Every founder has heard of or even experienced a legal horror story: overpriced services; unanticipated fees; frustrating delays or an attorney that just doesn’t get it. But like it or not, lawyers are an indispensable part of almost every startup process, and it pays to understand what your lawyer is thinking, how they earn their fees, and what they should be doing on your behalf.
Get it Right at the Start: Lawyers are typically a startup’s first outside adviser, arriving on the scene even before angel or venture capital investors. Most importantly, a good lawyer provides a founding team with the lay of the land: what types of investors may be interested in your idea; how will those investors make go/no-go funding decisions; where can affordable office space be found; how can employees, advisory board members and company directors be effectively identified, recruited and compensated – just to name a few. Better lawyers know more.
Small Transactions have Big Consequences I: Incorporation: Lawyers manage two of a startup’s earliest and most important transactions: First, lawyers convert you from “Smart, Motivated Team” to “Smart, Motivated Team, Inc.” The difference limits your liability, and protects you from losing your shirt (and house and car) if your product or service hurts someone (even an app can generate legal “damages”). And while you can incorporate using LegalZoom or another online tool, a professional startup lawyer supplements incorporation with founders’ agreements (to split equity among the team and reserve some to incent future hires), invention assignment agreements (to ensure that the company owns the product you’ve created), tax elections (to ensure you don’t generate a huge tax bill before you have any revenue) and several other crucial, but oft-overlooked documents. More importantly, a good lawyer provides perspective on the nuances in these documents; at the genesis point of your company, small mistakes can be multiplied many times over when you are the verge of hitting it big. You need to get this right.
Small Transactions have Big Consequences II: Investment: Second, your lawyer negotiates a term sheet on your behalf. When an investor invests in your company – whether it be an angel through a convertible note, a venture capitalist through a Series A financing, or a strategic partner lending you money to grow – they do so via a written contract. And while every investor will assure you they are on your side and will help your business beyond providing mere cash, at the negotiation table, your interests are not fully aligned. Your investor wants to maximize their potential profits, and divert any superfluous risk onto the founders. Most have negotiated with entrepreneurs many times before. Your lawyer’s legal, professional and ethical duty requires an exclusive dedication to your best interests, at the negotiating table and beyond. Experience and professionalism here go a long way.
Size Matters: A typical entrepreneur walking into a big law firm is thinking one thing: I can’t afford this. In fact, most law firms can’t afford you. The business model for a law firm representing startup clients resembles that of an early stage investor: your law firm is betting that you will make it big, remain loyal to the firm that birthed you, and then hire them to handle your more expensive legal needs – like buying a competitor; going public; or suing someone infringing on your patent. Only the big firms can afford to make this kind of long-term bet on their clients. Similarly, most offer flat rates on basic services like incorporation and term sheet negotiation, and allow founders to defer paying those fees until they receive their first investment. Smaller, “bargain” firms need to make money on each client and end up nickel-and-diming you.
Wisdom Pays: A good lawyer is your company’s sherpa, negotiator, networker and trusted adviser. Professional startup lawyers are repeat players who have seen best and worst practices in action and know how to counsel founders. When searching for yours, here are some things to keep in mind about some of the best known players in the legal industry:
Wilson Sonsini: The granddaddy of startup law firms. The silicon valley-based firm consistently leads in the various rankings with offices around the country and internationally. Boasts a mile-long list of gold-plated clients.
Critics say: Heavy competition between partners (a result of an “eat what you kill” compensation model) means lawyers don’t collaborate within the firm to provide you the best services. Some say the firm has left its startup roots behind in favor of later-stage, more lucrative legal work. Branch offices are less well-regarded than the SV headquarters.
Gunderson Dettmer: The purest-play startup law firm in the land. With about 250 lawyers spread over four offices, this startup boutique represents startup founders and venture capitalists almost exclusively. They know the startup game backwards and forwards.
Critics say: Their risky business model means they are always a few quarters away from dire financial straits. If your startup company has any sort of non-startup issues (such as a lawsuit) you’ll have to get yet another lawyer.
Cooley: Well regarded on both the east and west coasts, Cooley consistently ranks #2 nationally behind Wilson Sonsini in representing companies in venture-financings. After decades in Silicon Valley and having represented some of the industry’s biggest names, Cooley knows the startup business.
Critics say: When it comes to startups, the firm is good at everything, but not great at anything. Recent aggressive expansion has sacrificed quality.
WilmerHale: An east coast-based law firm representing technology companies at all stages of their lifecycles. The quiet leader boasted the highest number of venture-backed clients on the east coast last year, and has represented the most VC-backed companies on the east coast in their IPOs over the past 15 years. [Disclosure: The author has accepted an offer to work for this firm next year.]
Critics say: The wide variety of practices (litigation and corporate) the firm pursues means WilmerHale is not a true startup law firm.
Latham & Watkins: The LA-based firm has a strong history of representing startup companies on the West Coast, and recently expanded its startup practice to Boston. Many leaders in the startup law game have passed through L&W on the way to their current homes.
Critics say: The firm is best known as counsel to big banks and other corporate mega-clients. Especially on the East Coast, it will be difficult to convert the culture to be more entrepreneur-friendly.
Daniel Doktori is a third-year student at Harvard Law School studying startup-law. Follow him on Twitter @ddoktori.Subscribe to the Podcast