Part-Time GCs & Startups
Updated: Mar 9, 2021
In this post I share trade secrets and insights on a novel career track and legal service model - working for multiple companies as in-house, part-time General Counsel.
A Win-Win Model
This legal service model is relevant to attorneys considering career options and to companies wondering how to meet legal needs.
exposure to varied business models, industries and teams,
being on the team and not just an outside adviser,
eligibility for equity compensation (stock options or restricted stock),
diversified income streams,
no billable hours,
protected status as an employee in the event of insolvency, and
greater flexibility around "multi-jurisdictional practice," or "MJP," as in-house counsel.
regular access to proactive and preventative legal advice,
ability to quickly seize opportunities requiring legal review and assistance,
fewer problems resulting from inattention to legal issues out of fear of unexpected legal bills, and
more predictable budgeting and lower overall legal services costs.
Newer companies generally outsource their legal work to outside counsel. Too many companies then fail to timely and wisely use their attorneys because of inexperience and hourly billing anxiety. Neglect and inattention often cause bigger bills to clean up legal messes and loose ends and fix preventable legal and regulatory problems.
Sometimes these messes, loose ends, and problems negatively impact critical financing and strategic opportunities. Common due diligence challenges involve intellectual property gaps, entity formation or governance defects, equity ownership uncertainties, financing compliance issues, or flawed commercial agreements. These can complicate deal due diligence and delay or even derail fundraising or M&A transactions.
Problems caused by legal mistakes and loose ends are so pervasive among startups that they inspired me to give talks in 15 cities and to write a 580-page book to help prevent them, Startup Law and Fundraising for Entrepreneurs and Startup Advisors.
Hiring a part-time, in-house GC to address issues as they arise and to manage outside counsel can produce better legal, governance, and regulatory results and more stable legal budgets than ad hoc processes managed by persons lacking legal sophistication.
Leveraging Remote Work Trends and Technologies
"In-house" does not necessarily mean "in the office," but simply a "W-2" employee. In fact, with today's legal and business tools, a skilled part-time GC can perform remotely just as well as any other employee.
The part-time GC business model is tailor-made for the ongoing shift to remote, dispersed workplaces. COVID-19 jolted business into adopting new systems, technologies, skills, and attitudes. Now we all must provide and receive complex information and business deliverables remotely. And reduced commuting and travel make it easier than ever to serve multiple companies.
Part-Time GC Legal Services Model
To date, I have served as in-house, part-time GC to thirteen companies. This run began after twelve-years as GC of online brokerage ShareBuilder. The ShareBuilder GC gig ended only after we sold the company twice. After the sale to Capital One, a recruiter called and said,
"I've got a great company for you but I'm not sure they can afford you or that they even need a full-time GC."
That conversation led to my first part-time GC role. It was with a health and medical device company. The salary and benefits for 50% of my time were great, but I still viewed it as transitional.
Simultaneously, I unexpectedly grew a business law practice as Of Counsel to a boutique business law and litigation law, Kinsel Law. I thought I was just advising Capital One. Eight years later, I'm still Of Counsel, counseling a dozen clients in tech, consumer products, security, fintech, CBD, and SaaS.
In 2013, I began hearing from entrepreneurs wanting legal help. I started saying something like:
"I'd be happy to chat. Depending on your situation, it might make sense to help you as part-time GC, or in a more ad hoc role as outside counsel."
The ability to offer two different legal representation models opens doors to deeper discussions about a prospective client's business model, stage of development, legal needs, and budget.
Variations on the Part-Time In-House Model
There are many paths to this business model. I know excellent attorneys with completely different backgrounds doing similar work.
Others with less or different experience can pitch themselves more narrowly - part-time Corporate Counsel, part-time Contracts and Licensing Counsel, part-time IP Counsel, part-time Litigation Counsel, or part-time Compliance Specialist. I am well-acquainted with another attorney who successfully holds several roles as part-time Corporate Counsel.
The multi-client, part-time model is only limited by one's imagination, interests, and effort. Individuals and companies should think flexibly.
