A Challenge To Startup Lawyers
We closed an investment recently. It was a seed round. Our firm priced the round and we were joined by a number of small VCs and a few well known angels. We agreed to close on a standard set of "light preferred" documents without negotiation. There was no investor counsel on the transaction. We just signed the standard documents which were tweaked to reflect the round size, share price, and board provision in the term sheet.
The legal fees for this transaction were $17,000. I talked this over with the entrepreneur and we agreed to pay the legal bill. We are both big fans of the law firm involved and felt they earned their fees on this transaction.
But I've been thinking about this situation over the past week and I'd like to issue 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 $5000 or less. I just don't see why it should cost more than that.
The complaint used to be that VCs would negotiate everything and then whatever the VCs didn't negotiate, their counsel would negotiate. Well our firm and many other firms who invest at the seed stage have taken that criticism to heart. We don't behave that way these days and many of the firms we invest with don't either. But the fees have not really come down dramatically like I had hoped they would.
What more do we need to do to get to a $5000 legal fee for an incorporation and seed round?
When an entrepreneur gets a $500k or $750k or even $1mm seed round every dollar counts. And $15k, $20k, $25k of legal fees hurts. That's one less developer working for three months. Think about what a developer can build in three months.
I'm not talking about follow-on rounds where things get more complicated and round sizes go up. I'm talking about the first money a company gets when the company needs to incorporate, set up a bank account, and get real. I'd like to see $5000 of transaction costs. What do we need to do to get there?
Can you elaborate on what the law firm on this transaction did? What service they provided for the investors? Surely it was more than clerical, no?
they did nothing for the investorsthey represented the companythey incorporated the company, put together the financing docs (using astandard form), and edited them to reflect a few tweaks on the term sheet,circulated them, and closed the deal, did the required filings, etc
What would you think of a law firm that charged $5000 cash plus $5000 in convertible debt? Is that a move in the right direction?
I would never use a lawyer that wanted equity in the firm. Who exactly would they be representing in any conflict?(This is one of my “soapbox” issues where my wife just gets a glass of wine and takes a hot bath until I finish ranting…..)-XC
Nope. I think it can be done for 5k
For sure. Was curious what you thought of firms that took equity (or conv debt) in the start-ups they rep.
Taking equity presents two basic issues for counsel: (1) it makes the subject firm an angel investor (as opposed to a service provider) and (2) more importantly, creates an inherent conflict of interest which can ripen in follow-on financing rounds and/or Liquidity Events. As to Mr. Wilson’s broader question, firms can offer alternate fee arrangements which defer fees in excess of a benchmark until a significant VC raise or Liquidity Event (albeit, deferred fees may typically be payable with a premium as if and when they become payable). In any event, the firm has to make a business decision as well. I would be more inclined to enter into such arrangement with a committed entrepreneur with passion/vision or a serial entrepreneur as opposed to the (sometimes typical potential clients looking for an alternate fee arrangement) “two guys, a gal, a pizza parlor and a Business Plan” part-time entrepreneur. If anything, entrepreneurs want to encourage counsel to do MORE for them (but while keeping fees in check). There are plenty of attorneys capable of generating a suite of documents (assuming no negotiations to some sort of accepted standard documentation and that the Issuer’s pre-money capitalization is workable). However, the value proposition can certainly be augmented by business/transactional counsel advice in connection with executing the Business Plan, negotiating strategic alliances…etc. Lastly, there would have to be some sort of open source accepted norm for these documents. Who is to say whether “double dip liquidation preference” or a “participating” preferred stock (among the myriad of potential deal points) are the norm? Of course, if the transaction was a simple Bridge Note that converts in to the securities of a significant subsequent VC round, that should be much more manageable for all concerned. Counsel’s job when presented with documents for a client to sign is to review the documents, point out potential pitfalls and shortcomings, and negotiate them to the commercial advantage of the client. In this “open source” concept/situation, the Issuer may very well have to acknowledge the lesser standard of review/negotiation in the retainer letter. My two cents.
I just started reading your blog more often. I would love if you would do a post on what it means to go from project to “getting real.” Most entrepreneur tips/articles talk about not incorporating too soon, running lean, MVP’s etc. What about the next stage? Of course when you raise money you know what you need to do with it, but what are some admin things every company needs to do when this time comes (as you mentioned, setting up a bank account, “getting real”). I would love to hear some thoughts on this as an aspiring entrepreneur.
It can absolutely be done for 5k. We’re 8 months deep @gojee, have raised two convert rounds, done employee contracts, done customer contracts, recently incorporated from an LLC, and constructed an option plan. All this was for under 15k, using a partner and an associate from a top 10 national law firm who is very active in tech. A key component of this was my co-founder and I doing most of the grunt work on the docs ourselves. I cringe when I hear startups dropping 15k of a small seed round on legal docs. If you’d like the name of my lawyer, please reach out at [email protected]. He’s absolutely awesome, honest, and realizes that the payoff to him and his firm will be when we succeed many years down the road.
Fred: was there ‘value’ billing in the $17k? Are you suggesting that lawyers can produce the same work product in 33% of the time, or that they should reduce their hourly rate to 33% of the old rate? Do you think that reliance on standard docs gets you there?
it’s like wine—-people assume a higher price is because of higher quality. A firm that does incorporation for a $5k wrap fee risks being thought of as cut-rate, which will keep them out of the bigger ticket deals.I’m probably the biggest non-fan of startup lawyers ever (and im a money manager, i assure you the ones i deal with are worse than what the tech world deals with). Having said that if you want the same counsel that draws up incorporation docs to be the one that structures a series c multi institutional round, you’re going to get stuck with high fees.
Fred, if that’s what was done, then yes, it could be done for $5k, and I’ll walk over to your office now and agree to do every single one at that price. (I’m ex-Brobeck Palo Alto). I’ll take my standard forms and release annotated versions that can be debated all day long by other lawyers and we can all agree on which terms matter (and thus belong in your term sheet) and which just have to be efficient and fair. (Why haven’t I done that yet? Chasing $5k financing deals!)But here’s what I’ve seen, particularly for new founders: they don’t automatically know that when I say standard, or if Larry Sonsini himself says standard, what that really means or what it means to them. There is a middle of the road model for a typical VC-funded tech startup and we all know what it is. Founders have to ask their questions and get answers.I do incorporations at a fixed fee; it’s more than the DE filing fees because I answer those questions, at length, for them until they’re satisfied.Convertible notes and even seed financing documents are simple and cheap as long as they’re not negotiated heavily. That’s the real moral hazard that most lawyers fear.
As a follow up to my previous post (see below), everyone can email Shon Glusky directly at [email protected]. He recently moved there from Bingham.”It can absolutely be done for 5k. We’re 8 months deep @gojee, have raised two convert rounds, done employee contracts, done customer contracts, recently incorporated from an LLC, and constructed an option plan. All this was for under 15k, using a partner and an associate from a top 10 national law firm who is very active in tech. A key component of this was my co-founder and I doing most of the grunt work on the docs ourselves. I cringe when I hear startups dropping 15k of a small seed round on legal docs. If you’d like the name of my lawyer, please reach out at [email protected]. He’s absolutely awesome, honest, and realizes that the payoff to him and his firm will be when we succeed many years down the road.”
All of that for $17,000 is a good deal. These agreements have words and words have meaning. The problem with saying “every seed deal should be done for $5000” is that it leads entrepreneurs to believe that every situation is the same. I am a start-up lawyer and have done well over 200 financings–every deal is a different deal. You are not allowing for due diligence, cleaning up the mess the founders made, etc. You are also not allowing for the fact that founders have no idea what these terms mean and need a good deal of educating in connection with the transaction.In reading these comments, I can see a great deal of naive thinking by many of the business people commenting on this post. The comment above about a lawyer charing $35000 for a cram-down round is hilarious. That is frankly cheap and those types of financings are very complicated and raise a number of fiduciary duty and disclosure issues. Something like that can be a full-time job for 2 attorneys for 2-3 weeks.If you guys think this business is just a bunch of standard forms, then why use lawyers at all? Why not get your forms made, insert [Name of Company] in the appropriate places in the documents and then do a search and replace every time you do a new deal. You guys act like lawyers add no value here and you are flat out wrong. This is a services business and staffed by human beings that work on an hourly basis. Lawyers are expensive to hire out of law school. To do that kind of a deal for $5000 would work out to about $150-250/hour. This is less than a plumber makes for christ’s sake.Anytime a VC says “a few tweaks,” I shudder. VCs and entrepreneur’s are really good at coming up with seemingly simple solutions/compromises that in reality are quite complicated to draft and work into documents.And of course, for your $5000 deal if there is something screwed up in your documents or IP was properly assigned to the company, it will be the lawyer’s fault.
i beg to differ. this deal was as cookie cutter as one can be
Why have a lawyer involved?If the documents are standardized and previously vetted, then what value does the presence of a lawyer provide? The firm won’t want to dramatically lower the hourly rate for access to their partners or associates, too much risk of impacting other aspects of their business.It seems like they’d be more willing to allow a lower-paid tier of professionals to handle the details of the transaction, if the alternative is to lose the business altogether.
yes i was wondering the same thing.
maybe that’s what we have to do. but there are filings to be made, the charter, the state forms, etc. i think you need someone to do this stuff for you.
oh, so it’s a govt fees/compliance problem? surprise surprise! well no worries. the collapse is well underway, so that problem should take care of itself soon enough. we should probably start building the networked society, though. i think a good starting point would be the creation of our own stock exchange, complete with its own currency and regulatory terms. the problem is we need much more political will to engage in various forms of civil disobedience, and an allegiance to morals/principles rather than fear/government symbols. need to get some rage against the machine blasting through the VC/entrepreneur blogosphere.
You wise man…kid.
“Needing someone to do this stuff for you” is why it costs so much. Bear in mind, legal ethics and malpractice liability aren’t designed around selling specific, limited legal work as a commodity. You can ask a lot of mechanics, plumbers, programmers, gardeners, to take a quick look at something, but the same isn’t true of lawyers (or doctors).When you hire a lawyer, it’s like hiring a doctor: in terms of ethics and liability, the lawyer becomes responsible for most everything going on from that point forward. They thus have to go back through everything you’ve done to check for red flags, just like how a new doctor has to do a full history on you regardless of how many times you’ve told other doctors of your history.Some lawyers are trying to change that and offer piecemeal representation (for a reduced fee), but the law governing their liability and their ethical duties hasn’t really changed. If you want something less than that degree of service and responsibility, then you need to DIY. There’s not much of an inbetween.
Should we change some of those laws
Totally agree, if these are standardized docs, show me an online form and let me use my credit cardDon’t know what federal/state regulation requires at a minimum but something like this should be doable
Sounds like a good idea for a startup!
we are getting close to that with a certain NYC small firm. I don’t know if they want me to call them out but we just closed an investment where the firm charged the investors $5k for a seed round.that’s not the total legal expense since the company had Gunderson representing them.But $5k for the investor legal bill in a seed financing is a big improvement to the old days…
Enlighten us…did the start-up’s bill exceed the $5000 investors’ bill?
i’ve been getting investor counsel to work for $5k for years. Jay Rand atManatt has been doing that for USV for years.but i am talking about a deal where there is no investor counsel and nonegotiation of the docsi want the company counsel to charge $5k in that situation
i want that tooit should absoultley be possible since seed financing docs are simple and straightforward.it would also be smart long term thinking for law firms to get more aggressive with this since they would be in better position to earn the legal work over time as well which is a bigger opportunity than the initial financing docs
totally agreei think we simply need to demand it upfront
When professionals making millions of dollars per year in a 2/20 business decide to drop the “2” and just take only the “20”, I think this would be a lot less disingenuous conversation.For folks who don’t understand, VCs raise money for their funds from investors, just like entrepreneurs raise money from VCs. You might think the VCs get paid only if they do well and they make money for everybody, but that’s not how it actually works. In fact, the standard model is that the VCs take a “management fee” every year that adds up to 2% of their fund size. On top of that, they get 20% of any profits their investments return to their investors, the “carry”.So a VC firm with a $300M fund is pulling down $6M/year, even if they add no value at all. Plus, they take 20% of any profits they return to their investors.To VCs, who compare themselves professionally to investors at hedge funds and private equity shops, this measly $6M seems very humble and small. But if we’re now framing the discussion to claim that top professionals should not earn more than $5k per transaction, then I think we really need to question why a VC is making $2M/year before any profit is determined. After all, VCs might make only a couple investments each per year. So maybe their management fee should be $5,000 x [# of investments made per year].Fred and Bijan, are you prepared to discuss waiving your management fees and only making money when your investments do well?
we changed our fee structure in our most recent fund. we didn’t need to. we just did it because it was right
Fred, I’m not able to respond to your response below, so I’m posting right above it.I don’t think your response is fair. You have stated publicly that you are not taking a management fee on the new fund because you might not choose to put the money to work and you don’t want to be obliged to do so. I think you would have to agree that this is not a typical scenario. For example, would you be willing to agree not to take a management fee on any future USV funds? My guess is that you would not make that blanket statement.Similarly, if a lawyer takes a retainer from a company and then the company chooses not to utilize the firm’s legal services, the lawyer will return the unbilled money. I think this is the fair analogy.The fact is that VCs take 2% of the money off the table that could be going to entrepreneurs innovating and changing the world. Instead, VCs take that money to pay for their own needs like associates, conferences, an office secretary, a new office space, a new website, plus what I bet is a pretty nice NYC lifestyle that most founders could only dream about. Why do VCs need these things? And are these “needs” more important than funding world-changing companies with that money?In the case of USV, your fees from the last early-stage fund were in the neighborhood of $6M. Wow! Think of how many developers we could hire with that money.I think entrepreneurs should demand that VCs stop taking this 2% off the table when it could be going to founders instead. Your investors have allocated this money for the VC asset class and if your fees were more reasonable, then founders could be more productive with the money.
“Think about what a developer can build in three months” – you don’t want to ask a lawyer to do that, they’ll charge you an extra $1000
Richard, thanks for the tip. If my client had just raised a seed round I’d probably charge him a thousand bucks to think about it. I think Fred’s post is stupid, and he and all the other whiners on this site should go suck an egg. Seriously, 17k is chump change. Sure, this stuff isn’t rocket science. Any college grad could do all of this stuff for you and do a good job. Your entrepreneur could do it all himself, frankly. Just read a few legal wikis, negotiate his own documents, drive some documents up to the secretary of state’s office, modify some board resolutions he finds on google.But isn’t your entrepreneur a player? Doesn’t he have better things to do? My great grandfather was a lawyer in the 20’s, 30’s and 40’s. He billed his clients hard, the all complained, and they all kept coming back for more. So will all of you.
