It?s the holiday season, and many of us are thinking about gifts ? what gifts we?ll be selecting for friends and loved ones, and if we?re being honest, what gifts we?d like to receive ourselves. This spirit of giving has made its way into the startup community as well, where many companies are shopping for the gift of free legal services. While you may be thinking, ?I was really hoping for one of those driverless cars from Google,? entrepreneurs assume that not having to pay for legal services until a company reaches a certain stage of development or brings in a certain amount of funding can be a real boost to a fledgling company. Many entrepreneurs think, ?I?ll be able to afford a lawyer after [fill in the milestone], but not now.? Unfortunately, some companies are learning that free legal services can have other costs that are not at all beneficial for the company.
Is this what your company looks like?
So how does the free legal services thing work? Some law firms will offer to waive or defer a company?s legal fees for a certain period of time (say a year) or until they close a funding round of a certain amount (say $500,000). Don?t be fooled into thinking these discounts are the equivalent of Macy?s Black Friday sale. Here are some details on how law firms make these startup packages work:
- Large law firms divide their attorneys into distinct practice groups, and the work some lawyers do tends to be more expensive for clients (think bet-the-company litigation or taking a company public). These practice groups essentially subsidize the work of the team working with startups, because, as you probably know, startups don?t need lots of expensive work done.
- In a large law firm, compensation is frequently tied to objective measures: how much money the lawyer has generated, how many hours the lawyer has worked and how many of those hours have been paid for by the client.? For a lawyer to invest significant free time on a start-up cuts into revenues and billable hours that could be spent working for a paying client and (ultimately) the lawyer?s compensation. As a result, the free start-up work tends to get done by junior lawyers who are just learning how to be useful, instead of more senior lawyers who can actually add real value.
- For better or worse, large law firms have large overhead. In order to support that overhead, most firms want clients who will spend a good amount of money on their legal fees. Do startups want that? No. So how do these firms reconcile working with startups? They work with as many as possible, hoping that some of them will turn into large companies that will generate large legal bills down the road. If that sounds like a lottery ticket strategy, it is (and yes, I?ve heard the phrase, ?lottery ticket? used by these firms to describe how they think about startups). These firms tend to treat startup work as a loss leader; they do the free work now so there can (hopefully) be a big reward in the future, and their budgets and marketing efforts reflect this.
Of course, you may be thinking, ?I don?t care about law firm economics; I just need to launch my company for as little money as possible.? So perhaps we should look at what the company side of these legal services packages looks like:
- First, let?s think about what it looks like for another practice group to subsidize startup lawyers? work. In theory, this doesn?t sound so bad. But in reality, as with any business, the best service tends to go to the client that generates the biggest bill. And for large firms, the VIP treatment tends to go to private equity funds, large public companies, and anyone looking to sue someone else for tens of millions of dollars.
- Second, if the ?lottery ticket? strategy works, firms do end up working with many emerging companies. So who is there to counsel these companies? Often, startups are relegated to working with junior attorneys who have little in the way of legal or business experience, freeing up more senior attorneys to focus on larger clients and continue the firm?s marketing efforts to bring in even more startups.
- Finally, to stave off the possibility of a firm?s loss leaders being made up entirely of companies that don?t make it big, some firms have begun interviewing companies and choosing to work with them if they feel they?ll be successful in the long run. This approach strikes me as rather odd ? not only is the service relationship upside down (aren?t you supposed to get the benefit of picking who you want to work with?), but since when did lawyers develop the skill of predicting a company?s success?
The reality is that while startups may have simple capital structures and small teams, their legal needs do not start and end with ?get my company formed and help me bring in $500,000 from a group of angels.? These companies face serious questions about matching corporate structure to anticipated funding and growth patterns, building teams, avoiding legal disputes, and protecting intellectual property developments. Working with startups means being a partner to the company?s founders and helping them build a solid foundation for growth in the future, work that requires more time and consideration than handing out form documents and filling in blanks in a questionnaire.
So while the idea of avoiding legal bills can seem enticing for many companies that are starting out, in practice these engagements can result in legal services that are worth exactly the price paid for them.
PS ? A big thank you to Bill Contente for his help in putting this piece together.
This post is published by a Channel partner:
Source: http://bostinno.com/channels/free-legal-services-for-startups-you-might-just-get-what-you-pay-for/
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