As you know, my blog is about venture capital, angels, start-ups, emerging growth companies and the like as these are the areas I’ve spent my career working in.  Despite being a lawyer, I really don’t write much about the law per se as most people would think of it, but more about the legal aspects of doing deals with angels, venture capitalists and start-ups.  There are certainly laws you need to know as a start-up or emerging growth lawyer.  You need to know securities laws and corporate laws, among others.  But being a corporate transactional lawyer isn’t driven by rules of law and procedure like in other areas.  Trust and estates lawyers, litigators, tax lawyers, environmental lawyers – their careers are spent knowing, understanding and interpreting hundreds of pages of law, code, regulations and statutes.  Securities and corporate laws aside, the career of a corporate transactional lawyer is mainly spent negotiating deal documents or providing very strategic advice based on years of being around deals.  These things aren’t guided by legal process necessarily but more by practice, course of dealing and market terms.  It’s experiential.   

Despite the fact that my practice doesn’t center around heavy rules of law, I still have an appreciation for how complicated it has become.  Slip and falls, tort claims, the exorbitant costs of litigation and the fears of getting sued.  It’s risen to an all time high of craziness.  My wife and I were laughing the other day at the fake goalie masks that our kids got as a hand-out at a recent Flyers game.  They were fold up goalie masks that were made completely of paper and clearly, even to a child, only a play toy.  Nevertheless, it had a warning on it – “Not intended for actual use.  Will not provide protection.”  How many of these ridiculous warnings have you seen on products that I am sure the lawyers have required.  Here are some funny ones, and here are some more.

So I thought it was very apropos when my wife recently sent me the following video.  I couldn’t have guessed how appropriate it would be given the topics I had been thinking about.

Watching this video made me think of a book I had read many, many years ago called “The Death of Common Sense”.  It was a great book with great examples of how the law and the legal system had unintended consequences.  I pulled it off the book shelf and low and behold, it was written by the same guy giving the lecture.  Watch the video above and, if you get the chance, buy the book – it’s a fun and interesting read and will get you thinking.  Let’s all bring common sense back (as they say, it’s something you cannot legislate). 

I welcome your comments, thoughts and questions.  Thanks.

Chris McDemus is founder of VC Deal Lawyer, a blog devoted to providing insights on start-up and emerging growth companies.  Chris is also founder and owner of MCD Law Partners, LLC, a boutique corporate law firm serving start-ups,  early-stage and emerging growth and middle market companies.

• When to Fire Your Co-Founders, by Simeon Simeonov (CEO at FastIgnite and former partner at Polaris Ventures);
• What Constitutes a Start-up Mistake, by Simeon Simeonov;
• The 18 Mistakes that Kill Start-ups, by Paul Graham – I guess I was 3 short on my list; and
• How to Pick a Co-Founder, by Naval Ravikant.

Hope you enjoy these articles/posts and the additional info and perspective they add to this topic.

Chris McDemus is founder of VC Deal Lawyer, a blog devoted to providing insights on start-ups and emerging growth companies.  Chris is also founder and owner of MCD Law Partners, LLC, a boutique law firm focused on providing corporate, transactional and operational legal services to start-up and emerging growth companies.

Most serial entrepreneurs know how to steer clear and avoid these mistakes.  Why?  Because they’ve been through it already.  They know the landmines and can generally avoid them.  But first time entrepreneurs, although having a great concept and skills to back it up, most likely have no clue how to get started.  You need to learn from other’s mistakes and avoid making them yourself.  Here’s my list of the 15 most common, but avoidable, mistakes made by high growth start-ups.  The goal here is to have you spending your time building value, and not wasting resources fixing what may be obvious to others.

