals at the larger firms. Indeed, it will often be that the Associate is the CEO’s direct pointperson in most, if not all, of the company’s legal affairs.
To be fair, most Associates and Principals at the renowned firms are very competent and do excellent work. That said, Associate-level work is still very expensive at a name-plate firm (on the order of $400-500/hr) and there is an increased risk at large firms that overworked Associates can make expensive mistakes or do things inefficiently that a more experienced resource at a smaller firm simply will not.
At the end of the day, however, selecting corporate counsel is a highly personal decision and a startup CEO has to balance many interests — not simply name recognition and cost considerations. In a legal crisis or a financing, the CEO and the legal counterpart at his or her law firm will spend many hours together. As such, the personal connection, rapport and confidence that must exist between them is paramount. However, like a bad hiring decision, if the relationship becomes fractured or if there is a troubling loss of confidence, the startup management team must act quickly to make changes and bring in alternate counsel. Loyalty is a noble thing, but continuing to retain a law firm — regardless of its prestige — in the face of a loss of confidence or poor performance can be very destructive to a young company.
Finally, to reiterate my earlier point, I strongly encourage startup CEOs to invest early in the company-law firm relationship. Make time to get to know the people you will be interfacing with. As I have stated in earlier posts, when things happen they tend to happen quickly. This applies to financings as well as to other matters of a legal nature that are time-sensitive. [Are there any legal matters that are not time-sensitive?] Laying a foundation within the firm that represents your company will grease the wheels enormously when the time comes to pull together a deal team or other group of legal experts to help you navigate your particular situation.