The Legal Relationship
In recent years, several attorneys seeking career advice have asked how I structure my legal relationships with companies. Obviously this is a request for my key trade secrets. After some initial reluctance, I have shared my part-time GC template "Offer Letter Agreement" with several attorneys in recent years.
Now, in the same spirit of helping my legal peers, and also to help raise awareness of this unique and valuable model for companies with unmet legal needs, I am sharing my current part-time GC Offer Letter Agreement template here. Two caveats: (i) this is not legal advice, and (ii) this template is not intended to be perfectly all-encompassing and protective - it meets my risk/comfort level and it is "designed to be signed."
Designed to be signed is an idea I bring to many contracts, particularly those I consider "sales funnel contracts." As I tell my business clients and colleagues:
"It is more important to bring in lots of revenue quickly than it is to pin down every conceivable risk, since you can deal with most problems when you have lots of money."
In sending a potential client my part-time GC Offer Letter Agreement, I am aware that if it is simple, they might just read it and sign it, But if it is loaded up with disclaimers, waivers, acknowledgments, and other obtuse legalese, the potential client will likely send it to outside counsel. As my direct competitors for the work, the incumbent lawyers may either (i) strenuously urge the client to simply leave the work with them or (ii) over-lawyer the agreement to where I have no interest in signing it.
That is why it is merely two pages and devoid of boilerplate legalese. Take it or leave it. Use it in whole or in part. But also realize that, although short, each paragraph, sentence, and word is important. Below, we'll discuss some key principles.
September 18, 2020
Dear Paul Swegle:
We are pleased to confirm our offer to have you join X Company, Inc. (the “Company”) as General Counsel and Secretary on the terms provided in this Offer Letter Agreement.
The Company’s Board of Directors will promptly ratify your position as an officer of the company. The Company agrees to promptly obtain and to maintain at least $2 million of director and officer liability insurance.
Your start date will be ___________________________.
Your employment is “at will” and can be terminated by either party at any time upon notice, subject to the terms herein.
Your duties and areas of responsibility and authority shall be as follows, including any others that you and the Company mutually agree upon:
· Work with the Company to raise additional capital.
· Advise on and assist with legal and regulatory issues, including:
· corporate governance
· intellectual property protection
· contract review and negotiation
· product development legal support
· HR processes, including drafting and negotiating employment documents
· regulatory compliance
· risk management
· retention and management of outside counsel
As Secretary, you will attend all Company Board meetings, time permitting, and guide the Board and its committees in maintaining proper minutes and other records. You will have access to all Company documents, records, and communications.
Your monthly salary will be $[xxxxxx], equivalent to $[xxxxxx] annually, in exchange for [xx]% of your time, or at least [x] hours per week on average, depending on the Company’s needs from week to week. The Company will not provide you with any health or dental benefits at this time but will offer you such benefits once they are made available to other employees.
[One-half] of each of your salary payments will be deferred until such time as the Company receives additional third-party funding totaling at least $[xxxxxx] in any form from any source or sources, at which time all accrued and unpaid amounts shall be paid within 15 days and no further deferral shall occur.
Amounts deferred and unpaid shall continue to be owed to you according to the foregoing, even if your employment with the company ends, and the Company undertakes to immediately advise you as to any funding events triggering the Company’s payment obligations.
In addition to your salary, the Board, with your assistance, will promptly establish an equity compensation plan and promptly provide you with ISO stock options equal to [x]% of the Company’s authorized common stock as of the date that the Company creates the equity compensation plan.
[xx]% of your options shall vest immediately upon grant, effective retroactively as of your start date, and the remainder shall vest in equal monthly installments effective as of your start date and continuing over the subsequent four years until fully vested.
Your unvested options shall fully vest immediately prior to any acquisition of the Company or any other change of control involving more than 50% of the Company’s assets or capital stock, or upon any termination of your employment with the Company without cause. Under this Agreement, “cause” means neglect of duties after written warning and opportunity to correct, or any form of fraud or other serious misconduct.
Your option grant shall provide that, within 90 days of the termination of your employment, you shall have the ability to elect to convert your vested ISO stock options to non-statutory options, or NSOs, and extend their post-employment exercisability from 90 days to 2 years, to the extent such period is within the life of the options.
