Why Start-up Lawyers Frustrate Me

I’ve decided to start a series of posts called “Why Xs Frustrate Me.” Today, X = Venture Lawyers. In future posts, X will equal academics, entrepreneurs, accountants, venture capitalists, drummers, the patent ecosystem and other targets of my affection.

Given that I used to be a start-up lawyer and that even today more than half of my friends continue in this profession, what better group to complain about? Besides, I don’t get enough negative emails per day, so this will surely help. 

My two main gripes are pricing and execution:

Pricing:

As everyone who hires startup lawyers knows, it’s more expensive all the time to get help. $300 hourly rates that were once reserved for partners, are now allocated to junior associates. To put this in perspective, when I started as a venture lawyer in 1998 my starting salary was $71,000. Ten years later first-year attorneys at good firms are starting at $165,000. I was eligible for a 10% bonus back then and have been told the same is true today. So with bonus the spread is $78,100 and $181,500. That is a difference of 132% in ten years! And yes, compensation at all levels in law firms has changed at least this much.

Now, what I find really interesting is to compare this compensation change versus the average amount of money that venture-backed startups raise in their first rounds. According to the latest NVCA yearbook, in 1998, the average company raised $5.1 million in their first round of financing. In 2007, the number was $5.7 million. That is a difference of 11.7% over ten years. Admittedly, in 1999 and 2000 companies were raising two and even four times the 1998 first round amounts, but these numbers quickly fell back into historical averages after the bubble burst.

One more comparison that is interesting: CEO compensation at venture-backed companies. There aren’t consistent professional studies that track the last ten years, so I’ll draw on my own experience, some of which was part of my research for a series on compensation published on AskTheVC.com. in 1998, CEO cash compensation ran was in the $150,000 to $160,000 (median) range while in 2007, the median was $200,000 to $220,000. Even taking the largest spread possible the ten year difference is 46%.  I’d also argue that the pool of world-class CEOs has not expanded nearly as much in ten years as the amount of competent venture attorneys. 

So these are pretty compelling statistics, right? (If you are like me, you normally fall into the “lies, damned lies and statistics” school of thought). Well maybe, because I don’t see our companies spending 132% more in aggregate legal fees, although the charges for our counsel to help with financings has doubled during the past ten years. What I see is that our companies go the “self help” route a lot more often than the past and do not seek legal help when it actually may be a good idea to do so. Unfortunately, a lot of it ends up on my plate and I end up rendering a lot of “informal” advice. It’s not a great position to be in, as I’m far past my days of being an every-day and competent lawyer, but what can companies do when they can’t afford to call their lawyers? So today, we have the worst of both worlds – disproportionately higher legal spend when compared to other costs and less actual legal counsel on situations that would previous dictate legal involvement.

Execution:

While my first gripe pertains to nearly all lawyers, this frustration is more particularized to about 50% of the venture lawyers I run across. Simply put, why can’t lawyers know when to leave well enough alone and not feel like every piece of paper needs a mark up?

Especially given how expensive lawyers are these days, why on earth would the culture of “must mark up documents to show value” persist? (Answer: lawyers make more money). Especially in the world of venture financings this is very frustrating. Ten years ago, I admit there was a lot more mystery and uncertainty in getting venture financings done. However, with the advent of the NVCA model documents collection (of which I was a draftsperson), resources like the term sheet series that I co-wrote with my partner Brad Feld and just the sheer number of trained experts in the field, financings (especially early-staged deals) are largely cookie cutter.

Then why on earth did I have to spend last week negotiating registration rights with a partner at a major law firm? In fact, I got to do that twice last week along with other stupid boilerplate language that no one really cares about. Sigh. I got to watch our money that we financed the company with being transferred to the law firm. Perhaps the most annoying comment that I heard last week was from an experienced venture lawyer who told me that he got a set of documents that were perfect and that he and his teamed “struggled” to find things to mark up because they couldn’t just say the documents were fine after round one – even though they were. He had three lawyers on the deal work on the markup.  Also last week I got to see a bill that one of our companies received from its law firm:  $72,000 for a Series A financing.  That was bad enough, but when you figured in the fact that our counsel drafted all the documents and charged close to $15,000, it was especially appalling.  These deals are not complicated.  This should not happen. 

