To build and scale a startup, you’ll need a lawyer who specializes in startup law and understands venture capital. Good lawyers are expensive, but hiring a top-tier startup lawyer will save you money in the long run.
Hiring an inexperienced startup lawyer to manage your legal needs is like hiring an inexperienced dev to as your CTO. You’re incurring unnecessary technical debt. You will be making early decisions that are expensive to refactor.
Hire an Actual Startup lawyer.
If you want to build and scale a startup, you will need a lawyer who specializes in startup law and understands venture capital. Not an M&A lawyer, employment lawyer or general practitioner, you want a startup lawyer. How do you recognize a startup lawyer?
- look for an AngelList profile.
- Ask about the last VC deal (>$2MM) they closed.
A startup lawyer will use the right-size legal tools for the job, and build build a solid legal foundation for your startup.
If you need a machine and don’t buy it, then you will ultimately find that you have paid for it and don’t have it. ~Henry Ford
The Right Size Law Firm for Startups
A small law firm can be far more efficient than either a solo lawyer or a big-law behemoth. Solo lawyers may come with a cheap sticker price, but they bill that same rate for all work. Even mundane tasks will be billed at the lawyer’s full rate. On the other hand, a small team of lawyers can assign tasks to the person with the appropriate experience and rate.
Solo lawyers have limited capacity. When a startup begins to scale, it will quickly outgrow the capacity of a solo. Response times will become slow. A small team of startup lawyers have the capacity to work with a technology startup as it scales from seed investment to exit.
Big law firms have capacity to get work done, but they also come with overhead and massive inefficiencies. A smaller firm, leveraging modern SAAS tools, can achieve the same results without the bureaucratic bloat as waste.
Be Wary of Hiring Your Investor’s Startup Lawyer
Founders need investors, and founders need lawyers. But startups need their own lawyer, not their investor’s lawyer. If you come to the table without a lawyer, your investors may suggest one for you, or even cajole you into using their preferred firm. Be careful.
Even well-meaning lawyers can be subtly influenced by VCs they work with on a regular basis (and not all lawyers will fall into the “well-meaning” category).
When you work with a law firm only works on the founder-side of startup deals, you can be more confident that the VC money is not influencing their advice to you.
Lawyers or Insurance Salesmen? “Don’t just go with the lawyer that the VCs insist upon. These lawyers will work with the VC on a hundred financings and with you on only one. Where do you think their loyalties lie?” By Angelist founder Naval Ravikant, 2005.
Finding the Right Lawyer for Your Startup
Startups Need Specialist Lawyers, But Not Big Firm “Lock In”. A big-firm partner will try to cross-sell you on all of her firm’s other lawyers. Not because the other lawyers are the best fit for your startup, but because the lawyer wants the “origination fees” associated with this cross selling. By Jose Ancer, 2015.
Find the Best Lawyer for Your Startup with This Off-the-Record Advice. First Round Capital, 2014.
Lawyers and Technology
If you’re building a technology startup, you will need a lawyer that understands and uses technology in her practice. Are your lawyers emailing your confidential documents in plaintext? Are they using strong passwords? Are they trying to fax you documents or make you sign paper?
Your lawyers, like everybody else, should be using software to automate simple repetitive tasks.
Working with Lawyers
How to Work with Lawyers at a Startup. When to hire a lawyer, how to choose a lawyer, how to manage costs, and more. Your startup law firm should be local, right sized, and startup focused. By Mark Suster, 2010.
Lawyers are Referees, Not Coaches. Lawyers teach you the rules of the game, but not how to win it. Your lawyer will tell you whether something is legal and whether it would breach a contract. A good lawyer can tell you about problems that tend to arise in similar deals. However, lawyers generally can’t tell you whether something will create value. By Babak Nivi, Venture Hacks, 2008.
Contracts are for the Divorce; Not the Honeymoon. Some lawyers make mountains out of molehills. Others provide real value by helping founders avoid legal traps. Know when to listen to your lawyer and when to listen to your VC. By Jose Ancer, 2014.
It’s the Hours, Not the Rate. “In all my years of auditing lawyer bills, it’s the hours that always stand out. The hours, in any complex matter are what spiral out of control. In these big issue situations (litigation, patent stuff, M&A, IPOs, etc.), the amount of hours that an efficient and creative lawyer will save you far, far outweigh whatever hourly rate they may charge. By Jason Mendelson, 2013.
What Are Standard Legal Fee Arrangements For Un-Funded Startups? $5k fixed fee for incorporation, founder issuance, all initial contracts. Also discusses common terms for deferring legal fees. By Jason Mendelson, 2007.
What should legal fees in a Series A financing be? “Legal fees in Series A venture financings routinely exceed $50K.” By Yokum Taku, 2007.
A Challenge To Startup Lawyers. “When you have a seed stage company that needs to incorporate and close a seed round where all parties are willing to close on a set of standard docs without negotiation and where the investors agree to go without counsel, I think the legal fees for such a transaction should be $5,000 or less.” By Fred Wilson, 2011.
Should I pay my investor’s legal fees? Startups will probably need to pay their investor’s legal fees. Try to get the legal fees capped (for both your lawyer and the VC’s lawyer) before negotiations get started. Don’t give up a big chunk of equity “for the privilege of paying your investor’s legal bill.” Venture Hacks, 2007.
i always advisor founders to agree on a fee cap with their lawyers before a fundraise or big deal. saves so much ill will later.— Sam Altman (@sama) July 15, 2014
Startup Lawyer’s Poker: Fee Deferrals. “In many cases, fee deferrals are just clever ways for firms to ‘lock in’ already de-risked founders and have them ignore massively marked-up price tags on legal services.” Read this post and think about how big-firm legal fees, even if deferred, will affect your runway. By Jose Ancer, 2015.
Be Cautious About Deferred Fees in Dealing with Lawyers. “These have their legitimate role in the world of startups but, as with any other form of ‘easy credit,’ they can wind up costing you far more in the long run than if you simply negotiate good rates or fixed fee amounts for work you have at hand.” By George Grellas, Hacker News, 2011.