Selecting and Managing Startup Counsel
Updated: Mar 27, 2022
Most entrepreneurs and startups have limited financial resources and wisely allocate most of what they have to product design and development. Without a product or service, there is nothing to sell, and no business model.
But when startups allocate insufficient resources for competent legal assistance, mistakes are almost certain to occur in the following areas:
Entity selection, formation and governance
Structuring key relationships
Equity issuances/cap table issues
Intellectual property protection
Contract negotiation and drafting
At the risk of belaboring the obvious, some mistakes are fixable and others are not. In between those extremes are mistakes with fixes that only partially reduce the harm to the enterprise. Fixing mistakes can also be far more costly than having done things correctly the first time.
Launching a startup is simply a complex endeavor fraught with countless potential pitfalls. I have highlighted many of these in a two-part article on the Entrepreneur & Innovation Exchange (EIX) website hosted by the Schulze School of Entrepreneurship:
At the end of this article, you will find my Startup Formation and Launch Checklist that I use with all of my companies. I modify it with each company to account for differing circumstances, but it's useful here to highlight the roughly 30 steps necessary to properly launch a new company.
Global Startup Counsel Registry
The present article arose out of the creation of my publishing company's Startup Counsel Registry. We recently launched the registry to help readers of Startup Law and Fundraising find local qualified startup counsel. Some of the firms mentioned in this article have agreed to be listed in the registry and others are likely to be added over time.
For a firm to be listed in the registry, we require identification of an individual attorney point-of-contact and we require the attorney or firm to confirm three things:
they want more startup clients and have the bandwidth to serve them,
they offer discounted rates to startups, and
they offer startups a free initial consultation.
The Big Law firms listed in this article are not included in the registry. This is, in part, because they are easy to find and active in many major cities. It is also because the majority of startups are not able to afford their rates.
The idea behind the registry is to focus on sophisticated, competent startup counsel who otherwise might be harder to find and who charge more startup-friendly rates than the Big Law firms. That said, there are attorneys in larger firms on the registry who have committed to providing competitive rates.
For those that can afford the associated costs, there are some very large law firms that focus on startups as a core competency. At the risk of offending any firms left off, the following are some of the top "Big Law" firms that focus on startups:
Some other elite Big Law firms that still serve startup and emerging growth clients but don't have quite the same level of name recognition as leaders in that space include:
The only real drawback with these and other Big Law firms is cost. Their senior attorneys currently bill at rates of $800 to $1,000 per hour. According to a 2019 study by Kruze Consulting, these firms earn an average of $57,000 per year from each of their startup clients. That number is likely 15% or 20% higher now.
That is money well-spent for startups that can afford it. My extensive experiences with Wilson Sonsini, Fenwick, Perkins, and Cooley have all been exceptional. Wilson Sonsini was primary corporate counsel to one of my companies through virtually its entire existence, until being acquired by ING Direct. Wilson Sonsini guided the company through numerous complex VC funding rounds and the acquisition.
The continuity of that representation was a driver of the company's success. As the company's general counsel, I always knew that the sage wisdom of our Wilson Sonsini partner, Patrick Schultheis, was just a phone call away.
There is also a significant degree of "social proof" that comes with representation by a well-known Big Law firm. VCs in particular, are often more comfortable investing in companies represented by these firms. Some of this is because the VCs likely figure that these firms would not risk damaging their own reputations by representing shady or questionable businesses.
But VCs also like these firms because their clients are less likely to have legal and regulatory skeletons in their closets and because the documentation upon which they have been founded, governed, and financed is all based on familiar, tried and true Big Law templates. All of these factors help to reduce risks for VCs and other investors, not to mention also potential acquirers.
For these reasons, my general advice to entrepreneurs with extremely promising business models is to go with the most prestigious law firm they feel is a good fit for them. These companies can raise the funds and generate the revenues they need to pay the Big Law invoices. If you're building the next unicorn, legal spend should be a secondary consideration.
That doesn't mean that you should not negotiate the rates, though. Once you see the preliminary engagement letter, try to negotiate the rates down. At a minimum, seek 10% to 20% discounts. Some firms will request the ability to make a very early investment in the company in exchange for discounts or attractive flat fee arrangements. Push a bit and explore options before signing the engagement letter.
Big Law costs can also be substantially reduced by allocating certain types of work to lawyers at mid-sized, boutique, or even smaller firms, leaving just the corporate/governance, finance, and M&A work with the Big Law firm. Specialized counsel with lower rates can very competently handle litigation, patents, trademarks, copyright registrations, employment and labor law matters, contracts, tax questions, and regulatory matters.
