Despite the valiant attempt of Sarah Reed (at the time general counsel at Charles River Ventures and now a partner at Lowenstein Sandler) and the rest of the NVCA committee (of which I was a part of) on model legal documents, I got many comments that the NVCA model documents “don’t work.” I think this is b.s. given that every firm I know was involved in the drafting, but let’s assume too many cooks can ruin a kitchen. In the responses I received, I heard these documents were too east coast-biased, too west coast-biased and too VC-biased. While I suspect much of the blow back is based more on ego issues than the quality of the documents (which I happen to think are great – good job Sarah and team), I’d like to suggest the following alternate approach.

Let’s take two lawyers from each of the few most active Silicon Valley firms and most active east-coast firms and put them in a room. One lawyer from each firm represents “the VC” the others represent “the company” to work together to come up with a reasonable set of deal documents, including all but a small amount of “business terms” that I’ll discuss below. Then everyone pledges to use these form documents in all deals against each other, UNLESS the client want to truly go “old school” and pay for complete negotiations for all the documents. Since everyone will know about these standard documents, the costs for opting out will be both financial and reputational. To pick one simple example, can we just agree to one demand registration rights and two S-3 rights? We all know that other than the procedures for piggyback rights, these provisions are simply not controversial.

I pledge that if the firms do this, I’ll accept whatever deal they come to and never ask for documents outside of this. Knowing many other venture folks in similar shoes as mine, I’m fairly certain that they’d like this approach. I’ve been involved with many hundreds of financings with the “usual suspects” and the documents always end up being one degree of separation from each other. I just don’t care about terms that much, as these documents don’t drive my returns.

I think 60-80% of my deals would immediately be covered by these documents even if no other firms adopted them. This alone should cut down costs dramatically. I have one piece of data that I think supports my conclusion: I’ve noticed material efficiencies on deals when Cooley Godward Kronish is on one side of the deal and Gunderson Dettmer is on the other. Both firms clearly have tons of experience as do other firms, but perhaps it’s the commonality of the “Benton / Gunderson book on financings” that tie these firms together, but there seems to be real efficiencies in the way deals get done when these two firms work together.

Furthermore, I pledge that if the firms do this, I’ll cut down my standard form of term sheet to one page. It will have price, preferences, board structure and a couple of other items not included in the standard documents. I’ll no longer have to negotiate registration rights, anti-dilution carve outs and standard protective provisions.

Adoption of these documents is the key. How best to do in light of the NVCA experience? First, the firms that negotiate them will need to be leaders in using them, promoting them and explaining to their clients the benefits of using them. Simply put – market the hell out of them. Next, other law firms will have the choice of either adopting them as well, or try to explain to their clients why the documents drafted by these leading firms “aren’t good” and / or the client should pay extra fees for custom documents. Lastly, VCs and companies will need to adopt them and mandate their usage.

While we are at it, maybe the lawyers can agree on standard forms of company formation documents (and yes, you’ll have to agree on whether or not transfer restrictions are in bylaws or option agreements). If you do this, perhaps you can go to fixed fee pricing for incorporation activities, as some firms are doing. The firm would send out a client questionnaire with all the pertinent questions and the documents would be modified accordingly. I realize that reality that some entrepreneurs are more sophisticated and experienced than others, so there will be some variability, but this should be a much better starting point.

Next, massively scale down legal opinions except for capitalization, due authorization, and litigation representations. Maybe they go away altogether, as they have in some M&A deals, but in any event, they need to be radically changed. (I can’t take credit for this idea. Eric Jensen at Cooley Godward Kronish recently suggested it). Not only will this speed up the process, but maybe law firms can spend less on malpractice insurance. In fact, I’ve never heard of any VC actually suing on an opinion, so maybe the punishment for screwing one up is “fixing” the problem for free, not uncapped liability that one always hears law firms talk about. In a comment to my original post, Jeremy Glaser, from Mintz Levin stated that much of the legal costs go into the non-contravention / no conflicts piece of the opinion. His idea that we should kill this particular opinion doesn’t strike me as a bad idea. If VCs want it, they can agree to pay for it and that is fine. One unnamed partner at a large Silicon Valley firm wrote me a series of very thoughtful emails regarding the need of no conflict opinions (and actually changed my mind on the importance of them), but also was quick to point out that we should tailor the analysis to a known universe of documents and be flexible to change the requirements depending on what series financing we are involved in and not force the same opinion to be given every time.

Lastly, make the diligence process easier. Create online data sites that contain all the relevant corporate documents. Allow your clients to post other documents to the site. Stop sending paper copies and spending time gathering documents. While the firms are agreeing to standard forms of deal documents, agree to a standard due diligence checklist. I promise that I’ll push my companies to use the portal and not waste lawyer time and money collecting documents.

So there you have it – Law Firm 2.0 on controlling financing deal costs. The big question is whether any law firms will take the leadership initiative to put aside ego and old ways of doing business to really move the ball on efficiencies and costs. Next topics: law firm billing practices, re-architecting the law firm and a lawyer “bill of rights.”

I’m very involved at the University of Colorado, both as an adjunct professor and board member of the Silicon Flatiron’s entrepreneurship initiative.  During this time, I’ve met Kurt Smith who is creating some wonderful entrepreneurship opportunities within the school of engineering.  He is the director of the E-ship program.  They have recently created a new Entrepreneur Certificate Program. 

