Nivi · January 15th, 2010
Yesterday, we published Top 10 reasons why entrepreneurs hate lawyers, a sponsor post by Scott Edward Walker. Scott’s a lawyer.
First, I thought other lawyers would hate it. I was totally wrong — we got a bunch of nice comments from lawyers like well-known Silicon Valley folks Yokum Taku, Josh King, and Matt Bartus.
Second, Bram Cohen, the inventor of BitTorrent, left an awesome comment that I’m reproducing here with added emphasis:
“Thanks for the link to my tweet, Scott.
“You cover the problems very well. My particular gripe in that tweet had to do with the practice of billing up several hours to answer a question asked in email, when all that was really wanted was the answer *if* the lawyer knew it off the top of their head. Next time I start a small company I’m going to have a policy that any hours billed need to be approved in advance, after estimates of how many they will be are given.
“You’re very right about the over-lawyering, and the NVCA docs in particular. There’s no reason in principle why one couldn’t take an NVCA document verbatim and simply fill in the blanks and do a round of funding without needing a lawyer at all. The contracts which people go into when they buy a candy bar are equivalently complex, but they’re implicit and contained in the uniform commercial code, and always going with the boilerplate works for everybody.
“Associates doing work is a real problem. I’ve found that insisting that all work be done by partners results in better work for less money in the end, even though the nominal hourly rate is much higher, because an associate will bill for several hours researching a subject which the partner already knows off the top of their head.
“Not only is the biggest problem with lawyers them being deal-killers, but being general activity killers. Too many inexperienced entrepeneurs get into ‘The lawyers say we can’t do X” disease. Lawyers can’t tell you you can’t do something. They can warn you about risks, and in extreme cases tell you that something is such a bad idea you’ll need to get someone other than them to do it (although I’ve never personally been told that) but the judgment call of whether the risk is worth it is the entrepreneur’s. Since lawyers are trained in risks and don’t generally even think about the business, they always advocate being overly conservative, sometimes to ridiculous excess.
“All this sounds much more negative on lawyers than I generally feel. I view lawyers as performing a necessary function, but their costs can easily skyrocket and need to be contained, and their advice needs to be taken with a very large grain of salt. I don’t have the deep distrust for them that I have of, say, sysadmins and HR directors, who who are entrusted with running the core systems for a company and can easily get away with all kinds of stuff if they’re of dubious ethics.”
Bram, if you’re reading this, can you share more lawyer hacks and maybe tell us about your experiences with sysadmins and HR directors?
Topics Lawyers
This is true for any advisor, your expectation should be that they will make you aware of the likely consequences of a course of action that you are contemplating (some of which you may not have foreseen). But they cannot make the decision for you. There was a great quote in the Fortune profile of Larry Sonsini where they asked him how he influenced fiercely independent entrepreneurs like TJ Rogers:
The full profile is here: http://money.cnn.com/magazines/fortune/fortune_archive/2006/11/27/8394382/index.htm
I blogged about it here http://www.skmurphy.com/blog/2006/11/30/larry-sonsini-profiled-in-fortune-nov-27-06/
My three take aways for entrepreneurs that I believe are still valid:
The best attorneys present options and make you aware of the likely and potential consequences of different courses of action, but understand that the business decision still rests with the client.
If you allow an attorney to invest (and then re-capture his dollars in (possibly deferred) fees) you may find it difficult to fire or replace the attorney. Make sure it’s someone you want a long term relationship with: there is no such things as ”free legal advice.”
Work with advisors who are willing to be transparent about their fees. If you were a prospective WSGR client, the answers that they gave here should be unacceptable. Understand why the code of ethics for accountants prohibit similar fee arrangements.
I’m in a unique situation to see both sides because I’m a practicing attorney (mostly IP and contract law) and come from a startup background, as an early-stage Rackspace employee and then legal-services company co-founder.