I used to work for a firm of CPA’s, we used to bill small clients hard during the last recession in the UK – they never came back.What’s worse, is that in the UK, VC’s expect you to pay their legal fees as well as your own.I don’t have a problem with lawyers fees as long as they are transparent, reasonable and preferably fixed.
your attitude is anti entrepreneur “anonymous startup lawyer”i hope your identity stays anonymous
I’m a frequent reader of AVC and I can see Anonymous Startup Lawyer’s point of view.I’m a former techie turned lawyer now doing other things. One thing I’ve seen in my experience, is the profession is under assault from the likes of the point of view advocated by fredwilson. It takes a certain amount of expertise to do what lawyers do, that’s why it’s the “practice of law” and lawyers are licensed to practice. That expertise doesn’t come from flipping some law books and sitting for the bar ala Catch me if you can. It comes from going to law school, somebody picking up the tab, and lots of work. The cost of service reflects the cost of services rendered and the cost of acquisition of that expertise. Moreover, laywers carry the risk of malpractice, they pay insurance, and that’s part of the cost structure.By the way, young lawyers putting out their shingle are entreprenuers in their own right too. So let’s not get too high and mighty about developers and their time and what they can build in 3 months.From what I’ve seen, a 4% legal transaction cost is not out there. So on a million dollar seed round, 16k is just what you should expect to pay for services rendered. Double that in places like NY is not out of contemplation either.The reality is 17k is chump change and if a VC is choking on that, there should be more serious consideration of what the upside of the transaction is. It’s not anti-entrepreneur, the only thing anti entreprenuer is cost cutting that wrings high quality legal advice out of the game, because Fred, that’s what you’ll do with your advocacy for a race to the bottom, which may not be all that desirable.
one of our portfolio companies sold recently and the company counsel gotpaid in the six figures. and they should have.i am not advocating cutting lawyers fees or hiring cheap lawyersthis is about the very start of a company’s life, when they have no moneyand every dollar counts
I believe it is in the eyes of the beholder-lawyer :). They see 5-6 0’s, $15-$20k sounds reasonable. Price what the client will pay rather than the value you add.Of course this is not always the case.
Mr. whoever you are…I am (that kind of) developer that can do a lot of things in three months and I also managed to have a “narrow” mind when it comes to certain kind of things, with all my efforts of keeping it “open”. There are useful jobs, that contribute to society development, and there are just jobs that are to keep certain people “happy” or “busy” or wherever term you might find out there. Sadly, for me the legal field does not appear to be more for society development than for the people engaged in that (legal) field. All the difficulties you are complaining about are coming from the fact that there are too many of you tho want a piece of it. More of you mean from the very beginning a rip-off from the legal school, more of you mean a ruthless behavior in competing with each other, more of you mean that increasing risk of malpractice (another rip-off from the insurance companies), and finally, all those are coming in the end (naturally) as a rip-off on customers. Fortunately, more of you mean a more affordable legal service offer for entrepreneurs. And it is not a “race to the bottom” at all, it would be a “race for normalcy” if we would give it a try. Choosing an expensive (experimented) legal service even when it is about simple things is does not make sense and is a move against the market demand (against yourself as customer), as it is against the market market supply (against the problems in the legal service industry).
“There are useful jobs, that contribute to society development and there are just jobs that are to keep certain people happy.”Any job that produces a product or service another human being freely chooses to consume (trading value for value) contributes to the advancement of society.
“To the engineering mind, a state will probably appear decadent in justthe degree that there are numbers of inhibitory or uselessly tabulativepersons employed to interfere with, and inquire into the actions ofothers” -Ezra Pound, Machine Art
This comment is such a perfect example of why people hate lawyers.
While there may have been some grain of truth to what he said (i.e., he believed the services were worth that), I find it hard to believe the tone was serious. I think he was kidding.
This was too funny — it has to be satire. Nicely done, too.
I just got a chance to read this post and the comments. I am a corporate lawyer with 17+ years’ experience, and my firm specializes in the representation of entrepreneurs (see http://bit.ly/cxRSh0). I absolutely agree with Fred, with one caveat: it would be prudent for the founders to sit down with experienced counsel and discuss all of the terms in the term sheet presented to them so that they can make an informed decision. Simply agreeing to close “on a set of standard docs without negotiation” may not be in the founders’ best interest — particularly if they have a “hot” company with a lot of different angels/VC’s expressing interest in investing. To my anonymous friend: Please read my post “Top Ten Reasons Why Entrepreneurs Hate Lawyers”: http://bit.ly/53SB5a. Thanks, Scott (@ScottEdWalker)
Fred – As a lawyer, I absolutely agree with you. There is no reason for heavy negotiation and $5K are more than enough for legal fees. The only problem I see is that the entrepreneur doesn’t know whether the “standard docs” you suggest to use are indeed fair for both parties, as opposed to biased in favor of VCs, who have understandably more clout with law firms.This is the exact reason why I started my legal wiki (http://standardforms.org). Lawyers and other interested parties can use it to negotiate standard docs “in a vacuum”, solely based on the principle of fairness, without the clock ticking or clients demands in mind. Once the crowd agrees on a set of docs, they can then be declared “standard” and used for small deals. The fees would be well within your range.
Cool. A legal wiki for founders. Awesome
“the entrepreneur doesn’t know whether the “standard docs” you suggest to use are indeed fair for both parties…” <—That’s a huge point. The concept of a flat $5000 and standard docs would be more widely accepted if entrepreneurs knew that other start-ups – that they know – used these docs. There’d be some comfort in that.
that’s what these standard docs are all about. we’ve closed something like ahalf dozen deals on them now and they can talk to the other founders aboutthem.
My first close cost me $25K in fees – in the early 90’s. Of course we used a big name firm in CA with a lead who gave me a ride in his vintage Ferrari. I was a rube.When I sold that company I used a great regional NC firm and a lawyer experienced in mid-market transactions. $20K all in for a US/UK acquisition. I was not a rube.When I do my next startup I’ve got my eye on a guy I’ve known for years who specializes in startups and India expansions (both in my strike zone) – he says it should cost around $7K for everything on our side. That is US incorp, India incorp, and the standard financing documents.It’s a three associate firm, and, no, they won’t help me when I find a heroin addict employee nodding off in the loo (true story) but I’m sure they’ll be able to find someone who will. Will he be around in five years? Well, he’s a baby compared to me, but maybe not, he could go do something else. But the Ferrari driving guy was not around 24 months later either – he’d got himself a trophy wife and a villa in Florence.My advice to new ent’s is that they get to know their lawyer and their banker well in advance of needing them.-XCPS – It’s also good to encourage at least one of your kids to study geriatric medicine, just saying.
“My advice to new ent’s is that they get to know their lawyer and their banker well in advance of needing them.”Truer words never spoken.”It’s also good to encourage at least one of your kids to study geriatric medicine, just saying. “Cracked me up.
Ha. A friend of my wife’s from college is a doc, but whenever her friends get sick she says: I only work on old people, sorry.One day she looked at me and said: Oh my god, I’ve only go 10 more years before that doesn’t work any more!So we ordered more wine._XC
Cliff: Good advice on getting to know your lawyer and banker before they’re needed.
I think, as most things, it depends on the situation (and I’m not a lawyer!).I often wonder why, increasingly, angels and investors treat startups all the same – as if their trajectory will follow something that’s happened in the past.To me, it’s not the setting of the bank account and the “incorporation” that I should be paying for – it’s the specific bylaws and counsel that I want.If I’m about to fork over a huge chunk of my company, I want to know what that entails – what sort of rights and privileges do the investors have?So many startups want to “get that guap,” that the long term implications seem lost – especially when we’re reading VC and Angel blogs ;)My question for lawyers isn’t “how do I get the money” – my question for lawyers is “How do I make sure this company becomes and stays the company that I want to be a founder of.”If you can answer that question and make it real in the bylaws and outline of the company’s structre – I’m willing to pay big dough for that – even out of pocket.
Yep… I love our lawyers – great guys – but I felt stung when I got our bill… it just didn’t seem right. Certainly was higher than expected.I now know how this works, but in general, I think the industry could use a well-known startup lawyer to blog about their work the way Fred/Brad/Mark etc. have exposed information on VC and everyone is better for it.Maybe there is someone out there who’s doing this?Transparency = winning, people.
your situation has also been weighing on my mind Reece. it was one of thereasons i wrote this post. it kills me to see someone like you hustling,struggling, and trying to make every penny matter. and then get a $25k legalbill. it just sucks.
yeah, it’s a killer.they’re willing to work with me on it, but it’s still more of a headachethan it should be.thanks Fred.
Sorry to hear that.You know its one of the toughest things about being just an entrepreneur. You get pounded on from all sidesCustomers pound on your price, investors pound on valuation and growth, and competitors just pound on you in general.You get to your lawyer, your accountant, marketing firm, and you think aaaaah no pounding then you get the bill and now you now get pounded in a whole different place if you know what I mean.The killer is when you count up how much money it took to get from customers to pay that bill, and weigh the relative value you think got delivered.The one solace: we do it because we love it.
totally… gotta love what you’re doing and believe in it to make itworthwhile.
I think that there is a lot of overworking in the legal profession, that is to say, it is not so much just that one set of documents randomly cost $12,000 when it could have cost $5,000. Rather, the price tag difference represents a divide between legal minds on how much review or over-review should go into a set of documents. Or sometimes the price is in response to servicing the client’s phone calls or renegotiations, which requires a perceived small tweak that is more work in reality on the legal side. It is a service profession. That is not to justify a larger than needed price tag though, and there are certainly ways to keep everyone on the same page with regard to the bill – managing expectations and transparency would help the legal profession a lot.Also, different firms have different approaches. There are plenty of entrepreneurs who will not go near a small firm in lieu of having a big name represent them. That also has a price tag.-just another attorney
Fred,One thought that comes to mind: perhaps you work out a general set of fixed price services with some good law firms for anyone you’re evaluating; $5k / initial deal, $1-2k/month pre-incorp advisory, whatever.It’s always up to the entrepreneurs, of course, but you could say “contact x,y,z partners at these firms; they’ve agreed to our fair-market rate for startups.”When lawyers know what budget they have, they can be extremely efficient, both internally, and also in telling people what’s worth their time to worry about and what’s not.The lawyers would get significant referrals, which they like, and also a great shot at having some growing companies with them.The moral hazard question is my only niggle with this setup; I’m imagining using a bunch of different firms mitigates that some. I don’t know, though.
For the most part, I’d say that exists. Virtually all the major firms in each market will have similar services, similar fee caps and similar deferral arrangements.
the one thing you need to keep in mind is we don’t choose the company counsel. the entrepreneur does. and they should. imagine if the investor chose the company counsel?so this means that VCs need to pressure company counsel to keep their fees down. we need to change our behavior in order for the company counsel to be able to do this. we have and so have others. now i want the lawyers to do their part
Yes, I agree. On the one hand, I’d never use counsel a VC suggested if I got only one suggestion. On the other hand, if you gave me a list of ten to twenty who’d publicly agreed to a ‘good conduct’ sort of standard billing arrangement, I would very likely call a few.
So Peter – as an entrepreneur, you would chose your lawyer from a list of the VC’s lawyer buddies? That’s a mistake. To get onto that list, the lawyer had better be on the VC’s good side. No doubt, there is risk of bias (whether intentional or not) in determining who goes on that list. VC’s want easy investments. Who (in any industry) would want to advise the other side to get a really good lawyer who is going to give them a hard time by advising the client of their best interests. Perhaps at a seed round stage that wouldn’t be a big deal, but later rounds when their is a greater diversion of interests between the VC and entrepreneur good lawyering really matters.
Reece: The guy to do this would be Ken McVay at Gunderson Detmer. He’s got the gravitas and the experience.Fred and probably 50 other people reading this thread know him.
well the sad thing is that is who reece uses
yup… Ken is awesome.
We are out there! I hope you find us and make us more well known. Two good lawyers who blog that come immediately to mind are Yokum Taku and Joe Wallin. George Grella’s also has good posts on his firm’s site and posts regularly to Hacker News. I blog daily (inspired by Fred’s awesomeness) and include many detours on public policy and other issues that (to my mind, anyway) impact startups, but other lawyers stick to just the mechanics.
good to hear!thanks for speaking up. i’ll check out your posts.
Thank you! And here are links to the other lawyer bloggers I mentioned:http://www.startupcompanyla…http://www.startuplawblog.com/http://www.grellas.com/faq_…
The smart law firm/lawyer will do it for $5K if they think for the long term. Once they are in and they give you a good value for your buck, they’ll get the higher fees in subsequent rounds and on-going legal business.If I was that company, I would switch out of that law firm who charged 17K. They won that, but not the potential 100K over the lifetime of the company.The reality is that some law firms are more “friendly” to the start-up environment than others, and it makes no sense to choose a big expensive law firm early on, except for very rare circumstances.
When we did a round for Foneshow our lead investor had all kinds of crazy and non-traditional terms. Our lawyer’s comment was “I’ve never seen such a ridiculous amount of paper for a $1MM round”.Needless to say closing the round cost a fortune in legal fees.
Why do you even need to use a lawyer for such a transaction? Can’t it be done dyi?What they charge for incorporation is already outrageous.Why don’t VC firms just hire a full-time person to do this kind of stuff?
the company needs a lawyer. they would be foolish to rely on a VC to do this for them.
Not if the terms are standard and published somewhere (maybe with the endorsement of other founders or portfolio ceos, as another commenter suggests).
I’ve never seen this work, not in 20 years of practicing law. Not once. In fact, the very best lawyers are likely to walk away from a company that has done too much “do it yourself” lawyering in an tech venture space because she knows it will cost way too much, no one will be happy in the process of fixing it. It can be done when the heat around the company merits it but in most cases you are casting yourself away to a desert island, I think, if you act as your own amateur lawyer. Some IP issues may never get fixed, not without going back and paying people who left the company months or years prior.
i’ll do you one better. I just had a law firm try to charge $4000 for a trademark filing. Instead we hired a cheap “trademarks only” firm for $600 (including the $325 filing fee).
I think mine was even cheaper, had a “coupon” $99 + filing feeSo far seems to be moving through the system ok…
Given that the best firms in the country wouldn’t charge more than $1000, then if someone tried to charge you $4000, that might actually be criminal. I’m a trademark lawyer btw.
Fred, can you link to the standard docs that you recommend for startups. Might be worth a quick update on the post?
there is not one set. there is one set per law firm. it is unfortunate but the firms can’t agree on one standard form.