1.       Making poor early hires and not firing fast enough – I don’t have enough fingers on both hands to count the number of times I’ve seen this happen.  The effect can be minimal or enormous, depending on the position, timing of hire, responsibilities, etc.  Two mistakes I see most often: 

• The C-level hire with an incredible resume of large company, Fortune 500-type experience, but that has absolutely “zero” start-up or emerging growth experience.  Certainly, you want to hire people that have great experience.  There’s no arguing that point.  At the same time, however, you want to make sure that the individual can utilize their skill set in a start-up environment.  Some individuals have built their careers operating under budgets stuffed with positive cash flow – the anti-thesis of a start-up environment.  Never hire someone solely on the basis that listing their former employer on your pitch slides looks great or because you think the company will grow into their skill set (you may turnover a couple of individuals in their role before you reach that size); and
• The hire that claims he/she brings something strategic with them, something that will only come into the fold because of their presence in the company.  I am not talking here about someone that brings a great rolodex, or a specific programming skill or the like.  I am talking about someone that says they have the contacts to help you raise $3M or someone that claims they have the prior relationships to land the 10 largest clients in your target market.  If someone lays claim to something so specific and strategic, and they are to receive a fulsome compensation package based on those claims, then condition some of that package on delivering on the promise.  X options for X amount raised, or X options for every top 10 client you bring in that signs an agreement. 

Consider the real reasons why you are making the hire and consider whether or not such individual may better serve the company at the advisory board level as they may bring significant industry contacts and the like.  Otherwise, just make sure you enter the hiring process knowing the traps that exist.  If you do end up hiring someone that clearly is not working out, then move on quickly.  It may cost you, but not as much as it would in the long run by leaving them in place. 

2.       Failing to assemble the correct management team – the management team that you form is incredibly important.  There are many schools of thought, but I invest in the jockey over the horse.  That’s not to say that the business model and having a large market aren’t important, they are.  Otherwise, you may not be able to develop the kind of return your investor is looking for.  But the team is uniquely important for two reasons: 

• Investors don’t want you learning on their nickel.  I’ve said this before.  For early stage start-ups, you want to see management teams that have some industry experience.  If you are in the technology space and your Senior V.P. of Sales comes out of the steel industry, there better be a great rationale for that.  Demonstrate that you have talent that knows the space; and
• A cohesive, smart management team can make lemonade out of lemons.  See Mistake #13 below.  You know what they say about “best laid plans”.  Nothing is foolproof.  But it wouldn’t be the first time that a smart management team saw a completely separate business model in the ashes.  That’s why you ultimately bet on the jockey. 

3.       Promising portions of equity to individuals in the beginning without a plan - my stomach always turns when I meet with an entrepreneur and they tell me that they struck a great deal with one of their lead employees – he’s doing all of his/her work for 10% of the company.  I can see the excitement in their eyes of having saved cash while getting their platform built.  Then I ask the follow up questions that should have been asked when the deal was struck, and the mood shifts.  Is this deal in writing?  What kind of stock does the employee think he/she is getting?  When and how is the 10% measured?  Is it measured at the time of the agreement or at a later date?  Is the number of shares represented by the 10% calculated on a fully diluted basis or not?  Can the 10% be diluted (i.e., if that 10% translates into 500,000 shares of common stock, will those 500,000 shares represent 8% when the outside investors put their money in or does the employee expect to be issued additional shares such that he/she still owns 10% following the outside investment)?  In other words, did you inadvertently agree to let them have 10% of the company forever.  Persons of reason laugh at the thought that anyone could think they’ve been given such a sweetheart deal.  Think again.  If you’ve just hired a very opportunist employee, they may have no qualms trying to hold you to a deal many would say borders on ridiculous.  Then it becomes a matter of how much you would pay to avoid litigating such an issue when you should be building your company.  This is an amateur mistake that is 100% avoidable. 

