VC Deal Lawyer

If you are an entrepreneur or the founder of a start-up or emerging growth company, one of the most important decisions you will make is hiring the right lawyer.  Like all things in life, there are good lawyers and bad lawyers and telling the difference up front can be difficult.  The service they sell (advice) is, at its core, intangible.  It’s not a consumer product that you can pick up off the shelf and hold in your hand or a car that you can take for a test drive.  Lawyers trade mostly off of reputation (which, itself, can produce contradictory results).  Also, lawyers can be great salesman.   They can sell themselves and sell their firms on work that they really don’t have the experience to do.  Lawyers that place fees ahead of client needs have no problem taking on work that they plan to learn how to do on the client’s nickel.  Lawyers can certainly extend their skills for certain client projects, but it doesn’t work in the world of start-ups and emerging growth companies.  Here’s my advice on finding the right start-up lawyer:

What to Look For

First and foremost, you should be looking for a lawyer that has specific, extensive (12+ years) and demonstrated experience working with start-ups, emerging growth companies, venture-backed companies, venture capital firms and angels.  It’s the difference between being a sniper versus a marksman or a general practitioner versus a heart surgeon.  Would you bring your children to the ear/nose/throat doctor to set and cast a broken leg?  No, you would not.  Don’t make the same mistake with your first start-up lawyer.

The greatest and most costly (not just in dollars) mistake that is routinely made is hiring just any old lawyer or your brother’s college roomate who is now a lawyer.  Most often, people rationalize this decision based on cost.  We can all agree that start-ups need to use their capital to build the business, but most qualified start-up and emerging growth lawyers are willing to find ways to work with start-ups to keep costs down.  If you go with the inexperienced lawyer to save yourself money, I can all but guarantee that you will later spent what you saved (times 5) when you have to clean up the mess prior to your first round of financing.  I’ve done those clean ups and they are time-consuming, costly, they slow down due diligence and they rob your organization of credibility at a crucial time.  Putting aside sloppy cap tables, sloppy contracts, option agreements that appear to give away percentages of the company that cannot be diluted, and so on and so on, one critical example is the friends and family round or angel round that gave away above-market rights for no reason other than ignorance.  I’ve been in situations where the friends and family or angels are asked to back off of some of their rights by the Series A VC and they refuse (wrongly so, since their rights were clearly excessive already) and the Series A round came within seconds of being dumped by the VC firm.

Here are some other pointers on what to look for:

• Ask for a representative transactions list from your lawyer (any transactional lawyer worth their weight already has one of these prepared – if they don’t, it’s a red flag).  Ask how many deals they’ve done, the size, the series (A, B, C, etc.), the industry and whether they generally represent the venture firm side or the company side;
• Ask for specific references - current or old clients for which the lawyer did a deal.  Call those references and see what they say.  It’s not the end-all-be-all, but still one of the arrows in your quiver;
• Try to find a lawyer capable of marrying experience with a personality.  There’s nothing worse than dry lawyers.  View your lawyer as your business partner and someone you will not regret having to spend time with in the trenches;
• Technical competence is only part of the skill set you look for.  The ability to resolve disagreements in a dis-arming fashion is highly rated.  You want a lawyer that can carefully balance their advice with your business and financial objectives and not just take a scorched earth approach to every issue;
• Don’t base your decision solely on cost.  Again, it’s a factor that should be properly weighted; and
• Do some online searches of your short list and see what you find.  LinkedIn accounts, blogs, recent articles or seminars, etc., should all confirm the storyline you’ve received to date from those lawyers.  If there is a clear diversion or discrepancy, it is something to explore.

Big Firms Versus Small Firms

A word about big firms versus small firms.  Most of my training in this area comes from big firms (namely, Morgan Lewis and Cozen O’Connor).  I currently work from a smaller plaftorm – so I am familiar with both models.  Many big firms have excellent start-up and emerging growth lawyers.  At the same time, there has been a shift in the legal universe and more often you are finding former big firm start-up and emerging growth lawyers on smaller platforms.  This wasn’t always the case, but now it is possible to utilize a lawyer with big firm training in this area but with the lower rates, or more flexibile billing arrangements, that come with smaller plaftorms.  I wouldn’t let big or small drive the decision, let the lawyer’s particular experience, and your comfort with their personality, drive the decision.  See my earlier article on the changing law firm model.

Where to Find Your Start-Up and Emerging Growth Lawyer

This can be a daunting task for the first-time entrepreneur, but there are ways to narrow the field.  I’d suggest tapping into the venture and start-up community in your area, and you will immediately begin to get a sense of the obvious players.  Venture firms, accountants and bankers that work with entrepreneurs are also excellent referral sources for qualified start-up and emerging growth lawyers.  We all know each other and when it comes time to find funding, accountants or banks, your qualified start-up lawyer will equally be an excellent resource for identifying those players. 

How to Structure Your Relationship With Your Lawyer

One of the most sensitive topics in the attorney/client relationship is the legal bill itself.  Billing arrangements are becoming more flexible, particularly with some of the former big firm lawyers that now practice on smaller platforms (see above).  Don’t be bashful in exploring different ways to structure paying for your lawyer.  Most lawyer’s utilize the historical hourly rate billing model that almost everyone is familiar with, but you can also utilize some of the following structures on a project-by-project basis:

• Success Fees - here, the lawyer aligns him/herself with the risk/reward profile of the client.  This is most easily utilized for transactions (e.g., selling the company or acquiring another company, doing an equity or debt financing).  The lawyer may agree to a lower hourly rate upfront so that if the deal does not get completed the client pays less (i.e., the lawyer sits side-by-side with the client on risk).  On the other hand, if the deal does get completed, the lawyer gets to bill at a rate higher than his usual rate for taking the risk with the client on the transaction.
• Equity – here, the lawyer may agree to take a lower fee and the client may give the lawyer a warrant or some other option to purchase stock at a later time at a reduced exercise price.  You need to take some care, however, in how you structure these arrangements.
• Flat Rates or Caps - here, the lawyer may agree to take on a certain project or transaction for an agreed upon flat rate or to cap his/her fees.  This works better with some projects than others depending on how hard or easy it may be for the lawyer to get their hands around the complexity of the project and how much time it may take (which can be impacted by the other parties involved and how difficult their lawyers are to work with).  If you have a significant amount of legal work then you may even agree to a flat, quarterly rate where the lawyer may commit to handle all of your day-to-day work that arises during that time period (excluding large transactions).

Make sure you know who will actually be doing the work.  More often than not this crops up when working with big firms.  The lawyer that is the start-up and emerging growth rainmaker generally is not the person doing the actual work.  This may not matter to you, but know the facts going in.    There tends to be more attrition in the lower ranks historically in big firms so some start-ups run the risk of having multiple lawyers on their account during the life of their company.

Monitor your bills closely and by that I mean actually review the time entries on the invoice, the lawyers who billed time on your account, their hourly rates and the amount of time they spent on certain projects.  If you want your bills broken down, ask that your legal work be broken into sub-matters so that you receive separate invoices for each – that will help you know what a specific project costs without having to go through one bill and add it up piecemeal.  If you find that your firm regularly exceeds their estimated fees on projects then set up milestones as stop-gap measures (e.g. tell them only to spend XX hours or XX dollars on it and then report back their progress before you decide to invest more).