However, this isn’t the norm. Most attorneys go straight to law school out of college or after a brief stint in the workplace. If they’ve been in business at all, it was usually at a low-end job with little business decision authority prior to entering law practice. The big firms and big-name schools are even “worse” in this regard, because both the schools and the firms rely on placing students into associate positions early on in life when the newly-minted attorneys are young enough to work long hours for the lure of a large starting salary.
Often, an associate in their first three years of firm practice will not have a chance to ever meet a client face to face or have to stand up and defend in court the provisions of a contract that they reviewed. The result of this is that by the time lawyers do reach positions in which they consult with clients, they’re so steeped in the law firm mentality that they’re exceedingly risk-averse.
Transactional and litigation practices are often cordoned off within a firm so that the people who draft the instruments are not involved if (and when) those instruments have to be revisited in litigation.
That’s not to say that these sort of firms don’t do a good job, but it comes at a very high cost and with a built-in bias against action. It’s presumed that the goal of any given deal is to avoid future conflict at all cost.
As the main post says, it’s up to the *client* to make the business decision, after input from all sides. Good lawyers recognize this. Great ones can provide a cost/benefit analysis to each of the options they recommend.
Looks like I wrote out my last comment too quickly and made some typos. Mea Culpa.
However, I also wanted to chime in on the “free legal advice” aspect of the post. There can be a large amount of pressure on partners and associates to generate billable hours. The practice of law is a business too, and something has to pay for the large law school loans that many practitioners carry for 10 or more years after exiting law school.
If you’re an entrepreneur, hopefully your goal is to make money eventually, even if you’re funded instead of bootstrapping. Your attorney is no different. If the attorney’s office is at the top of a prestigious tower and the conference room beverage service is on sterling and crystal, someone’s paying for that. Guess who … (its not the attorney).
Our firm dials back on the amenities in favor of devoting more client dollars to real work product and, personally, I don’t mind giving clients some off-the-cuff advice, but clients should understand that doing so can expose an attorney to malpractice claims if they’re wrong and that off-the-cuff advice is acted upon.
This is where a personal relationship plays a big part. Choosing a lawyer is just like choosing a business partner and you should look for some of the same skills in both.
That’s my 2c, not legal advice. Disclaimers apply 🙂
Another key point for first-time entrepreneurs is that unlike criminal law, commercial law is not binary. You either did or didn’t steal the candy bar, but you may or may not be liable for some capital gains tax for some off-shore disposal.
Commercial law is frequently down to interpretation – and this is why lawyers can make a good living simply by writing opinions for clients.
This becomes very relevant when you consider the size of your enterprise. Multinationals are held to higher standards (mainly because they are significantly more suable) than tiny startups.
Beware of fancy lawyers from big name shops. Even if you do get value for money, the risk profile of the advice is almost certainly appropriate for much larger companies than yours.
I’ll admit to finding the original post a bit negative for my taste, but then I’ve been quite happy with startup-specialist lawyers in the past. Yes, I did once work with a firm that was thoughtless on billable hours and piled partners on a conference call because it was a really interesting/tricky problem. That relationship didn’t last long.
On the “make the partner do everything”, I see Bram’s point, but if you’ve got a really sharp associate who’s been around for several years and has done the kind of work needed, they can get the job done very well for much less. Depends on the associate.
Hacker News comments on this post.
I can give a few thoughts on sysadmins and HR, although now I’m feeling a bit self-conscious about what I say, lest my words disappoint.
For keeping the reins on sysadmins the big thing is using hosted solutions whenever possible. You should do that for other reasons as well, including that you can evaluate what you’re getting in advance and that it generally results in a cheaper, better solution, but the accounting transparency which it gives management is a clear benefit.
In software companies it’s important to make clear that ops works for and in service of engineering. Their job is fundamentally to make the engineer’s work possible, and they should be judged based on how well that happens, not on any sort of self-evaluation of how pretty their machines are.