Many mid-sized firms also have startup-oriented legal teams. Depending on the city, a mid-sized firm might have 75 to 300 lawyers. Firms in this bracket rarely seem to have more than between one to five attorneys actually focused on startups. The following mid-sized and larger firms are exceptions to this rule and have strong, sophisticated teams focused on providing full-service work for startups.
Outside of these firms and others like them that no-doubt exist, I have always had somewhat mixed feelings about retaining lawyers in mid-sized firms as startup lead corporate and finance counsel.
First, their rates are not much lower than Big Law, perhaps 20% to 30%. This is because they still have fairly significant overhead and senior partner salaries to cover. If you are going to pay $500 or $800 per hour, you might as well do so with a more prestigious firm that provides some social proof and the other Big Law advantages described earlier.
Second, startup teams in mid-sized firms are sometimes less sophisticated and less stable over time.
Wilson Sonsini was one of the first firms to aggressively go after startup legal representation as a business model. They became the go-to firm to support startups from entity formation through IPO or sale, and for all of the highly lucrative requisite financings in between.
Outside of that transactional work, much of which occurs in Silicon Valley, representing startups is less lucrative than working for larger, more established clients. Mid-sized firms struggle to compete for that transactional business against the Big Law firms listed above.
Thus, as employers, mid-size firms pay startup counsel less and the work they attract from startups might be less sexy, albeit commensurately less demanding as well. These factors can pose challenges in hiring and retaining the very best startup-oriented attorneys.
As a potential client of a mid-sized firm, glance through all of the attorneys' bios. If there are only one to three attorneys that emphasize working with entrepreneurs, startups, and emerging growth companies and the rest are focused on litigation and serving large corporate clients, the firm is not really focused on startups and might not be a good fit. The specific lawyers serving you would need to be true experts in all areas of startup law, governance, and finance.
A good litmus test is to have the attorneys describe in detail all of the VC financings and M&A deals they have led over the prior one or two years. The due diligence, corporate cleanup, negotiation, deal documentation, and project management required to close VC financings and M&A transactions separates the learners from the true professionals you want in your corner. Attorneys who have not led VC and M&A projects recently may not be the strongest candidates to guide your startup to success.
The Kruze study also highlighted the following list of boutique startup-oriented law firms.
These firms are highly focused on startups, and they likely do work of equal quality to the Big Law firms, but at lower hourly rates. The Kruze study says they earn an average of $33,000 per year from each of their startup clients. That number is likely 15% or 20% higher in 2022.
While rates vary across different geographies, one might expect to pay hourly rates of $500 to $700 for sophisticated startup counsel at a boutique firm, possibly lower for associates.
In Big Law, younger associates do much of the day-to-day work, under the guidance and supervision of senior associates and partners. Startups working with boutique firms are more likely to be served directly by, or to at least have more regular contact with, experienced partners. These partners are almost always attorneys who came from Big Law but transitioned to boutique firms for more autonomy, better work-life balance, and less Big Firm politics.
This highlights the importance in any potential law firm relationship of knowing exactly who will be doing the work and at what hourly rates.
Although I generally like to have associates handle basic and more routine tasks, I would rather pay a higher hourly rate to get the right answer faster from a senior lawyer than have a less experienced associate spend several hours longer coming up with the same answer or a less reliable answer.
I read an article recently in which a lawyer from a larger firm (looking for startup clients) wrote that solo practitioners focused on startups often often have lesser credentials and were likely rejected by better, larger firms.
While there may be some truth to this claim, it is far from a hard and fast rule. The Startup Counsel Registry contains several solo practitioners with very deep experience, impeccable credentials, and very sophisticated clients.
If the best startup lawyer in your town is working by himself or herself and your budget is limited, he or she may well be the best candidate for helping you launch your company. Many solo attorneys bill out at hourly rates ranging between $300 to $500.
You would almost certainly need to work with separate counsel to file patent applications, respond to litigation, or handle sophisticated regulatory issues, but competent solo counsel can likely handle everything on the Startup Formation and Launch Checklist below. Many "solos" are also capable of competently drafting and negotiating contracts and other business documents faster than larger firms, where workloads are heavier and turnaround times sometimes slower.
Financings and M&A are other areas where you may need to probe on a small firm or solo firm attorney's depth of experience and capacity. As noted, those are among the most demanding and sophisticated projects any attorney can face. If they have done lots of them and are still doing them regularly, there should not be a problem. If it has been a couple years, though, it might be better to hand those projects to one of the listed boutiques, mid-sized firms, or Big Law firms.