The firms simply need more pressure from financiers first (because they tend to be more organized), and also serial entrepreneurs. Ted Wang’s Series Seed documents are perfectly adequate to the task 80% of the time, and I use them now 50% of the time (sometimes I can’t because they are too standard for one party’s or another’s taste). It can be done.I have no vested interest in Ted’s forms other than the cause of efficiency. The hesitation I have with SOME of the other standard forms out there are that they can be programmatic or reflective of an agenda that may not be as relevant in six month’s time, a year’s time.Ted’s forms of course also price the seed round and many leaders (Chris Dixon comes to mind) encourage entrepreneurs to go with notes. By the way, a full note round, despite popular opinion, won’t be any cheaper to do than a priced round using standard docs.
i like a priced round tooted’s forms are ok, but they are missing a few things that we view asstandard
That’s good to know. If you and one of your company’s decided to go public with your agreed redline to Ted’s docs, it might be that your iteration would become the new de facto standard.
well i have ted the feedback privately but he resisted it
With all due respect, as a startup lawyer that has done hundreds of deals, it is most certainly not the law firms that can’t agree on forms, it is the investors. I always push to use some transparent form, like NVCA or series seed or whatever because as company counsel, I do have an incentive to keep fees down, but every investor has things they “really need.” Even as you point out Fred, the Series Seed are missing “a few things that we view as standard” but clearly A16H is very comfortable using them regularly.
Law firms are widgets. Law firms could agree if investors and companies could agree, but the ecosystem is too diverse and even on fundamental issues often does not agree–see priced deals versus convertible notes. Hard to see agreement though given the number of investor groups and constantly changing founders.As a sidebar, it is possible to agree on standard forms if the principals agree on the need for a standard. Some of the most complex deals in the world are done off standard template agreements–the ISDA master swap agreement. ISDA’s require a schedule with details of transactions, and some counterparties negotiate certain key terms (like the need to post collateral). for many particular kinds of swaps there are standard ISDAs or confirms so it becomes a fill in the blank exercise. Most swaps require no legal fees, just a confirm. Even a negotiated ISDA often takes less than $5K to negotiate. 10 years ago, I thought we could get close for VC financings with a fill in the blank checklist but that isn’t realistic anymore.
It’s not up the lawyers. It’s up to their investor clients. If the investors want their lawyers to use a certain set of forms, the lawyers will use that set of forms. Except for lawyer dishonesty or incompetence, this isn’t a lawyer issue, it’s a client issue. Investor clients simply need to decide what they want.
I completely agree Fred. In the startup phase every dollar counts, for the law firm the extra $15K-$20K is a drop in the bucket, for the entrepreneur it means cutting resources. I recently did a patent search for a new company I am working on. It came-out to $9,000 once my law firm was done…then I found-out I could have done the search online for under $1,000.This was my fault for not doing my research but at the same time the law firm had no problem taking the little money I had for this project. Live and learn!
I think $9K may be too high, but it isn’t impossible. $1,000 seems dangerously low. It depends on your technology, but professional searchers often charge in the $1,500-2,500 range. Then the lawyers spend time reviewing the search results and creating what should be useful and actionable advice. You are always free to eliminate the searcher and/or the attorney from this process. In any event, as you (and Fred) learned, always get a quote before you agree to a project.
We do full A round docs , have our lawyers draft with a cap of $7500. Probably costs the company another $5k with a lot of heavy riding on their counsel to keep the stupid lawyering down. We just had one deal were the guy decided to change every punctuation and capitalization (supposedly he didnt charge us he just “couldnt help himself”We strongly recommend using counsel who are “ex major law firms” to get the quality at much lower cost.
i think $12.5k for a deal is still way too much Michael. and why use counsel on your side if you know the docs cold? our strategy is to agree to use docs we both know well and avoid investor counsel all together.
This could be a business opportunity for a lawyer willing to set up $5k a pop seed closing document conveyor belt service line. Web interface, maybe include other services a startup needs.Next stage: “proceed to checkout” in Angelist 🙂
I was thinking the same thing, why not a legalzoom type of operation for startups, add in the legal wiki for self explanation, and vetting by trusted sources and you probably have a pretty nice business.Until the bubble pops …
This, I think, is one of the greatest values of seed programs like Y Combinator. When we joined, they walked us through the entire incorporation process using their standard docs and all we had to pay was ~$200 to the state of Delaware. They also have standard docs for both priced rounds (series AA) and convertible notes (which should be made public sometime soon) which keeps legal fees low. Additionally, it’s really really helpful to negotiate a “capped fee” with the lawyer ahead of time – many are willing to do this but you need to hammer it out before you actually start working on the round. This way as an entrepreneur you don’t feel bad asking questions.
YC has been an innovator here as they have in many ways. we have closed ontheir standard forms a few times.
One of the ancillary benefits of YC is that all the other pieces get done right upfront, which saves time, headache and cost. YC helps you make sure that you get your founders stock, founders vesting, 83(b)’s, offer letters, option plans, etc. all done right and founders understand the importance of handling those items from day one. With all those issues properly handled, the seed stage financings should be a non-event for your and the investors’ lawyers.
In the Openfund we do it with £400 per company including legal & accounting setup for investments of up to €50k. But then again we do pre-pre-seed from your perspective.In the end of the day though, do you get charged $5k for a cookie cutter routine, or does it involve actual lawyer time?
I agree with this post, Fred. My background is as a corporate lawyer and I think the part of the reason for outrageous fees sometimes is the lack of options the entrepreneur feels they have. They know they need a lawyer, thus they pay whatever the first lawyer they talk to says it is going to cost. I now run a site called ExpertBids.com and I have seen the price for incorporation and a seed round, as well as other startup related legal services, come down as result of giving entrepreneurs an easy way to get multiple bids (both hourly rates and flat fees) from different lawyers. Sometimes the lowest price lawyer isn’t always the best, nor do I recommend entrepreneurs select their lawyer solely on price, but getting multiple personalized bids at least gives the entrepreneur choices and likely some lower priced options.
One of my least favorite topics. . .Entreps need to remember to do two things, and we as VCs should help them with these:1. do your homework and deeply reference legal counsel. Certainly there are lawyers who could’ve/would’ve gotten this transaction done for something closer to the price you wanted, Fred. Talk to 3-4 clients who’ve been in similar situation and find out what their bill was. Part of the problem is that I’ve seen a handful of “startup-friendly” “great guy” lawyers out there who actually seem to specialize in ways to crank up the bills. Reputation as supporting the startup community does not necessarily translate into cheap fees. It always shocks me that there are guys who will take advantage of their clients when there’s a VC on the other side of the table (presumably I and other VCs are folks who could be referring these lawyers more business!), but it happens. Anyway, validate in advance with prior clients that you’re going to get your money’s worth.2. Negotiate a capped fee in advance. THe situation you describe, Fred, seems tailor made for talking to the lawyers in advance and setting expectations. There’s no reason for surprises. Any good lawyer taking the long view on the relationship would be happy to do that transaction for less than $10K, anyway. Dont leave yourself open to variable pricing on a transaction that should have no surprises.
Capped fees are important, but also need to acknowledge the company and the investors own part of the process. I’ve seen a lot of companies push all cleanup issues over to counsel because of a capped fee, even for things that the company should have handled from day one like inventions agreements, proper documentation of angel financings, etc.Your lawyers should be able to give clear fee estimates in advance, flag issues BEFORE they go over the fee cap, eat amounts where the lawyers ran the meter, talk to the company/investors about how to manage the process efficiently. But ultimately, a company also has to acknowledge responsibility in running a process and keeping bills down by doing its pieces.
One big hurdle is the overall massive increase in lawyer rates, which Jason Mendelson from Foundry has done a great job of addressing, but at some point people need to acknowledge some costs.I haven’t done as many venture financings as Fred, but have done my fair share (~60). I’ve generally found the legal fees for the financing docs alone to be very small. Typically a brief review against a term sheet, a couple of quick discussions with opposing counsel and they are done. A lot of financing, the bill for the financing docs themselves is probably less than $2k.Doing the due diligence is where the fees, even for an early stage company seem to rack up. Even the basics–reviewing founders stock purchase agreements for share counts, did everyone assign their inventions to the company, have all founders and employees signed inventions agreements, checking Board authorization for option grants, reviewing angel docs, state securities filings, etc. Diligence then translates into issue cleanup and into preparation/review of disclosure schedules. Typically you have to ask a couple of times to get all of the basics that should be readily accessible, such as invention assignment agreements which should be organized, scanned and in employee files but never seem to be.Both investors and companies want the schedules reviewed, many startups do not have everything well organized (even those that don’t have much to organize) and someone has to pull it together, then review it and companies rarely want to prepare schedules on their own. Investors do not typically review due diligence documents to confirm all the assignment agreements are in place and meet legal requirements (for example, statutorily required disclosures in California and other states).Plus investors often want a legal opinion from counsel, so counsel has to review things carefully whether they want to or not. Even when someone does not want an opinion, the investors certainly expect that company counsel will be prepared to give an opinion in the next “real” financing so someone needs to do the work up front b/c many issues have a time hurdle in correcting them–like securities exemption filings.Anything goes wrong and the investors and companies are not saying “well, I only paid $5k so I got what I paid for” they are saying “why did brand name law firm X not avoid this issue”.
If a company has several founders all of whom are immediately available to sign invention assignments and found a new company with a cap table they all agree on unanimously, where could due diligence possibly come in? Investors have to trust that founders really do own their code, and if the founders were trying to pull a fast one the notion that the lawyers could rat it out is an utter absurdity.
Fred, weighing in as a startup lawyer, I agree with you that 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” should be $5,000 or less.I’m not privy to the details of the transaction you reference, but here are some of the things that may have blown efficiency in this deal, by way of answering your question about what to do to get there:*Was the company not incorporated until the seed financing came together? While this sometimes is doable, sometimes an appreciable lag between the actual start of the project (IP contributions, contractor arrangements, purchasing of domain names, trademark issues) can rise possible problems with assignments of invention and tax issues for founders that a good startup lawyer is going to want to go ahead and address before the seed round. And in fact you have to do that because even in a simple set of initial financing docs, you will have some basic reps you can and should be giving.*Were the founders shares already issued and subject to reverse vesting? Had they already signed assignments of invention?*Were there contractors that the founders needed to go back to and get proper work for hire or other agreements from?I guess where I’m going with all this is, when founders put all legal issues off until they have seed financing, it’s quite likely that there will be things that could have been done in a standard way, in terms of just corporate and commercial organization, that need to be retrofitted after the fact in order to close a round. It’s very, very tough, I know, because the inclination is to totally bootstrap and put this stuff off until the angels or early stage VCs step up.
Hey William, Do you have any recommended resources that founders could use to guide them toward getting “standard stuff” taken care of before facing a seed round?Thx!
Michael,The single best organized site that covers most of the normal questionsand issues founders will have is on Yokum Taku’s site, athttp://www.startupcompanyla…. Partof what I like about the index there is that Yokum identifies questionseven if he hasn’t posted on them yet. But he’s posted on most of them.My good friend Joe Wallin also writes posts on specific issues, though,expressing just my opinion, the layout is too busy and it is not as easyto find posts as it should be. http://www.startuplawblog.com/Inspired by what Chris Dixon did on his blog, I re-worked the archivetab on my blog, named it “contents,” and listed out posts by categories.But it doesn’t work as well as it should to surface content by topic ondemand. Yokum’s q&a approach under broad categories may be best.The other thing I would say is, hang out with a lawyer or two andcultivate relationships with them. Many are approachable and like totalk shop. A lawyer who knows you, your background, the context in whichyou are approaching things, where you mean to go, is going to be able tomore narrowly tailor suggestions for what you should read, what youshould be thinking about, and thus make the “homework” burden lessoverwhelming.
Really appreciate the prompt and thorough reply!
You bet. I appreciate your note back!
I don’t work all that much with startups but I often encounter an expectation that legal work be done for very little. There are times when “usual” legal fees for work are perhaps more than the situation merits and also times when the fee charged is a lot less than the work merits. To me, this links to the debate about value billing versus the more traditional hourly billing which many attorneys prefer.The one challenge I encounter is that clients often don’t have an appreciation for what goes into the work done for them to protect and further their interests. On one hand, they shouldn’t be required to know this but, on the other hand, it would make a world of difference to how lawyers’ work is perceived. I have this notion that clients often have the wrong perception of where the value in legal work is. Prospective clients that I come across seem to see value in documents and agreements rather than the expertise that went into establishing a legal framework that is encapsulated in those documents.Sometimes the work needed isn’t just about creating what a client thinks may be required but, as William pointed out, related things which need to be taken care of. At the same time, startups often have a need for quite a bit of legal work and charging the same fees that a larger and more established client may pay is a problem. Large fees mean that startups who need legal advice the most won’t get it and their businesses launch with a handicap from Day 1. It is a tough nut to crack and I keep thinking this ties back into the value billing debate I mentioned earlier. I am just not sure what the best approach to calculating these sorts of fees would be.
Paul, I’m not sure either, though I wonder if it might help to open source all documents and make sure no fees are charged for producing or customizing the documents. Then maybe the focus would have to be on the value of the counseling.
Legal fees for our seed round (£350k) in London were about £4,500 – not sure whether there’s a big difference between US and UK.
Negotiate upfront on fees. Our attorney agreed to cap the fees for our small seed with no investor counsel and standard docs at $6k plus outside costs (registrar in Delaware, fees, etc.). They came in a little under. We’re not in a large city (Rochester) which does impact costs and they billed at $360/hour which still rankles.It was still too high a percentage of our round for my tastes, especially given that our investors were exceptionally open and fair in their terms.Couldn’t someone start a boutique firm to do these deals, maybe with some group funding from angels and VCs? A Y-Combinator for legal?
i want the angel/VC community to negotiate the fees upfront with the entire legal profession (i know that’s never going to happen but you get my point) because the first time entrepreneurs don’t know how this game is played
Form a purchasing cooperative and it will happen like lightning!What nobody is really willing to say is that lawyers are getting paid a million times for the same set of docs which resides on their computer in a file.If the buyer of the service and the provider of the service agree on the “standardized” docs, then this element is truly reduced to the cost of printing the docs.Use binding arbitration, liquidated damages provisions and loser pays provisions and even the deals that blow up continue to achieve the same targeted economies.Frankly, this validates all the efforts made by the Freds of the world — though we all know there can be only one Fred the VC Highlander — to reduce the drag on their invested capital.Lawyers can take offense and rightfully so that this “dumbs down” and “demeans” the years of learning their profession and craft but it no different than what Charles Schwab did to the brokerage business — separated pedestrian and mundane order execution from expensive securities advice and counsel.
