Legal Startup Cost Considerations for EntrepreneursYesterday, Fred Wilson – one of technology’s most prominent venture capitalists – posted a challenge to startup lawyers on his popular “AVC” blog.      After paying $17,000 in legal fees on a seed round funding transaction (with no investor counsel involved), he asks: why can’t we do this for $5,000 or less?   I had two immediate reactions to his challenge.

First, that this complaint, in one form or another, is one that a lot of us in the technology community (even those of us who are lawyers) have been wrangling over for a heck of long time.   It has come up constantly throughout the 10+ years that I’ve been involved in tech, and never seems to get fully addressed.    To be sure, every now and then a sharp, forward-thinking lawyer comes up with a proposed “open-source” type solution to the problem that never quite gets universally adopted.     For example, I thought the “Series Seed” site was a great idea and one I’ve shared with entrepreneur friends in the past.

Personally I wouldn’t narrow this complaint to the particular subset of work (seed round closings); rather, I’d extend the idea to cover the whole gamut of lawyer pricing to startups.    As someone who has run in an entrepreneurial community for a long time, I can confidently say that most entrepreneurs desperately need great legal advice, are willing to pay for it, yet are pre-emptively “sticker shocked” away from getting it. As a practical matter, two bad things result: (a) entreprenuers avoid lawyers, when they really do need good advice; and (b) a ton of interesting, intellectual, fun legal work out there for lawyers never makes it to their office.   Everyone loses there.

My second thought in reading the piece was: REALLY?! In this market, this is a big challenge?!  I’d think there’d be line a mile long of young, smart, tech-savvy lawyers willing to do a simple seed round closing for $5,000.  Gosh, if I were to hang out a shingle, I’d be THRILLED to take as many of those as I could get.   Working with young, exciting, “change-the-world” clients is amazingly fun and a great learning experience, second only to … well … working with young, exciting, “change-the-world” clients that are funded! These days, a young lawyer with an interest in technology and entrepreneurship could do a heck of a lot worse than having a stable of seed-funded clients to service – all of whom are entitrely convinced (and working like fiends to ensure) that their venture is going to be the next Google, and maybe it will be.    Not a shabby book of business.

Addressing the original challenge specifically, and for those who don’t do much of this kind of work: in a standard seed round transaction, there are usually a limited, well-identified number of issues involved to negotiate over, and the closing documents are fairly standard.   Wilson’s right, there is rarely good justification for a big bill, especially when there are skilled lawyers involved.  Actually, there ought be an inverse relationship between the skill of the lawyers involved and the size of the bill in these type of transactions – and in practice the result is often the opposite. A good, knowledgeable startup lawyer knows what’s negotiatble and what isn’t, knows the customary stances and compromises for the various legal terms at issue (e.g. anti-dilution mechanisms, covenants, tag alongs, reg rights), and what rights and protections an investor can reasonably expect.   It absolutely takes some skill and experience to professionally counsel a client receiving seed funding, but it’s not exactly the heavy lifting (hours-wise) of litigation discovery, appellate briefing, or things that by their nature just take a long time to do properly.

Some lawyers will object to that scary word “standard.”   Yes, technically, every deal is different.  Every deal involves some level of customization – the key concept being some. Most of the paperwork doesn’t require a lot of time-intensive drafting or wheel re-inventing.     A lawyer absolutely needs to spend some time asking the right questions, assisting in working through the negotiable terms, properly conducting due diligence, and so forth.   But, in the vast majority of cases, much of this work can be process driven.    It’s just not the same, in terms of time-investment, as having to research, brief, and argue a complex interpretation issue in front of an appellate court.

I’m a corporate type, I practiced law in a big corporate department before I left to work in tech, and I am huge fan of lawyers.   I believe that lawyers can be amazingly valuable assets, and that … wait for it … many business lawyers are actually dramatically underutilized, particularly in the entreprenuer community. They’re underutilized because many business lawyers price their services in a way that simply discourages their use.   They charge too much for some things, and too little for others.    An hour of lawyer time tweaking a standard seed round Stock Purchase Agreement just does not have the same value to me, as a client, as a hour of your time strategizing with me on how to structure a complex acquisition transaction, wherein I get to directly benefit from what you’ve learned from the hundreds of other similar deals you’ve seen.     It’s not just the billable hour at fault, but that is a big culprit when dealing with the business needs of startups.

The topic really pushes for more immediate discussion on both alternate billing structures and the adaptation of agile project management techniques to the practice of law.   These are big Susskind-ish topics, but they’re becoming more practically relevant every day.

In the meantime, I hope that Wilson’s challenge inspires the technology/venture capital community to seriously consider a more “open source” type approach to early seed funding transactions  to facilitate investment while also keeping legal costs in line. If I were ambitious, I’d also suggest there’s room for some creative ideas to address what I feel is a major lost opportunity; that is, the continued representation and advisement of young companies after they receive their seed funding.    The demand and need for those legal services is there, but it’s largely unsurfaced due to the lack of widespread adoption of creative, cost-effective approaches that work for both the entrepreneur and the lawyer.

I hope Mr. Wilson’s challenge is one that’s met, instantly and overwhelmingly, by an army of terrific, skilled, business-savvy lawyers.