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It’s the Hours, not the Rate – Why Most People Focus on the Wrong Thing When Choosing a Lawyer

Given my background as a recovering lawyer, I’m often asked by portfolio companies, friends, other VCs, etc. for attorney referrals.  I don’t get asked too often on routine matters, but the really important “bet  the company” stuff where counsel selection is critical.  Fortunately, I’ve had the pleasure to work with a lot of good folks which soothes my inner zen master, as so many lawyers are average at best.

However, literally every discussion I have is similar to this:

Me: “Hey, you should check out X, Y and Z for what you need.”

Them: “I did, thanks for the recommendations.  They are all great, but X is $500 and hour, Y is $650 and hour and Z is $850 an hour.  Therefore we are going with X.”

Me: “You realize that hourly rate is largely irrelevant?”

Them: “Huh?”

And thus a discussion ensures on why hourly rates are largely irrelevant.  Why is this the case?  Simple math: Total Bill = Hourly Rate X Hours billed.

In all my years of auditing lawyer bills, it’s the hours that always stand out.  The hours, in any complex matter are what spiral out of control.  In these big issue situations (litigation, patent stuff, M&A, IPOs, etc.), the amount of hours that an efficient and creative lawyer will save you far, far outweigh whatever hourly rate they may charge.  In fact, the higher hourly rates seem to have little or no effect on overall lawyer bills as I look across multiple companies, it’s all about the knowledge, experience and efficiency.

One simple decision, for instance the decision to not file a particular motion, response, fight an irrelevant issue, etc., will impact the total fees way more than an hourly rate.

So when you are shopping, do your diligence on the creativity, efficiency and deep domain knowledge the lawyer has.  The amount of hours you will save far surpass any difference in rate.

(***Caveat:  This doesn’t pertain to simple matters like company formation, typical venture financings, etc.  Also, at some point hourly rates DO matter, but I’m thinking of a lawyer who is  $1000 an hour and I would stake my reputation that his overall bills are lower than any of his peers for similar matters.)

January 20th, 2013     Categories: Law, Venture Capital    
  • http://siliconhillslawyer.com/ José A

    Definitely an important point. It relates to the large v. boutique firm question as well, which I find a very interesting trend in startup law and write on-and-off about. The marketing pitch from boutiques is that they’re flatter, have less “overhead” and can bill lower rates. And many do offer the same or better quality at a lower cost.

    But a lot of tech-focused large law firms (a) invest heavily in technology and project management, and (b) have a huge amount of experience to draw on (to avoid reinventing the wheel on non-standard issues). So, as you say, the rate might be higher, but the faster turnaround more than makes up for it. That isn’t to say, of course, that there aren’t boutiques that do the same. How your lawyer/firm works is far more important than how they bill, and that definitely requires you to dig deeper than just asking what their rate is.

  • http://www.facebook.com/doyle.albee Doyle Albee

    We have similar conversations in our business. “But I can get a freelancer to do that for $75/hour, and you want $125.” Then you factor in addition work that needs to be done — which we can often do much faster and deliver better quality — and the total bill is less for better work. This conversation could apply to many industries, especially in professional services.

  • Saul_Lieberman

    If you are right, shouldn’t it also be true that the lawyer with the
    higher rate should be willing to cap his/her fee at an amount that
    is not more than (and perhaps less than) the cap offered by his peers?
    Is that your experience?

  • http://simplifilm.com/ Chris Johnson

    I’d love to see an enterprising legal startup do something like: create a set of documents that negotiate all the predictable points of contention in normal startup deals: angel investing, VC, etc. Then these would be marketed as an “Our Deal” company or whatever. This way it would save VCs time because all the docs were straightforward, predictable, searchable and certified.

  • http://www.facebook.com/1kenthomas Kenneth Thomas

    Another thing to consider is the value of your own time. If you’re hiring someone who takes twice as long to complete, they’re also likely to eat up 2-3x or more of *your* time as the matter progresses.

    • jasonmendelson

      Agreed