4.       Failing to properly structure founder shares - once you’ve decided who the founders are going to be, you’ll need to structure your founder shares.  Founder shares embody the concept that if a founder receives all of their shares upfront, fully vested, then there’s no incentive to stick around and help build the company.  That founder could walk one day, keep all of their shares and piggyback on the hard work of the remaining founders.  Founder shares usually vest over a period of time and are issued as restrictive stock grants.  By way of example, a founder may be issued a restrictive stock grant of 400,000 shares of common stock, vesting annually/monthly/quarterly over 4 years.  If the founder stays for the full 4 years, he/she keeps all 400,000 shares.  If the shares vested annually and the founder leaves 2 1/2 years later, they keep 200,000 shares (the company usually buys back the remaining 200,000 shares at the same price the founder paid for them).  If they are fired for cause, it is possible that they could lose all of the shares.    If there is just one founder, there is really no issue until such time that the company seeks to raise outside capital.  At that time, the investors may insist that the founder put some of their shares on a vesting schedule – again, to align both founder’s and investor’s incentives.  If there are multiple founders, then this is something that should be put in place at formation.  For some further info, see both of these articles from Mark Suster regarding Founder Prenups and Founder Vesting. 

5.     Picking the wrong type of entity and structuring early ownership 50/50 – see my earlier posts regarding picking the right type of entity and the difference between entities.  In my humble opinion, if you plan on seeking outside investors, then go with the corporate structure.  You avoid the whole issue of VC funds requiring blocking entities (a result of some of their limited partners being non-profit companies) and the possible need (and accompanying cost and time) to convert your limited liability company to a corporation at a later date.  In terms of how you structure ownership, if there are two founders then find some difference between yourselves to rationalize one person taking 51% of the ownership.  50/50 deals, absent some complicated deadlock breaking provisions, simply result in a standoff the minute the founders disagree.  In order to make the 51/49 split more palatable, you can give the 49% owner comfort that he/she will have a say in material decisions (e.g., taking on debt, sale of the company, major hires, etc.) by giving the 49% holder certain protective provisions (i.e., the need to obtain their consent in order to approve these material decisions).  If you do provide protective provisions, then make sure you look at them in the totality.  You don’t want the exception to become the rule and end up in a 50/50 situation inadvertently.  

6.       Failing to consult experienced advisors at the beginning – many of the mistakes in this post could be avoided by simply hiring experienced start-up and emerging growth attorneys and accountants from the very beginning.  See my earlier post regarding hiring start-up counsel.  First time entrepreneurs may balk at this, serial entrepreneurs do not.  Serial entrepreneurs know that they will save time and money resources (far in excess than they would have saved in reduced fees by going with inexperienced counsel) in the long run because they eliminate the clean-up necessitated by lawyers that don’t know what they are doing in this space.  Hiring experienced counsel doesn’t mean the big price tag it used to mean.  Contrary to many years ago, the marketplace has many start-up and emerging growth experienced attorneys at reasonable rates (see my earlier post on the changing law firm market).

7.       Not having a clear business plan – the mantra here is focus, focus, focus.  If you try to become all things to all people, you will likely end up being nothing to nobody.  Investors back business plans that are clear and show some rational path to acceptable returns.  I would advise having your attorneys and accountants also review your plan.  If you are following my suggestion in Mistake #6 above, those attorneys and accountants see many plans and can provide helpful comments to improve and refine it.

8.       Raising too much or too little money – raise too much money and you may have just bought yourself complacency (along with many of the other mistakes in this post).  Too much money allows for making poor early hires (Mistake #1 above), consulting experienced but not cost-effective counsel (Mistake #6 above), losing direction (Mistake #7 above) and spending endlessly or needlessly (Mistake #11 below).  Raise too little money and your runway may be cut short before you launch your product or have built enough to support raising additional funds.  Planning and projections are the name of the game here.  You need to look into the future as best you can and consider how much money you will need to reach the next fundraising stage.

9.       Failing to properly document early agreements – there are early internal agreements to think about, and that experienced counsel can help you prepare, such as (i) shareholders’ agreements between the founders, (ii) founder share agreements and possible 83(b) elections, (iii) non-competition, non-solicitation, confidentiality and invention assignment agreements for employees (these are critical, particularly for employees that are building your product, as you might not own what they develop without them), and (iv) proper equity compensation plans (i.e., stock option plans), and option grant agreements.  There are also early external agreements such as customer contracts, service agreements, licensing agreements, office leases and the like that need to be prepared.  I’ve seen scenarios where early stage start-ups leveraged the existence of early customer contracts, but due diligence by VC funds later uncovered that those contracts were not as strong as previously thought.  Use of experienced counsel early on will provide some assurance that the contracts contain the appropriate protections.

