Finding a lawyer for their startup (let’s call it Newco) is not very high on the to-do list for most entrepreneurs. It should be. Thus, today’s two-part blog: Why selecting startup counsel is important; and what to look for as you consider your options.
By way of background, I’ve been a lawyer for numerous startups and venture investors, from launch to exit and beyond, in Silicon Valley, North Carolina, and Wisconsin. I’ve also quit practicing law four times – three to co-found or join venture-backed startups, and once to co-found and manage a $26 million early-stage venture capital firm. Whatever its other merits, my thinking on the topic of choosing startup counsel at least reflects lots of experience on both sides of the table.
Your Startup Business Needs a Startup Lawyer
People who haven’t spent a lot of time working with lawyers – which is to say most less experienced entrepreneurs – tend to think of lawyers as, well, lawyers. True enough, I suppose, but not the whole story. Just as there are dozens of varieties of doctors, there are many kinds of lawyers. In terms of a business looking for a lawyer, the three big categories are (i) small business lawyers; (ii) big business lawyers; and (iii) high risk/reward startup lawyers. Here are some reasons startups businesses need startup lawyers.
- Startup lawyers must be comfortable and effective working directly with entrepreneurs, mostly because startups seldom have in-house counsel. Larger businesses usually have in-house counsel that, among other things, provides the interface between the business and the outside counsel. While all lawyers speak legalese now and again, lawyers who work for other lawyers most of the time tend to speak it pretty much all the time. Entrepreneurs generally don’t speak (or understand) legalize. So, they need lawyers who are comfortable communicating in plain language – even as they can, when appropriate, speak legalize as well.
- Newco likely has a much higher risk/reward profile than its small and big business counterparts. Newco’s lawyers must be comfortable offering counsel that reflects Newco’s higher risk tolerance. Lawyers for traditional small and larger businesses generally (and correctly) offer counsel that reflects their clients’ lower relative tolerance for risk. A good lawyer for Newco will generally (and correctly) offer counsel that incorporates Newco’s higher tolerance for risk.
- High risk/reward startups typically value accurate counsel sooner over precise counsel later. Moving fast is one of the few advantages businesses like Newco have over more well-established competitors. But law schools teach, and most established businesses value, precision as much as accuracy, and thus don’t place much emphasis on speed. Good startup lawyers are better at shooting from the hip.
- The typical financing vehicles for high-impact startups are substantially different from the typical financing vehicles for traditional small and big businesses. A high risk/reward startup with a lawyer who doesn’t regularly represent clients in angel and venture capital transactions will almost certainly be more expensive, take more time, for any given transaction. I have seen deals that should have been done tank because otherwise quite competent, but out-of-their-niche lawyers were not up to speed on the “rules of the road” for high risk/reward investing. Not to mention deals where the time and expense of a financing round far exceeded what it would have been with experienced startup counsel on both sides of the deal.
- Finally, Newco is going to need lawyers who appreciate that most startups are, at various times, cash poor. That does not mean good startup lawyers are cheap (far from it: good startup lawyers are typically more expensive than their colleagues who focus on traditional small businesses). But they are often more flexible in terms of their billing and collections procedures than many other business lawyers. (Steer clear, though, of the too-accommodating startup lawyer - their largesse might reflect limited demand for their services.)
Choosing a Particular Startup Lawyer
Hopefully, it’s clear now why startup businesses need startup lawyers. Herewith are some points for choosing a specific startup lawyer for your startup business.
- Stick with lawyers who spend all or most of their time working with high-risk/reward startups and investors. It’s basic, really: just as you look for a specialist when you’re in the market for a knee replacement, so you should want a lawyer that specializes in high-risk/reward startup lawyering. It’s a niche business, and you want a lawyer who lives in that niche, not one who visits it.
- Look for a lawyer who takes the time, and has the talent and curiosity, to really understand your business, markets, and technology. At larger more established businesses, you’ll often find in-house counsel – usually a “General Counsel.” A key part of a GC’s job is managing in-house and outside counsel and making sure that their advice reflects the realities of the business. When you don’t have an in-house GC at your fingertips, you’ll want to make sure your outside GC really understands your business.
- Look for a lawyer who can add value beyond just legal advice. The best startup lawyers share their business and sometimes even technology insights and beyond that leverage their own business, technology, and financial networks on behalf of their clients. For a startup lawyer, good legal work is the price of admission. It’s the value-add that separates the good startup lawyers from the great startup lawyers.
- Pick a lawyer who can grow as your startup grows. While your business will start small, the breadth and depth of its legal needs will grow exponentially over the course of even a few years (we’ll assume Newco is at least partially successful in capturing whatever business opportunity it is targeting). Yes, there are solo and “small firm” startup lawyers who are quite effective in representing their clients in the early stages. And yes, you can bring in other firms for particular matters – litigation, patents, regulatory, etc. – as your legal needs grow. But that approach can be fraught with peril. Managing multiple relationships and matters across multiple law firms is difficult and expensive. Absent a compelling reason to work with a solo or small firm startup lawyer, choose a lawyer with a larger “full-service” firm that has the resources to grow with your startup.
So, my advice on choosing a lawyer for your startup. Self-serving? You bet. But your startup deserves good advice, right?