Full-Time/Part-Time In-House Counsel
In my article, Part Time GCs and Startups, I describe a legal service model that I and others offer to startups - that of part-time, in-house counsel. I have served as part-time General Counsel to more than a dozen companies and currently have five such positions.
Read the article for the potential advantages of that type of relationship and how it can be used in conjunction with outside legal counsel. You might be able to convince your favorite outside counsel to become much closer to the business as a part-time employee, perhaps even as an officer.
Tips for Managing Legal Costs
As described already, before signing an engagement letter, politely negotiate for discounts and other possible cost reductions. Here are some other tips for keeping legal expenses under control.
Limiting or Eliminating Retainers
I also always try to avoid or minimize any substantial "retainers" - amounts ranging from $1,000 to $10,000 or more that must be sent to the firm as a deposit, which often must be maintained during the relationship. Startups are notorious for not timely paying legal bills, so many firms are reluctant to deviate from their retainer policies. I am frequently successful, though, at getting retainers down to between $3,000 and $5,000.
Seek Lower Minimum Billing Increments
Additionally, push for a low minimum billing increment, hopefully one-tenth of an hour, or .1. This means that if you call your attorney and talk for three minutes, you will be charged for six minutes. If you talk for seven minutes, you will be charged for twelve minutes.
I recently noticed a firm charging in minimum increments of fifteen minutes, or .25, including for thirty-second email messages simply forwarding matters from the company's Delaware registered agent. The firm was billing my company $100 for each forwarded email - .25 x $400 per hour. I removed the firm as an intermediary between the company and the registered agent to stop those expensive emails.
Inflated minimum billing increments can add up over time, particularly if lots of two-minute emails are each billed out at .25 of an hour. Request a .1 minimum increment.
Avoid Early Mistakes that are Costly to Clean Up
Carefully review my two articles noted earlier on common legal startup mistakes and avoid these mistakes. Do not form the wrong entity, do not form the correct entity incorrectly, do not fail to marshal and protect key intellectual property, do not make mistakes in granting or promising equity, and do not fail to properly structure key relationships with and among co-founders, early investors, or key employees or contractors.
Be Clear Up Front About Overstaffing
Billing questions and conversations are always a little awkward and need to be approached directly but diplomatically. One thing you want to avoid whenever possible, is having multiple lawyers unnecessarily involved in your work.
As a CFO friend recently lamented, emails to and from a major law firm had multiple attorneys in the "to" and "cc" lines, including a $1,000 per hour supervising partner who was adding no value to the project.
When you see too many lawyers on emails or in calls or meetings, you are likely paying for those people, whether or not they are adding value. Lawyers in big firms have painfully high "billable hour" requirements. Given any reasonable opportunity, they will throw some time on your invoice. You may need to speak up about your need to limit involvement of unnecessary attorneys in order to keep costs "within budget."
Watch those emails, calls, and meetings, and review legal invoices for evidence of "too many cooks in the kitchen" on specific matters or projects.
Avoid Requesting Memos or Other Lengthy Advisory Documents
Be careful what you ask for, particularly memos or other forms of written analysis from law firms. It is far more efficient to receive legal advice and guidance from lawyers orally than in writing.
Before lawyers will send out anything in writing, they often obsess compulsively to ensure perfect grammar, punctuation and formatting. They will almost always have other lawyers review any written document, all at your expense. A three or five page memo on something that could have been discussed in a half-hour is likely to show up as three, four, or five billed hours on an invoice.
In reviewing a Big Law invoice once, I found an entry for a memo on a regulatory question that I had never asked for or even received, and an associated charge of $30,000! After asking around and confirming that nobody at the company had requested it, I contacted our partner at the Big Law firm. They could not produce any evidence that it was requested and admitted that it had not even been completed yet, despite the $30,000 invoice. I told them to cancel it and remove the charge, which they did.
Review Bills and Raise Concerns Early in the Relationship
It is rare that I find anything too egregious in reviewing legal legal invoices, but you definitely won't find issues if you don't look. In addition to over-staffing concerns and unrecognized projects, keep an eye for unrecognized names. As the client, you have a right to know in advance who will be working on your matters and projects. If you do not recognize one or more names, ask about them.
Legal invoices should also be sufficiently detailed so that you know exactly what you are paying for. Legal fees are supposed to be reasonable. This clearly implies your right to requisite details necessary to assess that reasonableness.
"Padding" is the unfortunate term for lawyers bumping up the hours it actually took to complete a project. If you sense padding may have occurred on a project or matter, politely but promptly raise this issue. They may or may not make an adjustment, but they'll almost certainly review their invoices more carefully in the future in order to avoid awkward conversations.