We look forward to working with you.
[X COMPANY NAME]
ACCEPTED AND AGREED:
Paul Swegle - Signature
There is a lot to unpack here, so let's get into it:
Authority. I require appointment as an officer. There are pros and cons to this, including potential liabilities, but it is important to have adequate authority to fulfill the responsibilities the GC title implies. In other words, I insist on being the company's actual GC, not GC-lite.
Risk/Liability Management. The company must commit to obtaining and maintaining D&O coverage. This is important, especially if the role includes helping fundraising efforts.
Access to Information. I require appointment as Secretary (a separate officer role), attendance at all board meetings, and access to everything within the company. Again, I believe this degree of authority and access to information is necessary to perform the role of GC properly. Liability is full-time, so authority and access to information must be full-time as well.
At-Will Employment. My GC template always provides for "at-will" employment. This gives both parties confidence that the relationship can be ended promptly and without difficulties. As my equity grant is generally between 1% and 3% of authorized shares, vesting over two to four years, this gives the company confidence that my vesting can be cut off if the company chooses to go another direction.
Clear Responsibilities. The bullet-pointed areas of responsibility are tailored to my areas of strength and professional comfort. Under legal ethics rules, attorneys can and should carefully delineate the scope of representation, including any limitations. I always clarify with prospective clients that I do not handle tax issues beyond striving on a liability-free basis to flag them for others to address.
An area worth pointing out is "retaining and managing outside counsel." This enables me to place outside legal work competently and cost-effectively, and to ensure that outside counsel meet my professional and budgetary expectations.
Salary and Time Commitment. I rarely accept commitments of less than 10% of my time, but I have gone as low as 5% for clients with limited legal and regulatory needs, as is sometimes the case with SaaS companies. More common time commitments are 10%, 20%, or 50% of my time. It works well for me to have one company at 50% and several others at 10% or 20%.
And I make it clear in the template that these figures are based on a 40-hour workweek, despite the fact that I am inclined to work 60 to 80 hours per week. In the template, I explain the math. If it's a 10% commitment, that's only 4 or 5 hours a week, which is plenty for me to handle most day-to-day issues. A 50% commitment is 20 hours per week.
In practice, I generally work more than the committed hours, but sometimes less. It tends to work out. On the rare occasions where the work is consistently beyond the agreed commitment, I have gently convinced the client to amend the Offer Letter Agreement to reflect actual usage and an increased salary.
While my actual salary rates are confidential, I often show potential clients the math illustrating how my in-house rates compare favorably to retaining me on an hourly basis. In discussing the proposed salary, I also point out that it is an "at-will" arrangement and that they can always shift to hourly. No company has shifted to hourly to date.
Benefits. Change this paragraph according to your needs. I generally already have health benefits, so this paragraph is intended to highlight another cost advantage of the arrangement.
Salary Deferral. I only include salary deferral if I suspect that the company cannot hire me otherwise and only if I strongly believe in the company. I have drafted somewhat carefully to increase my odds of receiving the deferred salary. Newcomers should be aware that the risk of non-payment is real. My losses on unpaid deferred compensation from startups that did not make it are well into six figures. Over time I have tightened up to whom I grant deferral, in what percentages, and on what terms.
On a compliance note, it is not legal to defer 100% of salary, or to be paid solely in equity. The wage and hour laws of virtually all states require that all employees, including officers, receive at least minimum wage. In Washington State, the minimum amount an officer can be paid is $250 per week.
Equity Compensation Considerations
The ability to receive equity as an officer and employee is a significant advantage for counsel considering this business model. In general, attorneys are prohibited from "taking an interest" in a client. Although the literature on this issue is scant, no bar association appears to have taken the position that routine equity grants to in-house counsel on terms consistent with grants to other officers or employees raise concerns under the ethics rules.
That said, for several reasons, I keep my equity grants at reasonable levels, generally ranging from 1% to 3% of a company's authorized shares. I also avoid seeking non-standard terms, such as rights to anti-dilution, or any type of special voting or control rights that could put my interests in conflict with other shareholders' interests.