There should be more startup-friendly lawyers, investing in a long-term relationship, like VCs and Entrepreneurs do, with the company.Here in Italy, the setup fees are high, and the final transaction costs eat an unsustainable part of the investment.We had low prices thanks to some friends working nearly for free; anyway, the final cost has been near to yours’ (but our investment is several times smaller).
My company recently raised a seed round in the range you are talking about and negotiated the legal fees to $4,800. We interviewed 3 very respected law firms in our area (Colorado) and got quotes from all of them. They were $4,800, $12,000 and $15,000. I think the one at $4,800 understood we will be using them for more complicated stuff in the future and if they wanted us for the long term they needed to be very price sensitive on this initial round of paperwork. Maybe things are different in NYC & CA, but I’d think if start-ups/VCs bid out the paperwork the fees would go down.I should also mention we let each firm we interviewed know they were competing for our business with the other respected firms and since this fundraising was very basic, price was our main consideration.
Yes I would say that the lawyering business needs to be on top of the fact that these are future customers, and that they need to be sensitive that these future customers tend to network to each other….it is a make or break pr thing
I’m a now startup lawyer who’s worked in two venture backed startups and in-house at a venture firm so I’d like to think that I’m familiar with the issues at play here.The fact of the matter is that there are firms out there who will do the organizational work and the financings on a flat fee basis, entrepreneurs just need to be a bit more savvy in choosing their counsel. Clearly, a law firm who usually works with publicly traded company’s is probably not the best fit for a startup doing its first convertible round.By way of example, our firm regularly prices convertible rounds at $1,500 and priced rounds at $3-5k. These are flat rates. We try to make the process as smooth as possible often using Skype for communication and coordinating the “closing” via e-signature.At the same time, I think its dangerous to imply that these are just standard documents that require signatures. Even if the organization / financing uses “standard docs”, the value in a good startup lawyer is in the education he/she provides to the entrepreneur. Entrepreneurs need to understand the implications of 83(b), 409(a) and options pricing, voting, etc. A great startup lawyer is a great teacher.
i agree that working with the best startup lawyers is critical. that is whatwe encourage all of our portfolio companies to doi just want that set of law firms/lawyers to figure out how to do theincorporation and seed round for $5k
I think if the investors can settle on standardized middle of the road documents, Fred, problem solved.
As a “startup” attorney, I think $5000 is completely reasonable for standard forms and standard closing. However, I would add, at least under my current model, I try to build a relationship with the entrepreneur from the beginning. This prevents issue shopping and gives the entrepreneur confidence because the attorney has been with them from the beginning. This is my own personal taste, but I like to be part of the entrepreneurial process. I like to help entrepreneurs with good ideas create and expand a business.As for the issue of work for paper. This is always a quagmire, often presented by the startup because they just don’t have cash on hand. I always recommend payment plans or other risker (from the attorney’s side) options. This also builds trust. Equity can be a play but my rule is generally that it can’t be more than 30% of the fees. Otherwise, whether the intent is there or not, the appearance of conflict will always arise.Great post.
“And $15k, $20k, $25k of legal fees hurts. That’s one less developer working for three months.”Are those numbers the cost of employment, or just salary? I’m in the process of negotiating my take-home pay and stock options, so I’m curious for a little more perspective on these numbers. Would it be possible for you to do a post at some point on what you’d consider reasonable (or typical) equity to see offered to first employees? How is it affected by the employee agreeing to draw a salary at 20%, 40%, 60% less than their market value?Thanks.
Hey Mike, Fred did a standard stock option post recently, search the archives. By the way, for what little it’s worth, if you’re going to draw significantly below market value salary, my opinion is that you should receive, monthly, that amount times some multiple in stock or $0 vested options.This will still leave you with a tax burden, so factor that in to the salary negotiations.
Yes, I did see it, and I appreciated the overview of how options work. I think I’m more just interested to have more perspective on the actual numbers. It would be of benefit to founders, too, to know how much to expect to pay early employees in options and cash, as a function of their market value, time of hire, etc.
As a corporate attorney who works with many startups and VCs — at all stages– I would second many of the comments below. Sure, if there is a non-negotiated basic set of documents that all parties have agreed to (and counsel is comfortable with), the actual preferences can be done pretty cheaply– maybe 3-5 hours at whatever negotiated rate you have agreed to. But then there is all the diligence and backup to make sure it is right.Fred-Did you use NY/Boston/SV lawyers, or did you use a secondary market (Atlanta, Denver, Austin where the rates might be a little bit lower).Did you insist on a partner doing the work, or did a 4th or 5th year associate tackle it?Were there disclosure schedules?Did the company have sophisticated entrepreneurs who had done a seed round before, or did their lawyers have to explain everything to them?Had the founders stock been issued? Was it right? Was there reverse vesting being put in place? Did employees have invention agreements?Although none of these may seem like large issues, each of them takes time to deal with and get to ground, and at the end of the day, lawyers are typically being paid for their time. In addition, an extra $5K or $10K at the beginning may save $200K or $300K at the time of an M & A event or IPO (or more) — for example, if the IP is not correctly assigned, or if a founder’s reverse vesting is not correctly negotiated and the founder leaves.I think we in the startup and emerging company bar understand how important it is to our clients to be efficient and cost-effective, and we spend a lot of (unbilled) time teaching our clients how to help us in this. No one wants to take all the money in a seed round– we would prefer that our clients grow and do a dozen deals.
It was a long time ago but I had two reputable firms offering to do articles of incorporation and the angel round for free for the promise that they would get the follow-on business. We picked a young (at the time) but highly recommended guy at Paul Hastings. It was pretty straightforward but they made out well when we did our subsequent rounds. So to get $5000 and the likelihood of follow-on business should be a lay-up for any law firm wanting statr-up business.
I think it’s more common now to defer fees, but still bill, contingent on funding. This is definitely what gets a VC’s goat, it’s like lopping off some of their investment at the start, a little bit of dilution to start out their investment.. grr.
Fred – Couldn’t agree more. We paid … wait for it … more than $50K to raise a seed round back in Dec 2008. This to counsel who came highly recommended. It still makes me furious.
Great post. At hourly rate of $400 for a total of $17,000, the law firm would have done 42 hours of work. It seems that they must have done something more than merely incorporate the startup and tweak standard documentation to justify 42 hours of work. Often inexperienced entrepreneurs require handholding and education as to the implications of the terms of the documents, which results in higher legal bills. Once they understand that their firms are billing them by the hour for this service, they learn to reduce the time they require the firm to devote to their funding. Using standard documents for basic transactions can help keep these costs down. Fenwick & West and Andreessen Horowitz (http://www.seriesseed.com) and Y Combinator (http://ycombinator.com/seri… have created model documents for that purpose. Another way entrepreneurs can keep legal costs down is to learn as much as possible about the funding process and the terms in the funding documents without resorting to consulting their lawyers. There are many excellent resources for entrepreneurs, such as AVC.
42hrs is a lot of time for an experienced attorney to tweak a standardized term sheet An assistant or par legal can file the corporate papers electronically in 1 hr. Give he founders a 10 page summary on financing
Bill – Unfortunately, founders typically don’t read 10 page summaries on financing. And unless they have experience with funding, they don’t understand the terms even if they read the 10 page summary. So they resort to their lawyers to explain the terms. The could get an excellent education on financing terms by reading the many resources on the web, but most don’t.
One of my startups was lucky enough to participate in a “Deferred/Forgiveness” program with a major law firm ( who has since dissolved ). We were issued a rather large line of credit and accrued debt against it – only upon certain milestones did that credit turn into actionable debt ( 1MM in financing, 8 profitable quarters, or acquisition ). Of course we had to agree to give them first refusal on future work – and a higher rate than normal… but it was a great deal.The bills for our incorporation, vesting agreements, employment papers, and a host of other early-stage structuring topped out at around $7,500. While that was high – and billed out at rates from $400-$750 hourly (depending on who did the work) the firm was able to “tap into” a vast database of similar/identical contracts they had done. Probably 90% of their time was spent on guiding and teaching us — the rest on instructing a paralegal on what items to pick & choose. Had we gone with a “cheaper” law firm (hourly), it would have cost us twice as much — none that we interviewed had the capabilities, insights, or sheer experience in doing this items.My point is twofold:1- This early stage stuff is completely templateable. The top law firms are all using in-house templates; firms that don’t have the templates are just building them up as they go along.2- This is all fairly repeatable and standardized by the markets – the general terms on 99.9% of company charters are the same, as are the vesting agreements and employment agreements — our lawyers specifically wanted to keep things simpler and ‘industry standard’ to minimize what would have to be negotiated and analyzed during later rounds.
It is important to keep in mind that major law firms are the only service providers in the ecosystem whose fees have increased massively over the past 10 years in a way that has not been offset by productivity increases. 10 years ago law firm junior/mid-level partners in Silicon Valley often had rates in the $400 per hour range, few partners had rates above $600 or 700, and–most importantly–junior associates had rates in teh $200-300 range. Today, most partners are $600+ plus, some are $900 plus and junior associate rates are $350+ and mid-level associates who do a lot of the work for early stage companies are $500+ per hour.In many cases the per hour cost has gone up by 50% or 100% over 10 years, while almost all other costs for a startup have gone down. Heads for a startup are expensive and those costs have increased, but add direct value to a business. Heads for a law firm are expensive, law firm costs have increased, but so have their profit margins. Do a little digging for American Lawyer profits per partner data over the past decade.
There’s a simple solution here. Create a site (or even include a section in Crunchbase or have Dan Primack report it, etc.) where companies announce their counsel and the final bill on the round. That way, people can see exactly the ratio that Fred is talking about; $25K legal bill on a $750K seed round is preposterous – what does that say about the founders and investors? Echoing what many have stated, transparency both of the docs and who did what for whom at what price will force standardization and efficiencies. There are also some signaling aspects to this disclosure for future rounds. Even with a selection bias in who self-reports, that’s still a positive motivator and a branding opportunity for the law firms – “XYZ.com did a $500K seed round with ABC VC and $5K legal under PDQ Law Firm’s standardized Convertible Note docs.”
like thefunded, the result will not be useful
Ahh, you’re right Fred. Why misdirect via opt-in social pressure, just havelaw firms post their standardized template options, explaining exactly whatyou get from them at the $5K price point and a menu of a la carte servicesabove that number.
Fred, it is a great challenge, and I am sure that there are firms that would be happy to rise up and meet you on this. Call me next time!
It seems like there are 2 types of deals being discussed here:1) One-stop formation and financing. These are much easier to do at low cost because there is no history. I do deals like this for $5,000.2) Company was formed in the past by someone else and is now being financed. These take more time because I (as the lawyer) need to read the documents, do the diligence and help the founders respond to requests for tweaks based on unusual facts.I think Fred’s post was aimed at type #1 but (Fred’s experiences notwithstanding) it is relatively rare to form and fund a company all at the same time. I like the idea of the $5000 formation/financing package – the question is at what point the exceptions (negotiated terms, diligence, unusual tax, immigration or other issues) start to eat the rule.
I boot strapped my own startup along with my friend. I need a lawyer just to make sure our incorp docs and share holder agreement is correct. What kind of lawyer in NYC would be a right choice for my startup? please refere if u know some one
i am not going to recommend a lawyer on this public thread. email me at fred at usv dot com
I couldn’t agree more. I’m involved in a seed financing now where counsel is doing a flat $10k. Not quite your proposal, but it’s a start.
it’s in the right direction though
As a lawyer that works with startups all the time, our seed rounds usually come in less than $5k. That being said, while I think it is totally reasonable to have a seed round at $5k, your post is vague on the details that are important to lawyers, so the likelihood of getting firm commitment is interesting. Are you doing stock transfers, or is the seed purely convertible notes? What docs were built in to that round? IP transfers? Employment agreements? Stock options plans? Or are you talking straight convertible notes?Not to be an idiot, but why is the law firm doing the incorporation? You will save yourself a few $k by doing that yourself, and it isn’t hard. When you get in to by-laws, shareholder’s agreements, etc., the dollars add up.Standard docs agreed to by both parties ahead of time is a huge cost cutter. Even if it is convertible and negotiated, it shouldn’t be a big legal fee on that.Jeff
Sorry Fred, but I think you’re coming at this from the wrong angle.You write “We are both big fans of the law firm involved and felt they earned their fees on this transaction” but at the same time question the $17,000 bill. You wouldn’t be complaining about the final bill if you truly believed this law firm earned its fees!If you’re dealing with a Delaware incorporation and a relatively uncomplicated financing using standard templates, $17,000 seems like an awfully large number. Small and mid-sized firms in California will complete an incorporation for no more than a couple thousand dollars (including the filing fees) and even then all they’re really doing is filling in the blanks on documents not dissimilar from the ones you’ll find on LegalZoom for far less.I hate to say it, but this is what happens when:1. You don’t shop around.2. You use a big law firm but don’t know why.3. You don’t ask questions about billing and act powerless.For these types of transactions, there’s probably very little reason to use a big law firm that has significant overhead. If you’re into name snobbery but don’t want to be hit with $17,000 bills, you should:1. Become an educated client. If you make it clear you know what’s involved in the work being performed, you will see a difference in how you’re treated.2. Push back. If you’re doing the same transaction over and over again (or working with a firm that does these transactions on a regular basis), the firm knows its cost. So ask that future transactions be performed on a fixed fee basis. More and more clients are asking for this and it’s harder and harder for big law firms to say no, particularly if you’re an important client.3. If your firm won’t work on a fixed fee basis for “standard” transactions, or tells you that an incorporation and simple financing with no due diligence is going to cost $17,000, look elsewhere. It’s a tough market and you’ll have no problem finding another firm eager to serve you.Disclosure: my SO is an attorney.
remember that we don’t pick the law firm. the entrepreneur does. the VC/angel community needs to pressure the law firm but we don’t have the direct client relationship
Fred,Excellent post, very fair and reasonable to both sides.I am attorney but I do not work in the area you are discussing. I work with smaller businesses, most of whom will never reach the point where they will secure a million dollars in financing.However, I have a couple of thoughts on your post:1. I agree with the point that the fee should match the value that is being provided to the clients. If it does it, the fee is fundamentally flawed.2. A fixed fee where all sides understand the value being provided and received is always preferable.3. The rationale that the attorney is “helping the team” by reducing the fee and allowing for other uses of the funds only works well when the attorney is actually part of the “team.” Being part of the team means to me that the attorney has interest in the project that will pay off if things are successful. Of course, any interest would have to be subject to the relevant ethical and legal rules.One way I know that you can reduce your fees immediately is to work with attorneys who are not located in high cost centers (New York, Chicago, LA, the valley). I realize those attorneys are often very good and experienced but the overhead that is built into the law practices in major metro areas makes lowering fees nearly impossible. Also, there are plenty of attorneys between the coasts that could provide you with excellent service at a lower price.Shawn Robertswww.shawnjroberts.com
To get this sort of funding, do you need to have cash flow? Or is this just based on an idea that is presented?