I’d like to point out that not all lawyers are like this – but at least half of them are and the problem is compounded by the compensation trends discussed above. The half that aren’t like this have learned that efficiency and reasonableness is respected more by clients than the optics of needless document revisions.

So what’s the resolution here? It’s a much longer answer than I can provide today. I’ve been working on a thesis for quite some time that the entire business model of law firms is going to have to change, or it’s going to get uglier. Eventually, venture-backed companies are going to have to move away from the traditional law firms that service them these days. In any event, law firms are going to need to realize that the fees charged to startups versus public companies and what fees are reasonable in litigation versus corporate contexts are all different and that “one size fits all pricing” will not work in the long run. If I ever finish my "Law Firm 2.0 business plan," I’ll be happy to blog about it.

Frustration rant #1 over. Friends and colleagues, fire away…

  • Gabriel

    Nice post. I am working on a startup in NY and trying to find a decent venture lawyer who will work on a deferred compensation/equity basis. My friends out west are working with Wilson Sonsini using this structure. Can you make any referrals? thanks, gb

  • I don’t think it’s appropriate for me to single out any particular lawyer for recommendation.  Make sure that whomever you use gives you cost estimates upfront and also agrees to attend your board meetings for free. 

  • Gabriel

    Thanks for the quick response. I'm not looking for a particular lawyer per se, but it would be very helpful to know which firms will even work on a deferred comp/equity basis.

  • Email me at jason at foundrygroup.com and I’ll tell you

  • I have represented early-stage founders and their companies for over two decades in Silicon Valley. I tell them that a “vanilla” Series A funding can easily be done for $10K or so but to forget about it if the funding comes from VCs – in that case, plan to spend $35K for the VC’s legal bill and a like amount for the company’s, and that is just a baseline. I think the problem lies in part with venture lawyer billing structures (a surreal world if ever there was one) but it lies equally with the VCs themselves, who insist on giving a free hand to the very firms that will grind the process in just the manner you describe (i.e., using low-level associates, now being billed at $500/hr+, to do the document reviews, often in teams and invariably with a lot of pressure on them to put up high billables to justify their large salaries). The entrepreneurs themselves will increasingly demand billing caps, write-downs to reflect reality, and the like – I see nothing comparable coming from the VCs themselves. Perhaps the current economic meltdown will help change things, but I am not holding my breath.

  • Jason,

    I believe that these frustrations are because you go to firms with model that is poorly suited to start ups. Why would you expect 500 or 1000 lawyer firms like WSGR or Cooley to be efficient at servicing small companies?

    If you want swift and efficient execution, go to a smaller, more cost effective firm. Really, we can do you a fine job, much more effectively. You wanna be frustrated? Go to the big names where the associates have outlandish rates with the partners use to support seven figure incomes.

  • Jason,

    I believe that these frustrations are because you go to firms with model that is poorly suited to start ups. Why would you expect 500 or 1000 lawyer firms like WSGR or Cooley to be efficient at servicing small companies?

    If you want swift and efficient execution, go to a smaller, more cost effective firm. Really, we can do you a fine job, much more effectively. You wanna be frustrated? Go to the big names where the associates have outlandish rates with the partners use to support seven figure incomes.

    Mike

  • I am working on a startup in NY and trying to find a decent venture lawyer who will work on a deferred compensation/equity basis. My friends out west are working with Wilson Sonsini using this structure.

    • Most of the valley folks have NYC offices including Cooley and Gunderson and will work with deferrals.  If you need more, email me directly

  • Ben

    There is another great legal resource for California based tech startups–it is a confidential legal question and answer service that is geared toward startups and tech companies and it just launched. It is a new way for startups and tech companies to find the right lawyers for their needs.

    It allows companies to submit confidential legal questions to multiple lawyers simultaneously (all personally selected by the companies) on typical tech company issues such as IP, corporate, employment, etc. The answers companies receive will allow the companies to more effectively compare and evaluate lawyers before actually deciding to hire them. It is called Law Pivot (http://www.lawpivot.com).

  • Rick Horton

    We will all have our own complaints with our attorneys sometimes. We would always want to get the high payment we give them to be deserving. I, for one, just recently had an almost argument with our attorney concerning the car accident claims perth for my sister’s car accident last month. It is also frustrating, good thing it’s almost okay now.