In addition to ethics considerations, keeping equity grants modest and subject to vesting prevents them from standing out on the company's cap table. Investors do not like to see anything unusual on a cap table, and large grants to counsel could raise concerns.
The exact size of a requested equity grant always depends on two factors: (i) how far along is the company and (ii) how critical will my role be to the company's success. Sometimes my role is fairly routine because a competent law firm has laid the key groundwork before my arrival. In such cases, I might only request a grant equal to 1% or less of the company's authorized stock.
But the percentage will be closer to 3% if I will be playing almost a founder-level role. This might involve (i) forming the entity and establishing all of the company's governance structure, (ii) issuing founder equity, (iii) creating an equity compensation plan, (iv) helping shape the company's business plan and go-to-market strategy, (v) developing a comprehensive IP protection strategy, (vi) providing legal and compliance support to launch new products or services, and (vii) designing and helping to execute a fundraising plan, including creating a pitch deck, executive summary and elevator pitch, working on the founders' pitch delivery, identifying potential investors, and preparing the founders to respond to challenging investor questions.
When the upfront workload is that significant, not only do I require a larger grant, but I also require some amount of immediate vesting. Otherwise, I might spend hundreds of hours on a new company in the first few months and be vulnerable to termination after having received very little cash compensation and very little equity vesting. In those situations, I may require that 10% to 20% of my equity grant vest immediately. In some situations, I may also require a 2-year vesting schedule, instead of 3 or 4 years.
Restricted Stock versus Stock Options
The template contemplates the issuance of incentive stock options. There are some considerations around equity compensation that exceed the scope of this post.
The language about ISOs and NSOs in the Offer Letter template and post-termination exercisability is one example, but trust me, the second-to-last paragraph is a keeper.
More importantly, if a company is brand new and has a very low "enterprise valuation," it may be far more advantageous to receive equity in the form of restricted stock instead of stock options. Even if that restricted stock is subject to risks of forfeiture that reduce ratably over a number of years, the grantee can file an IRS Form 83(b) and pay all of the tax upfront when the taxable value of the grant is virtually nill.
This also starts the five-year holding period under Section 1202 regarding "Qualified Small Business Stock," which could virtually eliminate all capital gains tax if the stock is held for five years. For more on the pros and cons of options versus restricted stock awards, see my post, Avoid these Ten Equity Compensation Mistakes.
So if you get in "at the ground floor" as part-time GC to a promising startup, get restricted stock subject to an agreed forfeiture schedule instead of stock options, file your IRS Form 83(b) within thirty days of the grant, and have the company immediately include the value of the entire grant in your taxable income.
The General Counsel Audit
As noted above, part-time GC roles present the possibility of receiving options or restricted stock in multiple startups. This makes the role a little like angel investing and it ratchets up the importance of picking companies with strong potential and few skeletons in the closet.
The process I go through in assessing any new client I call the General Counsel Audit. It is detailed in Chapter 3 of my book, Startup Law and Fundraising for Entrepreneurs and Startup Advisors. The General Counsel Audit involves assessing a company across six areas:
Ownership and Control
Protection of Business and IP Assets
Possibility of Disputes
Ability to Raise Capital
Companies with significant problems in these areas are sometimes better candidates for the hourly model, since they may be less likely to pay any deferred compensation or provide a return on any equity compensation.
Multi-Jurisdictional Practice Considerations
Any attorney considering in-house work for a company based in another state must delve into the rules around MJP and the unlicensed practice of law ("UPL"). These rules are relatively murky and imprecise and there is little authoritative guidance on their application to the work of in-house counsel.
In the 80s, 90s, and early 2000s, there were numerous disciplinary actions against individuals who relocated to new states to take new GC positions without complying with applicable UPL rules. Information about these cases can be found by searching online for "general counsel disciplined for unauthorized practice of law."