LegalZoom for start up?
I’m no lawyer, but I’m sure each project varies and the complexity and work involved affects the cost. When I do work with people, I like to ask for a breakdown of the cost. Maybe that is poor etiquette in the VC/Lawyer relationship, but it can shed some light on the subject.
State Tax Advisors is a great service to handle Incorporation docs, foreign corporation docs and state sales Tax. Something like $395 to set up docs for state. http://www.statetaxadvisors…
I think the problem is that the parties come to the table before they’ve done their homework. Once counsel are engaged, all busywork is passed off to counsel and no one on the party-side takes any time to accomplish tasks that do not require a law degree. I’ve lost count of how many times clients have asked me to fill out a blank form for them or to call the bank and find out what sort of business accounts are available. I’m willing to bet that if you review the bills on this transaction, there is a whole lot of work that was passed on to the lawyers that could have, and should have, been done on-house. Clients have to be responsible consumers of legal services. It’s kind of like when you’re on a cruise and you charge everything to your cabin. It’s really easy to get out of control really quickly.The solution is simple. Have the lawyers do legal work, and that is all. Provide them with all of the information they will need upfront (or at least put some thought into corporate basics before your lawyer is on the dime.) Be proactive and provide discrete tasks. I’m at a major firm with top market rates, and I see no reason why $5000 is not a reasonable bill for a seed round … provided that all we are doing is basic documentation. However, it becomes much less reasonable when I need to have associates spending hours calling the secretary of state to learn about registration fees, filling out bank account forms, and having countless phone calls with clients to discuss corporate structure, voting rights, etc etc etc. Remember, a few 20 minute phone calls and you’ve already eaten up more than 10% of your budget. Plan your time wisely.
well, what do you think are the basic tasks, and what do you think everyone else should be doing
Two things that come to mind quickly are that the the company could handle their own cap table (but often don’t b/c they don’t understand dilution, fully diluted, pre versus post), and they should read some reliable startup law blogs before beginning the process so they understand concepts like pay to play, ROFR, registration rights, etc. Your lawyer can help you understand these concepts, but you should have a general business understanding of the concepts early on.In fact, every entrepreneur should sit down with the NVCA docs and read them and the footnotes b/c they explain a lot in English not legalease. Also give Brad Feld’s Do More Faster chapter on legal.Also, we have a bunch of free resources on our site http://www.goodwinfoundersworkbenc...
Seriously lets get to the root of the problem: Good lawyers want to make mad coin.No value judgement. I’m just stating the facts.You spent four years at an expensive undergrad college. You got good grades. You studied your behind off and paid a bunch of money to get great LSAT’s. Three years of ridiculously expensive law school, then before you really can practice you have to pass the Bar Exam which is made to trip you up, and then you spent four years working your ass off to get in the partnership track, finally after all of that you had to buy into the partnership.You don’t get the upside of your deals (which are not yours) and have to work on an hourly basis. Of course you are going to charge.You don’t want to hire some lawyer that works out of offices like mine, you don’t want somebody with no experience or that went to a no-name law school. Neither do I…we both know the difference between a bad and great lawyer is the same as the difference between a bad and great developer….immeasurable.So you get stuck with Mr. Big Bill. You control it you manage it but I’ve come to live with it. I get a number set in the beginning and then work to it.I wrote about that a month ago.
True. I think most people would be surprised if they thought about how much law firm partners and senior associates really make.
I know this is snarky, but most lawyers went into law to make a lot of money.Even if you are the exception, your worth at your firm is based on how much you bill.Its like telling a VC they shouldn’t charge a management fee or get carry.
“most lawyers went into law to make a lot of money.”I actually disagree with that as an envelope statement. I know too many law students and pre-law students that want to work in policy, civil, criminal or other variation of non-money making ventures.However, I totally agree that students who want to be transactional or corporate are looking at the $$$ as motivator
Ok, for the subset we are talking about we agree…..they are the subset I have the highest regard for….at least they can be honest about why they did what they did.Don’t even talk to me about the ones that go into it for policy and become Politicians or the ones that do civil and make a business bilking money out of the system….I have a name for them: John Edwards. As for the criminal ones they either try to leverage into politics: Elliot Spitzer or go on the defense side after a while.
40% of graduating law students drop out of whatever legal field they enter before 10 years. Other than those i generally agree with you statements
I know a ton of law students, it isn’t a ton of money, but it is one of the few service industries where you will be upper middle class and you are less scared about being exported. a lot of lawyers are not making serious money at all.Most lawyers don’t make big money, and they have a tendency to default on their debt.
i think its a reasonable thing to tell a VC they shouldn’t take as much fee income. we’ve changed our fee structure in our most recent fund because we don’t like the misalignment that fees representbut carry is a different thing. that is performance based comp and i can’t think of a good argument against that
You are right on that one.
they can still do that if the companies they represent grow into big companiesbut at the formation/seed stage, it is helpful (maybe necessary) for them to do the work very inexpensively
I’m totally with you, look it probably takes Reece serving 50 to 100 customers for a YEAR to pay that bill that got generated in a month, by a partner and an associate working who really knows how much. I’ve done 5 rounds in past lives….I’ll sign off with Charlie, I’ve even given advice to several startups on this for free.But I’ll take the lawyers view. I’m not going to make mad coin if they grow into big companies. I don’t get carry, they move away from start-up lawyers. If I gave a huge discount to every startup that came to me I’d go broke. Right now there are a ton of startups and that’s all the work I’m getting right now.So you are always going to have the Yin and Yang.I TOTALLY respect that you don’t have a lawyer on your side……I’m sure many feel that is just sucking more money out of the system because not only are you not paying for a lawyer (which we know traditionally gets paid by the company) but you don’t have two lawyers bickering running up the bill.When you get a bill that starts to become a percentage of the deal it really hurts. What hurts the worse is if the VC hires an asshole lawyer, the deal finally gets done and you’re so filled with hate you wish you didn’t do the deal, and then you get presented with Mr. Big Bill from the opposing lawyer. I’ve swallowed more bile than you can imagine on this one.
the VC going without counsel on a seed round is a good start. it shows weare trying our hardest to solve this problem. but i want the lawyers tofollow through on their part of the bargain.
This is not a challenge. The problem is where YOU are looking for your lawyer. I mean, did you go to a start-up lawyer with THIS task? If so, did you shop around? I doubt you did. Next time, do your homework.
maybe it would be useful for you to understand how this whole things works before leaving a comment like thatthe entrepreneur, who is often doing this for the first time, picks a lawyer. he or she then goes to the market and finds an investor group. then the deal gets done by his/her lawyer.then he/she gets a bill that is large relative to the amount he or she raised.
This is great. I’d love to get a copy of your “standard set of ‘light preferred’ documents”!
@Fred –Many responses are from lawyers who are imagining the issues that might have lead to the $17K bill.I would suggest a follow-up post with:1) The “standard docs” with the non-standard numbers redacted.2) Information about the state of the startup’s established corporate structure and cap table3) Information about the state of the startup’s established contracts and prior agreements.Then the lawyers in the crowd could respond with specific points about issues that raise the amount of lawyering needed.As an aside, I am surprised you don’t already know the answer to these questions already. I would have thought with the number of deals you have done that this question would have been asked and answered years ago. But sometimes we all get surprised when we realize we don’t know something that “we should”. Personally, I am very tight with any money spent so I always ask these questions. My discovered blind spots are elsewhere.
this post isn’t really about the specific deal i cited. it’s about a practice that needs to change
You need a lawyer fresh out of law school. We’ll do just about anything for a lot less.
Fred,Sometimes you get what you pay for. Over the last few years, we have seen lots of law firms open source their “standard” docs. Funny thing is, everybody has a slightly different standard. Venture deals are snowflakes, not form licenses. You’re not paying for somebody to fill out forms. You’re paying for insurance and (on the company side) for market information.Good law firms are like good VC funds in lots of ways. LPs will pay premiums to get into the funds that have the right team and deal flow. VCs should not expect otherwise in paying lawyers to advise on the deals that work.A better challenge would be — charge me what you need to charge me to run your business, but make the process as frictionless as possible. That’s where you might be able to optimize since not all law firms are alike in terms of internal teamwork and client-focus.
Layers, Doctors, Chartered Accountants charge for their extensive efforts, researches, tiring years of educations and hardwork. They do charge high prices as they are worth to be paid for their professional services. You pay them they will solve your problem which may result in million dollar loss if it is unattended. So i think they are not going to reduce their charges ever, instead they will be increasing…
You want the lawyer to get paid less, so the start-up, and by extension you, can get paid more. As it stands, you’re just trying to squeeze someone else out for your benefit, but framing it as a problem with someone else’s business model. You’re proposal is equivalent to someone saying ‘Why don’t you just give the start-up a non-recourse loan at 10%? If they make it, you get your interest, if not, you’re lose.’ The risk/reward structure on that deal is not an enticing investment. Likewise, doing work for nothing is not enticing to a lawyer. Get the lawyers to take equity rather than payment and you’re on to a fair system. The lawyers invest their time for a possible return, just like you invest your money.
not exactly. when the startup becomes a real business, they can pay more. but at the startup phase, capital is hugely expensive to an entrepreneur. every dollar counts.
Fred, I’m really happy you wrote this post today. At Standard Start (pre-launch non-profit http://www.standardstart.com) we’re working with Gunderson Dettmer and a number of other law firms to try to lower the cost and raise the value of legal counsel. I see so many companies scared off by the costs that they don’t utilize the high quality counsel good startup lawyers provide.With standardization and a more common sense approach to dealing with emerging companies, I think fees from formation to financing can be reduced. Things like Brad Feld’s upcoming book on term-sheets will be extremely helpful, but there is so much more we as a community can also do to educate entrepreneurs on how to best work with lawyer and extract the most value out of lawyers.Thank you for bringing this to the forefront Fred. Bravo!
$5,000 is not unrealistic for a “simple” seed round with standard non-negotiated documents. However, the corporate documents for most startups are in complete disarray by the time they get to their first seed round. Founder investments and employee options haven’t been properly documented, option plans are not in place (or are deficient), board resolutions haven’t been prepared for past company actions, employment agreements are lacking for key employees and officers, the entity hasn’t qualified to do business in all of the states in which it is conducting business, etc. Startups have even less money before a seed round and often don’t seek as much legal advice in the early stages. It often takes a significant amount of legal work to review and cleanup the entity’s corporate documents so that it is in a position to do the seed round. It’s this type of deferred maintenance that typically causes the fees to go above $5,000.00, not reviewing the deal documents and making the necessary filings. If the entity’s documents are not cleaned up, it can’t make the long list of reps and warranties that the VC’s include in the deal documents.
Great thread guys…just so you know, for our mobile app startup, freespeech (http://bit.ly/getfreespeech), we used a great team of Soho-based (New York) startup lawyers: RK ADLER LLP. The co-founders came highly recommended for the quality of their work and their creative billing solutions. They deferred our fees out a few months, and now, as we’re getting traction in the angel/vc space (which they helped link us up with), their fees for our convertible debt/seed round are really reasonable. I recommend this team as they have a great startup portfolio and vision, as well as a passion to be a part of the process. They even came down to help us with our soft launch at SxSW – let me know if anyone wants their info.
Lawyers will need to end their monopoly of artificial scarcity and compete like everyone else.Needs to happen = 100%Likelihood of happening =0%, since lawyers make the laws 🙂
What scarcity? There’s plenty of lawyers in the States, plenty of law schools, and many unemployed and underemployed lawyers right now. The average lawyer in California makes about $100K/year, hardly earth-shattering, given the number of years (opportunity cost) and tuition required to get there.As for lawyers making the laws, it’s curious that the laws and ethical rules governing attorneys are probably the strictest of those governing any profession. Combine that with what my professional liability insurer will and won’t let me do, and my hands are tied much, much more than the typical business person and more than the typical professional. E.g., I can’t take equity compensation, or sue to collect unpaid fees more than once in a long while, or my insurer will drop me. (Large firms may be able to afford to have costly policies where some of these rules don’t apply, or don’t apply as much).
Please, spare me.The State Bar is a self-regulating monopoly for your profession. They can and do control the supply of lawyers by changing the standards of the bar exam each and every year.Name me another profession where I have to pay $500 an hour for people to write up Word documents, no matter how well polished or intelligent they sound.I don’t begrudge you any of the fees you earn, and a good lawyer earns every cent of their money in complex transactions. But there needs to be true competition in the marketplace.
Please provide some evidence of state bars manipulating bar exams to control admissions – easier, tougher, easier – the stats don’t bear that out and the boards controlling them deny any such thing. Many lawyers would like to get rid of the state bar altogether and don’t view the bar as their friend and protector. It’s a monopoly the same as any other licensed profession is, which has standards for admission, testing, ethical rules, etc. to protect the public.Most lawyers don’t charge or earn $500 per hour. (You have to pay your family doctor more than $500 per hour to hear, ‘Not sure, could be stress, try exercising more and eat healthy.’ ) As other posters have indicated or at least alluded to, lawyers don’t get paid to “write up Word documents,” they get paid for knowing what document to write up, when, and what to put in it, in addition to advising and counseling their clients. This is the really value add, not any document. If the documents were the thing, then my DIY (prospective, mostly) clients would be succeeding, rather than screwing themselves, when they download docs from the Internet and try to implement them for.What line of work are you, or anyone on this board in where there is “true competition”? As other lawyers have stated, there is a lot of competition in the legal world, even new competition from alternatives like virtual lawyers and from legalzoom.com, etc. If you are only willing to consider 3 large firms for your legal needs, then it may seem like there isn’t so much competition.
Well said Fred. You should definitely be able to do a plain vanilla seed round with people who are willing to sign standard docs for $5,000 or less. The rest is most often needless process and many lawyers’ inability to operate practically.