Whether you work in a start-up venture or within a large corporation, the New 12-credit Engineering Entrepreneurship Certificate is geared toward the working professional that desires to play a more significant and influential role in business leadership by learning key innovation and professional skills.

To learn more about the Certificate Program including a detailed program description and a certificate application, please visit the E-ship website:

Congratulations Kurt on the announcement and I wish you continued success with the program. 

From the Recorder today (please don’t sue me for copyright infringement), this cartoon about my recent blog post and series on Law Firm 2.0.

I’d like to point out to those who have not me me in person that I do not have a double chin, uni-brow or a gut quite that flabby, but it’s really funny nevertheless.

If you want to see a bigger version of the cartoon, click here.

I previously posted an article called “Why Start-up Lawyers Frustrate Me.” In only my 4^th post on my new blog, I managed to piss off nearly every friend I have who works for a major law firm. There has been a ton of press and I think my IT guy is ready to shut off my email account. On the other hand, I got a lot of support from entrepreneurs, venture capitalists and in-house counsel who feel the pain of the current state of affairs for legal fees. So, I’ll take credit in generating discussion about a very real problem and hopefully my friends will still let me in their front doors of their offices.

First of all, let me make a couple of clarifications and observations on my prior post:

1.  The article was directed toward start-up general corporate lawyers and specifically costs of getting relatively simple financings completed. While all lawyers are expensive, what really frustrates me is recent experiences of having 5-20% of the VC proceeds going right back to the lawyers when we consummate small, early-stage rounds. I’m not attacking all legal practices, as I realize how complicated litigation, M&A, etc. can be. That being said, startups are finding it increasingly difficult to afford all legal services;

2.  While I’ve gotten flattened by some in the press, several partners at big firms have called me to tell me that they agree with me. Quotes range from “I can’t make a practice out of start-up work at my firm given billing rates and compensation structure and that is what I want to do” to “you are right but we don’t know how to fix it.”;

3.  Not all law firms are “evil.” I received many comments that I was damning all law firms. It is clear that some are much more aggressive in what they charge. While all the big guys pay approximately the same for associates, some are much more efficient on project and reasonable with discounts. Yes, there are some firms that despite lofty associate salaries have done a reasonable job controlling fees, although this is clearly not the norm;

4.  I have limited experience with smaller firms, so they may or may not be exempt from my frustrations, although by the amount of emails I received from smaller firms stating their billing rates, they certainly charge less per hour. That being said, I can’t vouch for their ability and efficiency to get a deal done and so a pure hourly rate analysis may be irrelevant. (I will add that one of the most expensive hourly rate lawyers I know, a litigator, is the most efficient attorney that I’ve ever worked with). Some comments from the VC sides of the discussion has said they believe the largest firms perform the highest quality work;

5.  Sometimes you do get what you pay for. Most of the truly exceptional lawyers that I’ve worked with do work with larger firms. That being said there are very few exceptional lawyers, even at these larger firms;

6.  Many assumed facts not presented into evidence, specifically that my experience with legal fees had to do with my companies and myself being “poor consumers of legal services,” asking for changes in documents and having unreasonable expectations. This simply is not true. These cases were friendly deals with returning entrepreneurs that we had long time relationships with. We both were sophisticated and did our best to minimize lawyer time;

7.  There seems to be a pretty big difference in fees charged on the east coast (more) than the west coast. Given that the majority of our deals are not on the east coast, I’ll refrain from making any major conclusions, but point out that comments made to me where dollar figures were mentioned as “reasonable” all had a material premium coming from the east coast; and

8.  On a humorous note, I love press pieces that imply that they’ve spoken with me, or spent any time actually reading my blog and can’t even get my name or work-related information correct.

Don’t think that I am taking back anything that I said in the prior post, rather given the amount of traffic that ended up in my email inbox, I thought I’d make some clarifying comments.

While everyone likes to be a critic, I suppose that I owe some potential solutions to the fee problem. So I’m going to do it. I’ve done my best attempt at creating the “Law Firm 2.0” business plan. Some suggestions are easy, some are hard, and some may be completely unrealistic, but since I’m starting with a blank piece of paper, here goes. Given the length, I plan on breaking the sections into separate posts over the next week or so. I look forward to a healthy discussion.

Normally, I don’t pay attention to in-house legal department of the year awards, but this year the award went to Qwest. Their General Counsel, Rich Baer has become a friend of mine over the past two years and I really admire him.

When my partner Brad originally introduced Rich and I over email and suggested that we have lunch, my thought was “what on earth do I have in common with a general counsel of a mammoth company like Qwest?” What I found was a thoughtful, smart, motivated, out of the box thinking executive that far surpassed my naïve assumptions of what a big company general counsel would be like. Rich and I spent the lunch geeking out on technology (he is probably the only GC in America who uses a Mac Air), music and television shows (Brotherhood on Showtime – a must see) and his views on how to build a better mousetrap within a corporate legal department. In a very short period of time, I realized that I was lucky to be introduced to such a progressive thinker.

Congrats Rich. You give lawyers a good name and I’m happy to hear that your legal department is being recognized under your leadership.

WTF?  Yes, that is our Secretary of State hanging out with the folks who rock all night and party every day.  Even the folks that brought us Spinal Tap couldn’t come up with any thing this preposterous.

Read the full story here.

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…