In recent years, many states have adopted ABA Model Rule 5.5(d). It provides:
(d) A lawyer admitted in another United States jurisdiction or in a foreign jurisdiction, and not disbarred or suspended from practice in any jurisdiction or the equivalent thereof, may provide legal services in this jurisdiction that:
(1) are provided to the lawyer’s employer or its organizational affiliates and are (i) provided on a temporary basis and (ii) not services for which the forum requires pro hac vice admission; and, when performed by a foreign lawyer and requires advice on the law of this or another jurisdiction or of the United States, such advice shall be based upon the advice of a lawyer who is duly licensed and authorized by the jurisdiction to provide such advice; or
(2) are services that the lawyer is authorized by federal law or other law or rule to provide in this jurisdiction.
Some states that have adopted Model Rule 5.5(d) require the attorney to register, others do not. And other states, like Washington, offer "limited admission as house counsel." In Washington, this is codified as "APR 8."
Even cleaner than relying on Rule 5.5(d) or something like Washington's APR 8 is applying for "admission on motion" to become a licensed attorney in the company's home state. If there is "reciprocity" between the two states, an attorney with the required number of years of practice can become fully licensed in the other state simply by getting through the other state's "character and fitness" review process, paying bar dues, and complying with applicable continuing education processes. The costs and administrative burdens of this process vary by state.
Another approach is to require the company to (i) establish an office in the attorney's state and (ii) become "qualified to do business" in that state also. The office could be at a WeWork, Regus, or other office sharing facility, as long as it is an official company office. Given the increasing prevalence of almost completely virtual companies, who's to say where a company is actually located? It would seem difficult to argue against a physical office located in the part-time GC's state, plus qualification to do business.
For companies with offices and operations in multiple states, in-house counsel always have to appreciate that MJP and UPL issues can arise from their activities in those multiple states. Fortunately, many states have adopted some version of Model Rule 5.5(c):
ABA Model Rule 5.5(c) allows an attorney to provide legal services, subject to certain limitations, on a "temporary" basis in a state where the lawyer is not licensed. What is temporary, you ask? Rule 5.5, Comment 6 gives this fairly expansive answer:
"There is no single test to determine whether a lawyer's services are provided on a "temporary basis" in this jurisdiction, and may therefore be permissible under paragraph (c). Services may be "temporary" even though the lawyer provides services in this jurisdiction on a recurring basis, or for an extended period of time, as when the lawyer is representing a client in a single lengthy negotiation or litigation."
ABA Model Rule 5.5(c)(1) - (3) addresses temporary practice "undertaken in association with a lawyer who is admitted to practice in this jurisdiction and who actively participates in the matter" and various forms of temporary practice in connection with litigation and arbitration.
ABA Model Rule 5.5(c)(4) is perhaps more frequently applicable to in-house counsel for companies with geographically dispersed offices and operations since it allows an attorney lawyer in one state to provide legal services in another state where he or she is not licensed if the services are both "temporary" per the above, and “arise out of or are reasonably related to the lawyer’s practice in a jurisdiction in which the lawyer is admitted to practice.”
This is obviously opaque language, but most experienced in-house counsel seem comfortable interpreting it as permitting the types of non-permanent but recurring legal advice and assistance in-house counsel are expected to provide to company employees wherever they reside.
Summary of Pros and Cons
Most early-stage startups cannot afford and do not need a full-time GC. But leveraging a qualified part-time GC to proactively manage legal, governance, and regulatory matters can cost-effectively reduce chances of significant legal mistakes and loose ends.
For attorneys considering part-time GC work, maintaining the ability to also perform services on an hourly basis as outside counsel may be beneficial in terms of income diversification and for the marketing value that "choice" always provides. Continuing with an existing law firm position, establishing a solo practice, or establishing an Of Counsel role at a new firm are three approaches to this piece of the puzzle.
For counsel considering part-time GC work, the professional and financial advantages can be significant, including:
greater diversity of experiences across different industries and business teams,
playing a more direct role in business development, business strategy, and strategic transactions,
ability to receive stock options, restricted stock, or restricted stock units,
leveraging ethics rules relating to in-house counsel that offer flexibility in representing companies in other jurisdictions,
enjoying the benefits of state-law wage protections in insolvency, and
not having to track billable hours.
Companies or attorneys with questions can reach out at email@example.com.