Fred,I’m surprised it hasn’t gotten to that point already, especially since the time taken by the lawyers isn’t that much. Sorta like drugs, the cost of the first pill if $1b but after that it’s a few pennies.We’ll see the cost come down to a much lower number in the next few months, especially if you and other VCs start hammering the point. I wonder how much of this is due to the “bubble” people have been writing about and lawyers saying “if there’s so much money flowing around, why not skim off a little extra?”–Adam
I am delighted to read Fred Wilson’s “Challenge to Startup Lawyers” and welcome the challenge. I am the co-founding and co-managing partner of a law firm designed to respond to this very challenge. SORINROYERCOOPER LLC is a new law firm embracing and fostering a paradigm shift for 21st century business realities. The firm combines a commitment to the highest-quality lawyering with a businessperson’s practical, results-oriented sensibility to meet the needs of the early stage, emerging growth and middle-market sectors, including technology, software, communications, marketing communications, Internet, alternative energy and cleantech, nanotechnology, biotechnology, medical devices and other life sciences enterprises, and retail, manufacturing and distribution enterprises, as well as the financial institutions, investors, directors, and executives who support and lead them. SORINROYERCOOPER offers creative and sophisticated solutions and accessible, responsive service by experienced lawyers, for highly competitive fees, ensuring a compelling value proposition. The firm, founded by three veterans of major law firms, one of whom was the former managing partner of Princeton and New York offices of a national law firm and a corporate and securities vice chair, and the others of whom were former general counsels of fast-growing private and public tech companies, now features locations in Conshohocken, PA, East Brunswick, NJ, and New York, NY. Since its founding in November 2009, the firm has grown to include other leading lawyers attracted by the firm’s focus and commitment, including the former chair of the corporate department of the NY office of a national law firm, former co-chairs of the technology and venture law practice groups of large California- and Philadelphia-based law firms, the founder of one of New Jersey’s leading intellectual property boutiques, the former co-chair of the tax group of a large Philadelphia-based law firm, and the former chair of the intellectual property litigation practice of a large Pennsylvania law firm.We now have proven that it is possible to have a business model for a law firm that ensures high quality work at sensible rates, without sacrificing profitability for the law firm, compensation for associates and staff, or focused, quality services for the client. For far too long, quality has not been accompanied with value. We have opted to reduce the non-compensatory costs associated with providing our services, thereby allowing us to operate at far more sensible billing rates that ensure value for our clients. Lawyering need not be a zero sum game with winners and losers – we believe our solution is the proverbial win-win. Thank you, Fred.
Why dont VC firms have in-house lawyer(s), who specialize in Venture Capital related legalities? (Or am I over-estimating the legal work required by an average VC firm, to need a full time lawyer on its payroll? )
Fred’s firm didn’t use a lawyer.This was the fee the lawyer charged the company.You could never have the firms lawyer advise the company. It would be a conflict of interest.
It seems like there’s room for innovation here. And any lawyer who follows through on these ideas should have a line of prospective customers around the block.Naval at AngelList has been talking about this for awhile and may be in a position to make things happen. He is also keen on moving away from notes and back to equity, albeit on a floating basis so companies could take money over time while rewarding early committers.Here’s a thought: put the standard docs on GitHub! Let them evolve! Make them forkable! Compare diffs!
Orrick has a nice “startup term sheet creator” that can help you get started via a set of questions: https://tsc.orrick.com/It's part of the “startup toolkit” with some other useful legal docs you can reference as a starting point. http://www.orrick.com/pract…Of course, these “freebies” are used as lead-gens for their practice, but it may give you some sense of scope of the range of legal issues a startup may have from incorporating, financing, to employee docs.
Forgot to mention that Goodwin seems to be making progress in this area with its “Founders Workbench”: http://www.goodwinfoundersw…
Fred…I’m watching these comments for an attorney to answer this question well.I applaud the tone of this piece though because this is not a lawyer bash at all. Lawyers are really necessary and honestly if you take JLMs line the other day that you ‘only get what you negotiate not what you deserve’ (think that’s it), the lawyer is the one that memorializes that negotiation.But, when it’s boilerplate, they should charge as such. And yes, they will have to change their model which is ready for a dusting off.
Fred, if you’re bringing the formation/seed round deal to the attorney, I think you and the company have enough leverage to insist on those terms upfront. It’s then up to the particular atty/firm to decide whether or not to take it. Personally, if I was faced with that choice, I’d be evaluating the companies on a case by case basis, rather than agreeing to accept all blanket offers, though if your firm was involved, that does make a difference. I also don’t think you’re advocating that you just find any attorney willing to do the work for $5k-which I’m sure there is no shortage of takers out there–I have to believe that your’re not just looking for someone willing to say yes to the bottom line. Just figure out the list of attorneys/firms you trust to do the work, rank them, and approach them, and see what sticks.
we aren’t bringing these deals to the law firm. the entrepreneur is. but they don’t always have the experience to know what can and should be done with respect to fees. i think the VC/angel sector needs to demand this in seed rounds.
I’ve used Andre at http://www.siliconlegal.com/ for seed, angel, series A and series B. They are fantastic. I think they charged under $5,000 for the seed. I strongly recommend them to every startup.
Please reveal the firm that started this thread/post with the $17k invoice (which to my mind is high but not so grossly off the chart that it justifies this kind of lawyer-bashing). I think I know the answer, as probably do many of Fred’s followers, but I’d like to hear it from Fred. No obligation, but my point is that, unless there’s an accusation that the firm padded its fees (i.e., fraud), which there is not, then what this mentality is going to do is drive these types of firms out of the start-up business completely and drive a race-to-the-bottom. The Gundersons, Wilsons, Fenwicks, etc., simply cannot function on a $5k rack-rate (and the ripple effect of that mentality on later rounds, exits, etc.) without completely ripping out their current overhead structure, and what’s interesting is that the $5k comes from nowhere except a number that was imagined over coffee this morning, i.e., it may or may not bear any relation to the work done based on the subject firm’s agreed-upon hourly rate. So these firms will simply exit the business of start-up/early-stage and you’ll get garbage-in, garbage-out (i.e., take a look at the lawyering in the world independent film deals and you’ll get a sense of what this will look like). I for one, am interested to hear from someone at one of these firms weigh into this thread.
do you think up rounds can and should cost more? do you think it will make up lost fees early on.Plus, a lot of the law business is dying precisely because a lot of firms are not willing to adapt that there is a new cost reality…
If you think of it in terms not like “Package X costs $17 but I want it for $5”, but instead of market fit problem like “I want a cheap package Y, but market is only offering package X with many bells and whistles that are great, but I don’t really need them and can’t afford them”, then it’s a completely reasonable discussion. The first one would be lawyer bashing, the second is an empty market niche where lawyer companies might get great business if they figure out how to tap that market.
Agree with your perspective here. I’m baffled as to how everyone is getting wrapped around the axle on this one. The consensus on all sides is that if a company hasn’t got too much hair on it you can have a top-tier law firm run the seed docs for $5-10k, and professionally stand over them later. If the extra $5k matters so much to you, raise $1.005M and move on. What we have here are gifted amateurs looking into a different business and drawing tendentious conclusions that suit them. We software types are quick to get all righteous when customers take a view on our cost structures and object to paying $MMs for software/service at a 99% gross margin.
I’m a corporate attorney. I could probably live with a lot lower billing rate if I wasn’t expected to respond to questions within 15 minutes at 2AM. This is one way to get the bill lower.That said, there’s a ton of work that goes into negotiating these documents because each start up is a completely different deal. At the height of the housing boom, there were firms doing enormous CMBS deals at very little relative cost because the deals were all exactly the same.That’s just not going to happen with startups. And because of the liability issues involved, its tough to see this taking off.The only way I see prices getting as low as you are suggesting is if this work is a loss-leader for the firm, with work coming down the pipeline when the company blows up. 1) I don’t see major law firms doing this and 2) I don’t see non-major law firms doing the next Google/Facebook IPO.
I’m a venture lawyer who has worked on 70+ deals over the past 3 years. Under current billable rates, 5K is doable in a large law firm if there really is no negotiation and no education of founders (i.e. law firm sent term sheet, reviews incorporation documents, drafts documents, presents draft to all parties along with signature pages, everyone signs, charter filed and then money wired). But the truth is that never happens. And it shouldn’t, because if it did it means no one has read the documents. I think 7-10K is more reasonable but if there are any issues at all this could easily balloon. In order for a law firm to consistently do deals for $5,000 or less, billable rates will need to decrease by at least 30-40%. Which frankly would make sense from a demand side perspective.From a supply side persective, the issue here is really the high cost of law school. Law school is so expensive (i.e. approximately 50K/year in tuition 70+ all in) that salary really matters to recent graduates. To compensate, law firms have raised wages comparably to the point where contract attorneys (whose credentials are often less than stellar and who simply do document review) can be paid as much as $60 per hour. To compete with those positions, a starting full time associate (whose credentials are typically impeccable) must be salaried at a premium to that. And given those high salaries plus overhead costs, it would be unfeasible economically for a decent sized law firm to lower billable rates 30-40%.Now if you use a small law firm/sole proprietor, that’s another story since overhead charges are significantly lower. I suspect that many of the lawyers on this board who make claims that they regularly come in under $5,000 fall in this camp. But be careful who you choose. Unless you find someone who has great deal flow and experience, they will likely be a little out of synch with what market is and you might end up with problems that will cost twice as much to fix later (trust me, I have billed many hours to clients fixing other lawyers mistakes). But the problem is if someone had such great deal flow, they could easily go to large law firm and double or triple income. I’m sure there are some out there still, but they’ll be hard to find.
I don’t disagree with the cost estimate in the first paragraph, but to be clear the supply side issue is the (understandable and appropriate) desire of law firm partners to make more money each year not law school costs. Law firm starting salaries have increased at a rate much slower than billable hour increases over the past 10 years following the Gundo driven jump in 2000 to $125k base and the increase a few years ago to $165k base, subsequently cut back in many markets. Billable hours rates for comparable levels have generally roughly doubled in a decade, while leverage ratios (associates to partner) have increased significantly allowing for much greater profits. A couple of bad years in the downturn, but most firms have doubled or close to it over a decade.
You’re absolutely right, but another thing to understand about law firm dynamics. Almost all Law Firms are a pyramid where a few huge rainmakers feed the entire firm work wise. Firms that aren’t as profitable are very wary of having their largest rainmakers poached by other more profitable firms with offers of more money thus causing the less profitable firm to completely implode (see Brobeck, Heller, etc). So while you’re right that the deisre for more profits plays a role, it’s more the fear of greed’s influence on those few rainmakers that is driving the billable increase.
No disagreement. I was a large law firm partner. I certainly understand the economics.
this is a great comment.i suspect founder education is one area that sucks up a lot of time
By focusing on associate wages, you are ignoring the fact that partner profits drives the biglaw business model to a huge degree. The crash of in ’09 of biglaw showed that partners do not give up their million dollar distributions easily.Your second point about small law firms is absolutely correct. If Fred wants to pay less, I’m sure he could find a firm that would pay the rates he wanted. It obviously won’t be a big brand-name firm, anymore. Of course, I don’t think Fred is willing to give up using top-quality lawyers.
A little off topic, but I worked as a contract attorney at one of the large firm mentioned elsewhere in this thread (for significantly less than $60/hour). Me and at least the top third of my contract attorney group ran circles around the “credentialed” associates and even a partner or two who had to bill a few hours and ended up on our project on rare occasion. We usually had to redo or correct their work, with some rare exceptions. Part of this was admittedly their lack of interest in document review type work, but they weren’t too sharp, despite their presumably impressive resumes, in many instances, as well. We were billed out to clients at about 6 times our hourly rate, so I’m not sure it was our salary demands driving things. It goes without saying that we were kept on a separate floor, no benefits, crammed in rooms to the extent that HVAC couldn’t handle the load (5-10 people in one associate’s office), not allowed to attend firm functions, no paid parking, etc. So, again, our “demands” were simply the lowest rate they could staff the project for, for the most part.These days I am a solo and fall into the camp referred to above – I could do this work for $5K, I think, but doubt Fred et al. would consider hiring me.On the thread as a whole, “standard” documents may be standard to the lawyer and VSs, but to the entrepreneurs that haven’t been there before, and think their business is unique and special, standard may not be what they want, may not be appropriate, and in any case, they need an attorney to walk them through the documents and understand the implications of what they are signing. Otherwise, to just throw docs at them to sign, “hey, they’re standard, don’t worry”, that’s how the chapter in every entrepreneurs (or musicians) autobiography titled, ‘How I got screwed out of….’ reads.
I’m a little confused by your post. You say you and the company felt the firm earned their fees, yet you go on to say you don’t see why it should cost more than $5,000. Do you think lawyers should just charge less for the same amount of work? Lawyers are in business like everyone else and are going to charge as much as the market will bear. Nevertheless, the company certainly could have found qualified counsel to do the work you described for $5,000 or less. But if you hire lawyers on an hourly basis, and they charge $750/hour for partners and $500/hour for associate, you’re going to burn through $5,000 (or $17,000) very quickly. And good counsel can be had for less money. If you want the lawyers you used to start charging less, and they won’t agree to an alternative fee structure, then you’ll have to take your business (or recommend that your portfolio companies take their business) elsewhere.
I don’t think that the intented message is ‘lawyers charge too much for their time’. However, there are two big things that matter in the total bill and could be significantly optimized for needs of thrifty startups.1) how much and what tasks are done by the law office to get the intended deal done – if there would be a simple, transparent guide on what tasks/documents are expected from the entrepreneur beforehand, and a common agreement between VC & entrepreneur on what reviews are required and what not, then that would allow to reduce the number of hours billed.2) what tasks are done by the partners and what could be moved to cheaper admin staff. In these comments I saw numerous issues of things driving up billable costs that really shouldn’t matter in a well-optimized business process – for example, if basic bank account opening papers need to be handled, it should never involve a $750/hour partner; a $750/week secretary can find&send the right blank forms to the entrepreneur or fill them out him/herself, and that can be handled by the ‘fixed’ price cost to not even bother with detailed hourly billing for this part of service.
the mistake we made is we did not negotiate the fee upfront. the lawyers worked for the startup, not our firm. but in any case, i believe this deal could have and should have been done for $5k.