10.       Raising early money without complying with the securities laws – no matter how you slice it or dice it, if you are selling a stake in your company then you are most likely selling a security which means you need to comply with federal and state (blue sky) securities laws.  This is true starting with the issuance of founders shares all the way up to issuing stock to VC funds and beyond.  The key here is to make sure that the transactions are structured in a way that you can claim an exemption to the requirement of registering the sale of the stock.  It is very important that you properly structure these transactions because poorly structured transactions (i.e., those that don’t satisfy all of the requirements of an exemption) will cause significant problems down the road.  They can derail future fundraising or cause the company to expend tens of thousands of dollars to later rectify.  Properly structured, exemptions exist for shares issued to founders, and to employees under equity compensation plans and to VC funds.  Most securities sold to outside investors are structured to comply with Rule 506 of Regulation D pursuant to the Securities Act of 1933, as amended.  You will save yourself significant heartburn later on if you take the time to structure these sales correctly the first time.

11.       Poor cash management and spending money on the wrong things - California Historic Landmark No. 976 – the “garage” where Bill Hewlett and Dave Packard started Hewlett-Packard in 1939.  Simple beginnings for what is now a billion dollar behemoth.  That garage epitomizes boot-strapping.  Fast-forward to the mid-1990’s to late 1990’s, during the internet boom.  Companies with only a business plan and little or no product were raising millions of dollars at hyper-inflated valuations.  Many of these companies managed their cash poorly or otherwise spent their money on the wrong things.  Enormous, beautiful offices and brand new furniture.  Artwork.  Game stations.  There was seemingly no end in sight, until the whole thing imploded in mid-2000.  Today’s start-ups seem to have learned some lessons from those days.  You see more group-share offices, people buying used furniture off of eBay, jamming 20 employees into 4,000 square feet of Class C office space.  You also see less tolerance for poor cash management.  We all know “cash is king” and you really, really need to think about every dollar that goes out the door and what you are getting in return.  You need to show investors you have the discipline to manage the cash to reach positive cash flow.

12.       Failing to identify a market for your product/service - having and developing a product or service is one thing, but finding someone to buy it is a whole other story.  Unfortunately, some entrepreneurs make the mistake of investing time and money into building the product or service before they’ve even considered who is going to buy it or how you are going to market and sell it to them (see Josh Kopelman’s article regarding customer acquisition plans).  The investors that most often suffer from this mistake are the founders themselves, friends and family and, sometimes, angels.  Very often it is the technical entrepreneur that may get caught up in this problem as their skill set tends to focus them on product capabilities and features and maybe not sufficiently on the need for those capabilities or features by the potential customer.  The mantra here is to fail as early as possible.  Try to identify what the customer wants and doesn’t want early in the process in order to reduce the amount of time and money resources focused on that feature.  This mistake is not just made by early stage start-ups, as companies mature and launch new divisions and products, this mistake still ranks near the top.

13.       Not being able to re-invent as you go - in the movie Heartbreak Ridge, Clint Eastwood starred as a gunnery sergeant in the U.S. Marine Corps.  Anytime his soldiers would run into an obstacle or an unexpected problem, he would tell them ”improvise, adapt and overcome”.  This is the perfect mantra for an early stage start-up.  As I mentioned in Mistake #2 above, even the “best laid” plans run afoul and you need to be able to turn the ship on a dime and possibly take a different tack on the problem.  Many say the difference between success and failure is only one factor.  A capable and creative management team may be able to salvage the company by re-inventing it along the way.  As the business grows, this skill set is still very useful.  There were many companies that needed to re-invent themselves as of late in order to compete with some of the very capital efficient business models that currently exist.

