Great Lawyers Are Worth More Than $5,000

If you want people to leave lots of comments agreeing with you, write a blog post saying that something is too expensive. And if you read the comments to Fred Wilson's latest post -- "A Challenge to Startup Lawyers" -- you'll see a whole lot of agreement. Fred argues that it should cost less than $5,000 in legal fees to close a straight forward seed transaction and asks, "[w]hat do we need to do to get there?"

Ordinarily I wouldn't jump into the fray here. What's the upside in defending attorneys? Everyone thinks that lawyers are a "transaction cost" and an impediment to getting real business done. Everyone thinks that they're getting overcharged for their legal bills. Everyone loves hating attorneys. That is, everyone but me.

So why jump in here? Because I think Fred's challenge misses the point. These "simple transactions" are the very foundation on which the companies in which we invest are built. They may involve uncontroversial terms (although, I don't think that is really true either -- look at Fred's own comment in which he objects to Ted Wang's "standard" financing docs as "missing a few things"), but they are not trivial by any means.

The contents of a company's Delaware charter will control the long-term governance of that company (and should it really be a Delaware company? a New York company? a California company? a Nevada company?). The terms of a company's "standard" stock option plan will have a huge impact upon how those shares are treated and traded (anyone who's watching what is happening with Facebook stock on the "private" secondary market today knows that something has to be done to fix these broken plans). The protection of intellectual property from day one is critical for a startup. And the failure to understand and comply with mundane tax laws can cost founders and companies millions down the road. These aren't exciting topics and they won't make a startup successful, but they are critical to the long term success of a company.

I am sure that the mere process of closing a seed financing could be achieved for less than $5,000. Fred's post essentially describes a situation in which the lawyers are merely the scribes of a pre-determined, uncontroversial and standard financing deal. In that case, the lawyers are really acting as overpaid secretarial staff -- do a search and replace for company name and send the docs off to Delaware. There's little question that a lawyer can get that done for five thousand bucks.

But even if such a simplified financing actually existed, the lawyers wouldn't be done. No two companies are alike. The founders all come from different places (did they start the company while working at another company? did they start the company at school? did they start the company alone or with a pair of megalomaniacal twins? etc.). They are all attacking different markets with different competitive landscapes and different competitors. They all rely upon marketing, business development and relationships differently. And they all have different histories (has the company been around for a day or a year or a decade?).

All of these things have a big impact upon not only how you set up your company but how much work it takes to get the company in shape. I have certainly seen some daunting legal bills when I first put money into a company, but in those cases it was not driven by wasteful attorneys, it was driven by real messes that needed to be cleaned up. If your assumption is that you are investing in a company for the long haul and are hoping to build a big and valuable business, every penny spent getting your house in order before moving forward is money well spent.

Sure, you could close an angel round for $5,000. But it would be penny wise and pound foolish. Establishing the foundation for a great company matters more than a few thousand dollars. Anyone who's worked with outstanding attorneys knows that they are more than overpaid scribes -- they are invaluable business partners. Maybe its just the former lawyer in me speaking, but I think a better challenge than getting your financing done for $5,000, would be to get your financing done right.

Comments

[Dave Biere]

Prediction: by 2020 one of the current second-tier law firms will make the effort to turn themselves into a high quality startup factory. They'll develop systemized processes and will drive cost out of the system.

This will cause them to start winning a large amount of startup business (many of whom will continue using them as they grow), and cause this firm to become a top-tier law firm.

We've seen this happen with other fields, and within law we've seen it happen with many types of semi-standardized cases. It's going to happen here as well. The only question is which firm is going to step up to the plate and become every angel's favorite law firm.

[Andy Freeman]

I don't care how much a great lawyer is worth.

I care how much it costs to get the legal services that help me.

[tj]

That's like saying, I don't care how great a server is, I care how much it costs to get the server. Lawyers are no different than any other service or product you purchase. There is a range of cost and services, roughly correlating, but not necessarily correlating.

[Jody Sherman]

David, I worked with you when you were an "outstanding lawyer" and in the transaction we did together we agreed that "good enough" was where we need to focus our attention, rather than negotiating out a bunch of insignificant items. Is "good enough" not good enough when talking about this type of transaction?

After several rounds of venture financing over the years, there have only been few exceptions to the rule (at least for me) of "standard terms". Most of that stuff is very clearly almost boilerplate and typically non-negotiatiable.

But where we found the need to either negotiate or modify that which was "typical", the costs of our "standard" financing grew dramatically, which oftentimes had me wondering if I should actually care about a particular item (and spend the money to address it) or just move on.

It would be interesting to hear from you which items you feel are "standard" and on which specific areas one should typically spend the extra money. The power of good information is mostly held by the people providing the money and the people doing the lawyering. And both of them have incentives to negotiate (one for terms, the other for fees).

I don't mean to imply that either of the above has bad intentions. In the case of an investor, they are just beginning their relationship with you so clearly there is no incentive to begin that relationship with bad blood. And company counsel certainly doesn't want to be at odds with their client, but almost always the same company counsel works regularly with the firms who are providing the financing.

So what should we, the entrepreneurs who believe we should get a really affordable price for our funding documents, really think about when we have to spend more than the $5000 Fred mentions?

Please answer in the form of a question :-)

[Matthew Crossett]

Thanks for the great article - I never thought about how influential this legal change could be before (just lift something highlighted from the article).
Just posted something similar - would love to hear your thoughts! If you ever want to link up sometime over GoToMeeting to talk about a possible collaborative article, let me know!
http://takecareof.biz

[Demi]

David, you did an excellent lecture on the Venture Law and Finance class!We love that!

[Pemo Theodore]

I video interviewed Ed Reitler, partner at Reitler Kailas & Rosenblatt NYC http://www.ezebis.com/startup-lawyers/ed-reitler-responds-fred-wilsons-challenge-startup-lawyers/ He suggested that $5k was a loss leader but they are willing to do it with the view to develop a long term relationship with the entrepreneur.

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