Thanks for replying, Fred. You’re certainly right that negotiating the fee up front would have avoided the problem. But what I still don’t understand is whether you think the lawyers *did* too much at a fair rate or whether they *charged* to much for the right amount of work. In any event, as a provider of legal services, I have found that if a client is unhappy with his bill, then in some respect, I have failed. Usually — and regardless of the fee arrangement — the failure is one of communication. This is a two-way street, of course, because if a client does not tell me his fee expectation, I cannot know what it is. So, if a client doesn’t share his fee expectation, I always ask. Then, knowing the expectation, if the project evolves in a way that makes it impossible to meet that expectation, I contact the client as soon as possible to discuss what is going on. A fixed fee doesn’t obviate that obligation, either, since surprises that would otherwise run up the bill on an hourly fee arrangement usually fall outside the scope of a fixed fee arrangement. Bottom line: the law firm should have made sure they understood the company’s fee expectation before commencing work. Once they knew the fee was going to exceed that expectation, they should have contacted the client to discuss the matter. And ultimately, the firm — without being asked — probably should have either written off the additional $12,000 (which, let’s face it, is peanuts to a large firm and probably could have been paid out of the partner’s marketing budget), or the firm could have simply accrued the $12,000 and kept it on the books until the company was in a better position to pay it (or the company took its business elsewhere).
I believe that most legal fees are inflated. Especially considering that if they are experienced and good they are just doing simple modifications to basic terms on a templated form that they should have done a thousand times.
If you take the time to find a firm that fits your vision and strategy, you will not be surprised or disappointed with the outcome. Some startups are looking for prestige, others for instant high-level access, and others for value billing.Our firm, Woodside Counsel, consists of experienced attorneys, all of whom formerly practiced with the New York and Silicon Valley offices of Skadden, Arps. Our focus is on timely and cost-effective service and our startup clients are happy to receive partner-level access at more reasonable rates. I am sure there are others like us out there but you have to shop around to find the best fit for you.If you’re interested in learning more about us, you can contact us here: http://www.woodsidecounsel….
Hina–You need to get yourself added to the website.
You could do it for no fee only if everyone involved were to have integrity and character.If all agree in principle to not screw anyone involved, and is fair then you would just say we agree that we are investing “x” dollars, we value the company at “y” dollars and we are taking “z”% of the company. We agree that we shall be fair and do everything with clear intent of not screwing anyone over.That would be a single page document and signed by everyone and no need of paying high prices to cover every angle to protect oneself.
This particular situation gives new meaning to the old adage You have to have money to make money —or lose it and pay for the lawyers to become rich…..
Here’s some food for thought for those commenting here: the broader the statement, the narrower the mind that said it.
sometimes that is true. but not always
I’m a lawyer in Brazil, and recently assisted a few (but relevant) startup companies. I still haven’t read all comments (but I plan to), but this is definitely something to be taken into considerations by law firms wanting to be a part of this most important sector.There is a lot to learn here. And lawyers (believe me!) are people too, and for the most part depend on the service rendered to make a buck. I’m not talking about huge firms, because I believe they couldn’t care less for “smaller” business. I’m talking about those who make only a few percentage of what’s actually charged. The majority of the fee goes to the partners, who are usually not involved in the transaction.With two of my clients, the effort I put prior to the actual setup of the company was immense. And for most of that investment I didn’t much financial return at first. Honestly.With one client, my investment eventually was paid-off, because the company grew and a lot of work had to be done.The other was kind of different. There were some unforseen problems and the company setup took longer than expected. We’ll see how it goes.Regarding the article above, many law firms actually charge royalties for the work done, as many of the applicable documents are in fact replicated throughout most clients. This should definitely be revised, adapting to the needs and financial situation of each client.But one thing is of the utmost importance: to setup a company, it is essential that things be done the correct way, and with legal support all the way. Most startups are companies aiming at third party investment, and for that to happen, the new companies should breeze through a due diligence, and not have contingencies that could affect company valuation.In other words, the word “investment” should be applied to both developers AND lawyers. That way everyone grows side-by-side.My 2 cents… No fees here! 🙂
We used Ted Wang’s (Fenwick’s) Series Seed Docs when we founded http://www.civicsolar.com about 1.5 yrs ago. We were very happy with the whole process.Links:http://blogs.wsj.com/ventur…http://www.seriesseed.com/p…
Class A offices and associates aren’t cheap. A lot of the large law firms that do this kind of work would gladly charge a company $5k for a no negotiation seed round with USV investing. That’s only because it’s a chance to cement a relationship with a company that is more likely than average to be able to pay full freight in the future. The beemers are paid for on the M&A exits. If you really want a more efficient system I think you have to be willing to work with firms that have a radically different cost structure. Most (though not all) VCs seem reluctant to go there, for their papers or for their portfolio companies. If you stick to the established brands you’ve got an excuse when things go wrong. Maybe some of the broader trends in start up funding (angels / platforms) will help drive some change, but I’m not really holding my breath. Good luck to those inclined to DIY, until Kid Mercury is running things you will need it.
Andrews Kurth has a Startup Package for exactly $5k for all incorporation docs/needs.Though it does not really include seed stage docs…http://www.andrewskurth.com…
I think you should open source the appropriate docs right here. If they have been through enough deals, VCs and entrepreneurs alike should work to live with them, with a “light review” by lawyers.
5K sounds right. 17K is a ripoff.
The only way to reduce costs is to automate the procedure as much as possible. This is, in fact, a good idea for a startup, Fred. 🙂
I love the idea that a partner is worth $900/hour and an associate is worth 300-400. What planet do you live on? $17000 to mark up documents and explain them to someone who is actually creating something? It is unfortunate that things like Legalzoom are not viable because the things we are talking about are not rocket science. I respect the work that my attorneys have done but I had to force them, upfront, to put a price tag on it. Otherwise they just rack up the hours. If you are heading into this, make a deal before you start, otherwise the high fees are really your own fault. You wouldn’t purchase other services without knowing upfront what the costs are, would you?This of course assumes the situation is as Fred described, standard docs, only one legal team and investors who are eminently fair in their deal.
Ohio State University’s law school has a clinic that works with start-ups on a pro bono basis. I bet that will keep the fees under $5k. http://moritzlaw.osu.edu/cl…
Interesting to see a post like this receive so much interest – as usual, Fred strikes a chord. Sad thing is Fred is unique in his view. In my experience, most VCs do NOT take to heart the notion that simpler is better, less is more, and limiting the negotiations on T’s&C’s is in the best interests of everyone involved in a seed or early round. Despite the lack of complexity in the early stages, entrepreneurs get sidetracked by this dynamic regularly. The only remedy for the entrepreneur is to have a great idea, and well formulated business model, and the leverage that comes from multiple potential investors. As for the lawyers’ role in this, some get it (and we know who they are) and most don’t.
Fred – Great post. Makes perfect sense. The transaction sounds from what you say, relatively straightforward. Regardless of how much money was involved, the fees for such a simple transaction do not need to be commensurate with the amount of the raise.I just completed my new article that discusses this issue from a slightly different angle – looking at innovation in the legal industry and how it is changing things like pricing. It is worth the five minute read.Link to article: http://bit.ly/f7RIrd
I agree with many of the comments here, but you also have to question the entrepreneur that doesn’t agree a cap / sensible rate in the first place or can’t negotiate their way our of a $17K bill. Doesn’t give me great confidence in their ability to manage the rest of the money being raised!
My experience with startup lawyers is not broad, but out of the several I have worked with, the two that I found most understanding and appropriate for startups were Ryan Roberts out of Southlake, TX and Lynne Bolduc out of Irvine, CA. Ryan’s fees were reasonable and his work timely and professional. When one of my companies got in a tight spot, he was very understanding and willing to be flexible. Lynne is highly qualified, very sharp, prompt, and though her messages are delivered sweetly, she represents her clients like a bulldog.
Fred’s comments make clear that he values good lawyers in the space. For those who don’t deal with lawyers much, it is worth noting that generally lawyers in the emerging companies space must be passionate about what they do and working with early stage companies. There are certainly easier ways to build a career in a large law firm than to build it $5k, $10k, $50k per client per year, less those that never pay. Even in the firms that “get it” the early stage lawyers are typically under a lot of pressure from firm management on a regular basis due to small revenues, slow/small collections, etc. Large law firms are built to think of revenue in $500k and $1m chunks, not $5k chunks. With few IPOs and many clients parsing out various pieces of work–ordinary licensing, patent, employment, etc.–for perfectly valid reasons it has gotten even harder for partners to build a book of business. Lots of the macro reasons are of the large firms own doing, but the lawyers who are good at this work are very passionate about it and it has become increasingly difficult to build a book of business that matters to firms over time.
Fred – to frame this debate, you should post the numbers and details from the bill. Without this information, it’s impossible to determine whether the $17,000 was reasonable or not. If the law firm spent 30 hours cleaning up the corporate structure, cap table, employment contracts and option pool or performing other necessary services to get the financing done, then the bill might be reasonable.
Fred, I think you want to bring “disruption” to everything!I say, “bring it.”
FredYour post raises some interesting issues.I think the key from both the client and lawyer’s perspective is to be straight, up front and transparent from the outset. If the situation is genuinely as you describe with the lawyer’s role being limited to documenting “standard” terms set out in a detailed term sheet with no negotiation then it may be possible to come within (or close to) the amount you mention. If, however, the scope of the work ended up expanding beyond that originally envisaged (for example work in relation to additional documents became required or other types of advice/workstreams emerged eg tax, IP or employment or DD the deal ended up in negotiation) then clearly this amount is likely to be too low. A clearly drafted retainer letter at the outset containing a fee estimate based on clear assumptions is therefore key from the perspective of both lawyer and client.In any event though, it is essential to bear a sense of proportionality in mind. Even though sometimes the level and complexity of documentation can be the same for a $1m fundraising as it can be for a $10m fundraising, clearly it would not be appropriate for the law firm to charge the company a disproportionately high sum by reference to the amount received. I also think that on the seed round, lawyers could/should take a bit of a “view” and potentially a slight hit on their fees to take a longer term relationship approach and in recognition/anticipation of the fact that they should hopefully be able to recoup on the later rounds and, of course, the holy grail of an exit.
Here’s the problem with your post:”We are both big fans of the law firm involved and felt they earned their fees on this transaction.”If they earned their fees, what’s the issue? Best I can tell, your “issue” is that they charged $12k more than you wished, and — the theory goes — “robbed” the start-up of precious capital. Your solution: lawyers give the start-up $12k out of the $17k that you admittedly “felt they earned.” Alternative solution: YOU give the start-up another $12k (or whatever the differential is between the “earned” legal fees and $5k) and stop crying about lawyers who, according to you, earned their fees.A larger problem with your post is the implicit assumption that lawyers aren’t already competing on price. The lawyer business is as competitive as any out there. We do not get together and decide the price we everyone charge for deals. Price is driven by supply and demand. So by all means shop around, and if you or your start-up investees can’t find the services you want at the price you want, it means your expectations are off.
There are software solutions, such as http://www.docdep.com/radar, which cost a fraction of what attorneys charge, that can help with all of this (deal room, cap table management, corporate governance, etc.) Might reduce some of the fees.
Unfortunately lawyers are not known for creating legal products and systems. The billable hour rules. This means that a good portion of most legal bills cover the law firm’s inefficiency no matter how good the lawyer or law firm is. This is probably true of the bill you’re talking about.Law firms don’t have incentives to invest in legal R&D to create these systems. If they did, they could create a system and charge the $5,000 you’re talking about. It would be like LegalZoom, but with a personal lawyer touch. The startup still gets a lawyer. Law firms could create databases of clauses, web applications, video tutorials, and other processes. They could try wikis to create baseline documents. Then the lawyers place a personal lawyer touch on the matter to tweak things to the nuances of the transaction and charge a flat fee.Is all this possible? I don’t think lawyers have a choice. It’s inevitable. Innovate or die. I’m working on a system for small local businesses and it’s coming along nicely.
Andrew – I could not agree more. In the meantime, there is such an online solution as you describe. It is not venture funded but I don’t expect it to be as I am predicting Legalzoom.com will acquire them.Here is the link – http://www.earlystagelegal…. Instant innovation!If you have an interest in how the investors are helping the legal industry innovate, feel free to check out my new article I posted on my blog last night. It will also cover other leaders (and leading investors – though not enough) in the space.Cheers!Tim
100% agree fredbut then… why isn’t this true for VCs themselves?why should VCs charge fat management fees for doing early stage work?at 2% per annum (or more!) VC fees are much much more than attorneys ever charge. (in the example you cite fred, if the raise was $1 million then attorneys got 1.7% fee, ond only once.)I know, its not exactly an apples to apples to comparison, but if VCs reduce their management fees then, de facto, more capital gets put to work in more startups (that is, if LPs don’t reduce their commitments but VCs reduce management fees, more LP dollars are available for portfolio companies.)one more thought –if venture investors really care about this issue…. then why dont VCs simply pay for the closing costs themselves? why exactly should startups pay for closings? i’m not deeply versed in scripture, but i’m pretty sure this is not a holy writ?;)
Interesting. I am not a lawyer but…will the VCs be more generous with the start ups too? Instead of taking 30% maybe take 25% and offer the lawyer and the plumber a bit? Or you want to be generous with other people’s money
You need to start doing flat-fee contracts with lawyers instead of time and materials. Once that happens, prices will go down.
From a lawyers perspective, is that a flat fee contract with a client means the client wll then consume infinite amounts of the lawyer’s time which is a lawyer’s only sellable resource. Per hour cost is the only thing that drives some clients to ever make a decision or stop asking for endless iterations. On most transactional work, a truly flat fee typically has a premium built in for success and a haircut for failure but startup fees are too low for that to work effectively.
Silly me, I though the ‘sellable resource’ lawyers had was their law expertise, not their hours in the day. Contract programmers hardly ever do time and materials contracts, so have to get their work done and manage the client, and they don’t whine about it.
I am already there Fred. I am always Shocked when I see price tags like you paid. I guess I am the dumb one when I charged significantly less. – JOKING!I see it like this. This initial creation transaction is the spark of a relationship I want to keep. I am a business guy whose business is law. My firm isn’t huge but we help lots of businesses get started. Some have even gone national. Heck, we have even worked for free just to stay on as an investment in the business’ future. Maybe what we need to get there Fred is that you call me first next time!Thanks for sparking the talk. Nice blog!
I’m working for a Swedish early seed VC (300-500 k per investment) and we always negotiate from standard agreements that can take us all the way. In one out of three cases we or the startup need the help from a lawyer for minor stuff. So these 10-50 k lawyer bills are really distant from my reality.The US have some fantastic systems in place for enabling entrepreneurship, but I guess your legal system is not one of them. Maybe some lobbying from the vc:s could make things simpler. The fewer barriers for starting and funding companies there are, the better the economic growth will be.Any suggestions here from the lawyer-community? How can things be made simpler (and thus cheaper)?