14.       Hangups on valuation rather than focusing on getting committed funds to make a successful business - I would like to thank Bob Fesnak of Fesnak and Associates for this Mistake #14.  You can see my earlier post for more information on this subject.  I place higher negotiating priority on liquidation preference and dilution than I do valuation.  Don’t let your hangups over valuation stifle your change of closing on committed funds.  Without the funds, there is no business.  Read my earlier post in depth.

15.       Failing to build a sustainable business around intellectual property - I would like to thank Bob Fesnak of Fesnak and Associates for this Mistake #15.  It’s a classic and goes hand-in-hand with Mistake #12 above.  Intellectual property is only one leg of the stool.  You need all of the legs if you want the stool to stand and not wobble or fall down.  The only way to monetize intellectual property is to build a sustainable business around it.  This is the gap that technology transfer offices at the university level try to overcome on a daily basis.  Intellectual property is created as part of the academic or research and development process and the university or professor desires to realize some value from that intellectual property.  However, the university lacks the other legs to the stool and has to seek the private sector’s help to fill in the gaps.  Technology transfer offices do this by partnering with entrepreneurs who can license that intellectual property and build a company around it.

You’ll find many other lists on the internet that focus on costly mistakes made early in the start-up process.  For additional resources, I would point you to 25 Entrepreneurial Death Traps, by Fred Beste (Partner Emeritus at Originate Ventures).  Fred is a great guy (and VC) and Originate Ventures is a great group to affiliate yourself with and to raise money from.

Thank you and I welcome your comments or questions.

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).

I think the main distinction here is what everyone means by dead.  Is it like Lehman Brothers, an eternal brand of investment bank that just disappeared?  Or is it like General Motors, a complete restructure of how they do business in the hopes of living to fight another day?  I don’t think big law firms are going to completely, physically disappear.  Certainly, some are going to close shop because not all lawyers are also good business people – they fly too close to the sun, get burned, and disintegrate (e.g., Brobeck).  At the same time, some are going to survive for various reasons.  It’s like anything else in business though – your model has to work for you to survive and the big law firm model is broken.

What is going to change – and there is absolutely no doubt about this in my mind – is how big law firms run their business.  Fat salaries for first year associates that don’t know how to mark up a document much less run a deal – gone (I suspect an apprentice model works much better).  Some may reconsider the museum-like office space and gallery-like artwork that hangs on the wall.  All will have to confront the complete disconnect between the billable hour and value for the client.  Indeed, this last point is the one I think has been brewing for decades and the current economic times have finally given clients the gumption they need to point it out.  Some lawyers recognize this – see article 1, article 2.  Change the billable hour model and everything else we’ve mentioned as a woe of big law firms will be forced to change.  You cannot provide a value to the client and also sit in your Park Avenue office, although some will still find a way to do this – remember the adage “no one gets fired for hiring IBM.”  Well, in a bet-the-company transaction, the general counsel will not get fired for hiring one of the top 10 law firms, despite the cost.

Nevertheless, lawyers are challenging this model from within by bringing their entrepreneurial skills to the forefront.  Take a look at Virtual Law Partners.  They’ve attempted to completely change the law firm model.  By going virtual they eliminated all of the costly overhead of running big firms like tony offices, artwork, etc.  Under the VLP model, the lawyers keep 85% of what they bill, the other 15% goes to pay for the technology backbone and collections support.  In the process, many of these lawyers gain a better work-life balance.  If you are keeping 85% of what you bill, you can cut your rate significantly (i.e., good for the client) and bill less time (i.e., good for the lawyer) and still make a very good living.  I predict firms like VLP will flourish and will fill a much needed gap in the law firm model (and will give clients a big law firm trained lawyer at very reasonable rates).  At the same time, some big law firms will remain and will continue to bill high hourly rates on enormous transactions or litigation. 

I could also see clients wasting this opportunity to force change.  The big risk here is that the economy roars back, clients get complacent with positive cash flow and they buy into the big firm model again.  Think of the purchase of hybrid cars, once the price of gas drops people tend to go back to SUVs.  Well, once clients are again flush with money, will they go back to the old model?