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.)