Non-software companies which don’t really have any ops but still need IT support are in a very difficult position. Many try outsourcing it, but that’s just as unreliable as insourcing, even from big name venders. For them the advice about hosted solutions goes double. And, I feel silly saying this, but buying macs for everybody can easily save more in IT and general management headaches than it costs in hardware. I wish there was a Linux-based OEM I could say that about.
HR also needs to have clear management expectations set. Their role is primarily a technical one, with duties along the lines of making sure people get their medical cards. It’s wonderful to have someone dedicated to such tasks, because they get done poorly and with great distraction when done by someone whose primary focus is business. The problems come in when HR starts being tasked with screening candidates. The person responsible for deciding on a hire is the person’s eventual manager, and interviews should be done by that person and eventual coworkers. A lot of companies wind up being run by HR because the first round of interviews always goes through them, with the predictable effect that they get employees who are deferential to HR but not very good at their jobs. HR’s role in screening should be limited to collecting information from candidates and doing basic background checking, like verifying educational background and getting criminal background checks.
The other common problem with HR is that their vision of company culture is often, ahem, different from what management really wants. Don’t be afraid to veto company outings and team building exercises if you think they’re pointless or overly expensive or humiliating, and do provide guidance as to what sort of group activities and company perks would be of value, because if you don’t give any guidance you can’t complain if you don’t get what you want.
One thing you should absolutely never use is an ‘outsource HR’ firm which acts as the technical employer of all your employees. In principle such they can save you money on benefits and administrivia. In practice they’re simply awful, and put your entire business at the mercy of an entity which is a glorified accounting hack. The disastrous effects of such beasts are one of the unaccounted-for costs of the price of health care in the US spiraling out of control.
Totally agree. If I were an entrepreneur I’d only want to use partner-level lawyers, particularly ones who have in-house as well as law firm experience. I say this as one who’s been on both sides of the fence — earlier in my career as an associate at WSGR doing VC financing rounds for startups, and more recently, as GC of a major consumer Internet company where I had the displeasure of paying $2 million a year in law firm bills. There is a real disconnect in the current environment, which favors lean startups with low burn rates, and the high overhead, inefficient staffing and uncritical over-lawyering that characterize many (though not all) large law firms. I think the late Craig Johnson was onto something with VLP, and I hope more firms like his (ours?) take up the challenge of building a better model, in classic SV startup style!
My biggest recommendation for startups: Make sure you negotiate a fixed-fee arrangement with your lawyers on fund-raising events.
– Most people will tell you this can’t be done. We’ve done it every time.
– Simply tell your lawyer that this is a “vanilla” standard funding with no big, non-standard items.
– Make sure to also talk with 2-3 lawyers and let them know politely that it’s competitive.
– Also make it clear that whomever you choose for the funding will likely get your work in the future as your company progresses.
– Finally, tell your lawyer that if any “non standard” items pop up in the fund raising then you’ll accept these are change items that they can carve out of the standard arrangement.
– This way you get a mostly “fixed fee” agreement. Most importantly it sets everybody’s expectations up front how much the transaction will cost. By doing this lawyers will be less tempted to allow “billing creep” in your arrangement.
This works like a charm.
Mark is spot-on (as usual). Fixed-fee arrangements (or capped-fee) with a competive bidding process is the way the way to go. A lot of large corporations (including GE) are moving to this approach as well. In certain transactions, however, it gets a little tricky negotiating the “carve-outs” in the engagement letter.
We use a tried Hollywood setup: our business affairs person is an experienced entertainment att’y. Our relationship goes back over a decade. Trusted expertise is our defense against grossly unfavorable terms.
(Eric Ries’ recent postings in a Harvard Business Review online setting cited Malcolm Gladwell’s New Yorker piece about entrepeneurs. Mal may miss a lot of things but he does make an excellent case that successes are almost never individual efforts.)