And in general, be alert for mistakes, innocent or otherwise. They happen. Your company might be accidentally billed for another client's project. Anything can happen.
Avoid Giving Unclear, Incorrect, and Superfluous Information or Instructions
As in-house counsel, I frequently hear colleagues go off on tangents or ask unnecessary questions in meetings with counsel. When there are two or more lawyers on the call billing by the hour, this can get expensive quickly. And when those colleagues are unnecessarily expanding or confusing the requested work or guidance sought from the firm, that can be even more troubling.
It is important to be well-prepared before engaging with outside counsel so that the advice or support you are requesting is well thought out and as clear and concise as possible. Avoid asking counsel questions that you really don't need answered, and certainly avoid sending counsel in the wrong direction. You will end up paying for the unnecessary or misguided work, however expensive.
Ask counsel to confirm back to you the scope and nature of any project before they begin and respond timely to any requests for additional information or documentation.
Similarly, keep calls and meetings with counsel focused. I know it sounds rude, but keep small talk to a professional minimum. You are paying for it. There's no small talk discount. If you spend ten minutes discussing your vacation with your outside lawyers, that's going on the bill. If counsel asks to take you to lunch or out for drinks, you can be fairly confident the time won't be billed. That's the time to catch up on small talk.
Other Legal Cost-Cutting Resources
Startup Formation and Launch Checklist (Corporations)
☐ agree on founder roles, contributions, and founder equity issuances, clawback terms, and confirm compatibility of expectations among co-founders,
☐ finalize company name with appropriate TM clearance/review, domain name checks, and DE secretary of state entity name availability check (and other states where operations or sales will occur),
☐ lock down key .com domains and other appropriate domains,
☐ prepare and file certificate of incorporation with DE (or other state) secretary of state,
☐ select and retain registered agent,
☐ establish virtual data room on a secure, flexible platform to capture and preserve all formation, equity, tax, banking, HR, lease, and IP documents,
☐ upon confirmation of entity formation, adopt sole-incorporator resolutions appointing board, approving bylaws, and resigning sole-incorporator,
☐ adopt initial board resolutions via “unanimous written consent” (UWC) appointing officers,
☐ obtain federal employer identification number (FEIN) from IRS,
☐ file business license application with secretary of state in headquarters state if different from state of incorporation,
☐ adopt UWC approving opening a company bank account,
☐ open company bank account,
☐ finalize founder stock purchase agreements, founder employment agreements (as applicable), and proprietary information and inventions agreement (PIIA) template,
☐ adopt UWC approving founder stock purchase agreements,
☐ execute founder stock purchase agreements in exchange for founder stock purchase price and founder intellectual property assignments/agreements, and execute applicable founder employment agreements or offer letter agreements,
☐ sign and submit 83(b) elections to IRS for all stock purchases or awards with clawbacks, capping off payroll taxes and starting the Section 1202 Qualified Small Business Stock 5-year holding period clock,
☐ adopt UWC creating equity compensation plan and plan documents, and approving any initial key employee/advisor restricted stock awards (subject to 4-year vesting/clawbacks and a one-year cliff; option grants require 409A valuation),
☐ draft template employee offer letter agreement, non-disclosure agreement (NDA) and Independent Contractor (IC) Agreement,
☐ select and register on platform like Gusto® to handle employee onboarding and payroll processing,
☐ lease office space or mailing address as necessary/desired,
☐ file "intent-to-use" TM application(s) with USPTO,
☐ if desired, adopt UWC to create Advisory Board, including adopting Advisory Board Charter and Advisor Agreement templates (alternate stock option/restricted stock versions),
☐ develop and execute fundraising strategy for pre-seed and/or seed rounds,
☐ implement invention-capture processes for patent protection, as applicable,
☐ establish bookkeeping via Quickbooks Online® or other platform and/or bookkeeping services to track revenues and expenses and maintain related records,
☐ establish account with Carta®, Shareworks®, or other cap table management platform and enter equity ownership info and records for founder grants, stock option awards, and/or restricted stock awards,
☐ implement expense reporting and reimbursement on platform with robust controls/checks and balances and audit functions,
☐ adopt written travel and expense policies, and possibly also an ethics or code of conduct policy.
Paul Swegle has served as general counsel to numerous tech companies and advises a dozen others as outside counsel. He has completed $13+ billion of financings and M&A deals, including growing and selling startups to public companies ING, Capital One, Nortek, and Abbott.
Paul speaks regularly at top law schools and MBA schools, where his popular business law books are widely used in courses focused on entrepreneurship and