Fredrik: One reason legal fees are high is that law firms’ cost of services is high. A lot has been written about this, but here are some of my thoughts on the causes:1. Conflicts of Interest Rules–While ethics rules relating to conflicts are a valuable client protection, they keep firms relatively small, such that economies of scale are difficult to achieve. Each lawyer’s conflict is imputed to the entire firm. In my own market of St. Louis, Missouri, the largest offices cap out at a little over 250 lawyers. While this is partly a function of the size of the local legal market and economy, every additional attorney creates conflicts that result in lost business, which keeps firms within a certain size limit.2. Unauthorized Practice of Law Laws–Again, this is often a valuable client protection, but there are 50 states in the US and lawyers can practice law (as defined in each state’s statute) only in the states in which they are licensed. This localizes legal markets and again makes economies of scale difficult to achieve. It’s also very difficult for a law firm to have a truly national practice–especially when the subject matter is largely state-law (rather than federal) driven.3. Ethics Rules That Make Limited Representation Difficult–It’s difficult–and somewhat risky to the law firm–to offer limited scope representation. While it might make sense from the client perspective to have a lawyer do a small piece of a project, it’s often not so simple from the lawyer’s point of view.4. Malpractice Considerations–This is related to Item 3, but being thorough lessens malpractice exposure, although it takes extra time. Unlike many industries, law firms have limited ability to manage risk through contract terms with clients, and lawyers often protect themselves by striving for flawless work even if the effort is disproportionate to the legal need.5. Market Inefficiencies–It’s so difficult to match a client with the attorney that would be the best fit, that it rarely happens. Again, this is partly a function of relatively small firms operating in localized markets. Several of the commenters to Fred’s post mentioned that they had done several hundred deals. A true specialist should have the capacity to do several thousand deals over a career. An efficient market would funnel the deals to such specialists and their teams, who would have such an ability to do a quality and efficient job that weaker players would be unable to compete.6. Low Investment in Productivity–The tools are out there–document assembly, knowledge management, legal process management, and other technologies and methods–but lawyer productivity (i.e., law services output per hour of input) is not increasing very quickly. In my opinion, all of the items noted above decrease the return on investment in productivity improvements. Low ROI results in low investment and weak advances in productivity. Low productivity means a high cost of services.This is the point of view of a non-economist lawyer observing what he sees around him and thinking about it. I’d love to hear what others think.Brian
Fred. In Ireland the only main early stage investor is Enterprise Ireland. They are state funded and invest in 70-80 start ups each year with an average investment size of €300k. Their investment is in the form of convertible shares with the valuation determined at a later stage once a validating investor comes on board. Their terms are always the same and their legal documents have been approved by the 5 main lawyers in Ireland so there is no major drafting to be done and keeps legal fees to around €5k per transaction. Perhaps a similar approach could be used for early stage investment in NYC with both VCs and lawyers agreeing to a set of investment documents and agreed pricing structure. Thanks. Mark
Our law firm has a standard $5K package for our seed rounds. It works great when the company is clean. Our term sheets are always clean, vanilla. What can cause the fees to go up though is if the company is poorly organized and needs a lot of clean up before closing. That can happen.I definitely think $5K is reasonable on seed deals and entrepreneurs should push for it.
HiWho are the best startup lawyers in Montréal ? Can you reffer the law firm you work with ?
I don’t know how ‘standard’ your standard documents were. I experience a lot of baggage and home-grown legal documents at early-stage companies. This is especially true for commercial agreements like NREs and pilots, but also for actual revenue-relevant clients. I’ve seen options for co-investments of vendors as well as clients, and also source code escrow in commercial agreements.Maybe life is more complicated for a corporate VC, but I find seed investments more complicated than A-rounds and B-rounds more complicated than A only if a completely new syndicate comes on board.
Excellent Discussion. I have witnessed these issues many times as an investment banker. I have founded a capital markets advisory firm, DealPen, to tackle this very issue with financial advisory / investment banking. We charge flat transparent fees on key advisory services. Info @ http://bit.ly/fwjEhzPatrick Donohue, CFAfounder, DealPen
All the difficulties you are complaining about are coming from the fact that there’s lots of of you tho need a piece of it. More of you mean from the outset a rip-off from the legal school, more of you mean a ruthless behavior in competing with each other.villas in lanzarote
With an oversupply of lawyers, fees are not coming down. Why is that the case? Part of the answer is the bi-modal market–there may be an oversupply of lawyers, but there’s not an oversupply of the lawyers VCs want to hire. But that’s only part of the answer.
I used to be a start up lawyer. The firm I worked for put together a ‘startup documents’ book, basic LLC incorporation, etc. All in price $2k. The docs were put together in 2000. I still have them but no longer practice law. I’ll give them out for free to anyone who will post them online for further free distribution. @Golding
I am a first time entrepreneur that is wrapping up our first outside raise. Total cost is $7500. We did a term sheet, full PPM (probably overkill but the templates from the lawyer we choose were in this form), re-did our operating agreement and moved the company to delaware and the entire bill was $7500. If you take away the move to Delaware total cost was probably 5 to 6K. We were able to do this because:1) We bid multiple firms (several were in the 15 to 20K range we just passed). 2) We educated ourselves on the important terms. I read everything I could including several posts on AVC and Brad Feld’s entire term sheet series (link: http://www.feld.com/wp/arch… 3) We found 4 trusted people I could talk to (a respected VC and 3 angels) to solidify what terms were going to be important for our specific deal. 4) We started with templates from our lawyer but we did the heavy lifting and tweaked the templates ourselves to be appropriate for our deal based on what we learned. That allowed our lawyer to edit rather than create which led to significantly less hours.Based on advice we ended up choosing a experienced and respected lawyer. We are in Chicago and his hourly fee was very high but we agreed on a tight range for the total bill upfront.This worked for us. Our bill would have been much higher if we required more education and if we did not take time learning what specific terms would be important for our deal. That is one area where I could see others really leaning hard on a lawyer and where I could see the bill rising.
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As an entrepreneur going through a similar stage, I wholeheartedly agree with your post and want to thank you for raising the issue! Maybe someday these transactions can all be handled via an App.
Fred, I’m so stoked that you wrote this! I’m an entrepreneur from a startup/legal-related industry and I couldn’t agree more, which is why my new startup solves for this: http://www.docrun.com. 🙂 It’s like A.I. for legal documents. Lawyers should be utilized for their strategy, their experience, their connections and their knowledge. Consumers shouldn’t have to pay thousands for these same high-end lawyers to do a “find and replace” function on a Word document.I’ve built a great team of attorneys who have left their high-paying jobs to come work for peanuts — all for one thing: to disrupt this space.So don’t fret — we’re on our way! 🙂
Fred,MasurLaw accepted your challenge back in 2008. Look at our early stage services fee menu at http://tinyurl.com/4ea7y8g . There have also been many other attempts at creating standard start-up documents (I can bore you with the URLs if you ask). But nobody really wants “standard” documents, because every person and every business is special.Most people don’t think through their equity structure up front, and then worry it to death moments before financing, and that’s why their lawyers bill too many hours and their legal fees end up too high.Nothing is more disheartening to the experienced lawyer than an entrepreneur who asks for “standard” documents and a “standard” capital table, or worse, asks US to create their capital table. It’s like admitting that you didn’t plan your business at all, you’re just winging it, and you’ll probably lose your investor’s money.If a “standard” house, car or marriage is not good enough for you, then why would you think that a “standard” business set up will be good enough? It won’t, you’ll come to your lawyer asking for more detail, they will charge you for it, and your start-up legal fees will be high.The truth is that entrepreneurs, VCs and lawyers all focus far too much attention on the documentation surrounding fundraising, and not nearly enough on building their actual business. For a good lawyer, doing early stage corporate documentation is like skiing the bunny slope. We’ll do it, but it does not hold our attention nearly as much as working with an entrepreneur who wants to build a breakthrough business.S____________________________________________MasurLaw212.931.8220www.masurlaw.com___________________________________________Technology | Ventures | Entertainment
I get involved in startup financings all the time, and do so generally within the ballpark of Fred’s $5,000 target. I practice corporate law with a generalist bent, and while many of my clients are (or work for) early-stage companies and investors, I try not to describe myself as a “startup lawyer”. That is because the value proposition to me is that I can get in on the ground floor of great companies and build relationships with great entrepreneurs at an early stage in their careers. I am accepting a risk in exchange for an expected reward: opportunities to do business with successful companies and entrepreneurs down the road.Many lawyers whine about unreasonable client expectations when it comes to fees. And I certainly am not above the occasional gripe when clients seem to want me to perform work at no charge. But at the end of the day, it is not the client’s problem to feed their lawyers. It is the lawyers’ problem to figure out how to distinguish themselves in a very competitive market, and then to get paid. And even in this competitive market, I find that good lawyers (good technically, good with client relations, and good at understanding the fundamental business problems of clients) can always get paid enough to make a living.That said, I am still experimenting with my fee structure and service levels. Ideally I prefer to work on a fixed or hybrid fee with a pre-defined SLA. That way I can spend as much time as I think is required to get the job done well, without making my clients nervous. Clients feel free to pick up the phone when necessary without dreading the 0.5 hrs of additional fee time. However, the behavior of the other party in a transaction (or a dispute), including their lawyers’ aggressiveness, is a huge variable in the amount of my own time that will be required to get the job done. I messed up on my SLAs a couple times and ended up working for effective fees not much above minimum wage. Again, all my fault here, not the client’s, for failing to anticipate the situation. I do think it’s possible to get the fixed fee / SLA terms nailed down so they are fair to atty and client.One practical suggestion for small-$ transactions: hire a lawyer (or even a non-lawyer consultant) as a NEUTRAL party to run the deal. I haven’t seen any deals use this approach, but would like to try it out. It should be cost-effective b/c rather than have atty’s acting as advocates for a position, you have a neutral whose goal is to get a deal done on terms that are fair to both parties. And, it avoids the potential imbalance created when only one party has a lawyer, and that lawyer is ethically obliged to maximize her client’s position.
My friend, Dave Broadwin, isn’t into self-promotion. But, as a startup lawyer, he wrote a very thoughtful response:http://www.emergingenterpri…
Like other commenters I don’t know all the details of the transaction, but $17K for a seed round? No way. Fundraising rounds should be boilerplate, especially when everyone agrees to the terms upfront as you said.
Here is one very smart law firms answer to a VC’s challenge – http://bit.ly/i7FSpK The question we need to be asking ourselves is what are you doing?? It took this firm less than one week to put together a very compelling package for all start-ups. Great job!
Fred, I have a genuine solution. We are already doing this in a different sector of the law in the UK and you have made me think how a solution to your challenge can be engineered that fits perfectly for the VC and start-up community, plus the lawyers that support them.A tiny bit of background: We were a tech start up a number of years ago and raised capital etc. Now our systems, content and services are used by major brands like Barclays, Royal Bank of Scotland and many others who serve their customers law. We also work with lawyers and connect it all together into an ecosystem.For instance, you can create a sophisticated Shareholders Agreement (to good commercial lawyer standard) using the link below. Our tech will take you through all the key negotiation points and create your draft in real time (which can then pass to a lawyer for collaboration).http://bit.ly/hCpo3PThis link will start the document immediately – note it will be redacted with some text obscured until you are an authorised user. Make sure you go through a good few question sets as the initial groups are more basic – eventually you will hit major questions and negotiating points that substantially redraft the document and you will watch the document come to life and amend major part of itself in real time.Getting the fee down is all about efficiency and codifying legal knowledge into a usable system that allow the parties to collaborate.From your blog piece I have an idea how we can put something together with the VC community that can be specifically positioned for VC’s and start-ups and of course include lawyers too!If you want to crack the challenge you posed I would welcome brain storming further.
First, I am accepting your description of the workload here without consulting with the attorneys. Assuming it to be accurate, even though you like them, you’re using the wrong firm. I’m speculating that you are using one of the major firms and supporting seven figure per partner profits. You’re using the same kind of firm that lawyers facebook and google and are getting charged accordingly. I’ll bet you can find a qualified small firm or solo who could have handled the matter effectively and much cheaper. I have clients tell me that i do a better job than the majors.Thus, the challenge is to you to select the right lawyer for the job.
excellent idea Charlie
If the relevant parties were willing to open source the docs, we could certainly build a site to store them and publicise them. Add in endorsements and you could build the sort of confidence you need.And if we open source it, we can get modifications to the terms back as contributions to the project.
Charlie: I agree, but I’m conscious that Fred mentioned that different firms have different “standard docs”, and there may be specialised sets of docs for particular niches, so there may be a need for a set of standards to pick from (much like various different open source licenses, etc.).Plus, legal agreements need to be able to evolve over time as legislation progresses (or, er, regresses).But yes, the less variety the better, really.
Do you really want to open the door for liability if for some reason the deal blows up?Law firms are designed to handle potential malpractice suits if things go wrong – that is built into the transaction cost. If both parties know what they are doing and comfortable with standard docs then great, go ahead, (and I think 17k is ridiculous btw) – but posting standard docs on the internet and then endorsing them for others to use seems to invite liability.
Dan – A set of standard docs on the internet that is generally accepted doesn’t mean you need NO lawyer. You would still have a lawyer, but the lawyer would use those docs as a starting point and the negotiation would be very easy because all parties know that they are universally accepted. I don’t think anybody wants to replace lawyers with a wiki. What would be helpful though is making the process more transparent and cost efficient.
Dan: Well, I suspect we’d need lawyers to sort out suitable disclaimers, waivers, TOU, etc. Seems like a solvable problem. (Although perhaps I’m being a naive engineer here….)Basically, the VCs can have “standard docs” and have confidence in using them without legal assistance because they’ve used them plenty of times. Entrepreneurs don’t get that sort of confidence because (typically) they’re not doing those deals day in day out. But entrepreneurs as a group are. Some way for the start-up community to pool knowledge and save precious capital (and time, for that matter) seems beneficial to all sides. Going light on legal assistance is a choice, and a risk, all the same.
Ok sorry sounds like I misinterpreted that comment. I totally agree that some sort of basic guidance would be useful and would provide entrepreneurs with more leverage.A similar trend has already emerged in the field of patent prosecution. Clients are moving away from hourly rate legal work preferring “packaged deals” instead. This started out as simply savvy negotiating on the part of the client and I’m sure a lot of it has to do with budget cuts across the board.I wouldn’t be surprised if flat rates for incorporation and related transactions quickly become the norm if clients ask for it.
With a company this FUBAR, if anybody sneezes somebody else will sue. $35K is pretty cheap compared to a lawsuit.Lawyers can solve a surprising number of situations the companies have screwed up but they ain’t Harry Potter.