I wish there were better news about SysAdmin’s. Yes, we’re Mac (except for our user testing gear to mimic what most kids use). Outsourcing has indeed been a series of fair to poor dates. Reliable SA’s are difficult to find, vet and hire right now.
And an unusual tool for basics in HR matters is an old one: private investigators. A lot of really sharp ones are retired police detectives. Their fees seem like a good value. Little escapes their review.
Yes. Lawyers tend to overbill, but often, it is the clients who let them. With a past as both a “big firm” associate and as in-house counsel, I have seen lots of huge bills go out the door. But what has often struck me as making the difference in that bill is the client. As a client, you have to set expectations with your outside counsel from the get-go. Ask them how long a project is going to take or the anticipated cost. Of course, things may be a bit outside the initial projected scope, but if your outside counsel knows that he told you it would cost X, he is going to try and keep it as close to that cost as possible. Further, as the client, it is your responsibility to look at the bills carefully and always be sure to speak to your lawyer if it seems heavier than expected. Trust me, once outside counsel knows that you are checking that bill carefully, he’ll be less likely to “bill up”. You have to set the tone for the relationship. The moment you neglect to follow-up on the 6 page legal research memo you were billed for, but never requested, you are sending a message to your outside counsel that you are ok with “extra” legal work – and fees.
“Lawyers can’t tell you you can’t do something”. This is true, in a way. However, a good lawyer will not just say “you can’t do this”. A good lawyer will say, “you can’t do this, this way; however a good alternative with less legal risk is . . .” A good lawyer for businesses and start-ups knows that there are business issues and legal issues, business risks and legal risks and takes all of those into account for the client and provides the client with options. At the end of the day, you want the best solution for your business and sometimes, that solution might leave you at a somewhat greater legal risk. Therefore, look for lawyers who have had both law firm and in-house experience, preferably those lawyers who have experience working with start-ups and entrepreneurs and understand their way of thinking.
Having been involved in multiple fund raising exercises over the course of the last 15 years including an IPO on the London Stock Exchange (AIM) I have figured that in the end it is your responsibility on how best to maximize the use of your lawyers.
Initially the first fund raising cost an arm and a leg (due to lack of knowledge on how lawyers bill).
In the end I figured that the best solution is to hire (and there are a lot of unemployed highly experienced contract lawyers available) on contract for 3 months an in-house lawyer. All of the due diligence, contracts can be read, discussed and internally dissected before engaging with (only) partners of the law firm you want to oversee the transaction.
This way you control the whole process end-to-end and the major law firm is hired for the appropriate parts needed to achieve the most efficient and cost-effective result.
A tip if you hire on contract is to be sure that you provide an incentive bonus to the in-house lawyer to complete on-time. An extra months salary can do wonders for midnight oil-burning for a job well done, on-time, on budget and professionally.
What about lawyers in the IP arena
I’m a start up company and I have a relatively large estimate just to file a provisional.. I am questioning the lawyer now as to whether his practice is about creep-billing
would anyone recommend having a patent agent instead do the provisional? anyone have experience with this?
I wanted to write in parallel to Nathan’s first post, but from the perspective of a law student about to join a corporate law firm. Like Nathan, I had the benefit of working before school — I cut my teeth managing investments in and doing marketing for a global social entrepreneurship network for 3 years before returning to school.
While it is true that most young attorneys don’t get face time with clients, it is the research — that Mr. Cohen derided — and interaction with partners — which should happen more than it does — that helps mold young lawyers into the list of competent start-up attorneys with whom so many entrepreneurs have had positive experiences.
Yes, the cost of a few hours of research over a quick email may be higher; I agree with Julia that both attorneys and companies could exercise more careful oversight in billing and fee arrangements.
However, good start-up attorneys are made, not born. Given how many people are turning to entrepreneurship during the tough economy (http://www.nytimes.com/2010/12/12/business/12yec.html?src=busln), it only makes sense to give more young attorneys the training and experience we need to continue to serve your vibrant community.