Without informing their board, a certain startup had amassed $150,000 legal fees in just three months.
The investor team I was part of grilled the founder to explain why. He told us the fees were for documents involving business formation, funding, various agreements, and intellectual property registrations.
Because fees like this can sink an early-stage startup, it’s critical that founders of emerging companies know cost-effective ways to use lawyers.
As a founder, you can get the most out of legal help by deploying a few smart strategies that won’t break the bank or blow your budget. Not everything you do requires a lawyer: You simply need to know when to engage your attorney, how much to spend, and when to do it yourself.
When you absolutely need a lawyer
Your startup needs the right legal structure. Structure depends on various factors: the nature of the business, its growth potential, funding requirements, liability considerations, and tax implications. Most startups are formed either as an LLC (limited liability company) or a C-Corp. Your business lawyer will help determine which structure best fits your company.
All startups enter into agreements and contracts with employees, suppliers, strategic partners, distributors and partners. It’s wise to have a lawyer help draft contracts to ensure your startup’s interests are protected. These three key areas require legal coverage:
Not everything you do requires a lawyer: You simply need to know when to engage your attorney, how much to spend, and when to do it yourself.
IP (intellectual property) protection: Identify and protect your IP, including patents, trademarks, copyrights and trade secrets.
Fundraising and securities law compliance: Your capital raises from investors require securities laws compliance. These laws were established to ensure transparency in investing. As an entrepreneur, you provide accurate information to your investors about their potential investment. This includes all associated risks. A lawyer will advise and help your startup navigate the process to ensure your company is compliant.
Employment law: When a startup hires employees, the business must comply with state, federal and different country laws that include operating and promoting a fair and inclusive workplace. To lay out the company’s policies, you’ll need an employee manual that an attorney can review or help create. It’s equally important to have relevant agreements completed, such as employee “IP assignments.” This means an employee who creates intellectual property for the company, such as patents, trademarks, trade secrets or copyrights assigns all rights of ownership to the company.
My six smart ways for your startup to use lawyers effectively follow.
Ask your network for referrals and research before hiring
Before hiring a lawyer, ask other entrepreneurs, your board and advisers for referrals to prospective attorneys. Find out what they’re paying for legal services in your area. This will give you a good sense of how much you’ll pay and what to budget for. Ask about education, experiences and how satisfied they are with their lawyer.
You’re better off with an attorney who specializes in the entrepreneurial ecosystem and has many years of experience with entrepreneurs. Angel investor groups often have alliances with sponsoring law firms that specialize in the startup space. Because these law firms understand the inherent risks for emerging companies, they often have experience on all sides of the complex business and intellectual property issues that startups are likely to encounter.
Protecting your IP is one such area where experienced counsel’s advice can be crucial. For example, when running my startup, we entered into a complex contract with a company to beta test our newly patented technology. This end user made an improvement they claimed was sufficient to result in their ownership of the product’s entire IP. Fortunately, the contract was clear: Any improvements they made to the technology would become our intellectual property, not theirs. Without this clause our attorney had wisely added, we would have lost millions of dollars.
Communicate to eliminate surprises
Discuss the lawyer’s fee structure upfront. Let them know your budget and expectations. Attorneys who work with startups frequently have a fixed price for initial legal matters such as business formation, contracts, intellectual property protections, employment agreements and legal documents for funding. It’s also fairly common for them to give startups extended payment terms.
Don’t be shy about explaining what your budget is. Ask for a detailed breakdown of legal fees and expenses — you don’t want to be saddled with surprise fees and expenses that eat up your cash reserves.
Get the name of the attorney who’ll be doing the legal work on your behalf. Don’t settle for someone who just graduated law school. Smaller law firms or solo practitioners are more likely to give you the experience you need along with a reasonable price. One of the lawyers we worked with had previously spent ten years at a much larger firm whose hourly billable rate was twice what we were now paying. On the other hand, it may be worth paying the premium associated with a larger law firm if you anticipate needing advice on a large array of legal matters, or matters requiring specialized legal knowledge beyond the experience of a small firm or solo practitioner.
Make sure to get a written statement from the attorney outlining how they will calculate fees. Ask for an estimate of fees for work not just at the beginning of the relationship but on an ongoing basis until you’re confident your attorney is cost-effective.
Always ask whether your counsel will agree to a flat fee instead of hourly fees on a matter-by-matter basis.
Before signing an attorney’s engagement letter, be sure it sets forth a clear statement of all the terms, conditions and fees.
Don’t overlook the attorney’s communication style. Note how comfortable you feel speaking with your candidate lawyer. Get a sense of whether they’ll be easy to work with. Ask how they would handle a disagreement should one arise.
Try to negotiate a lower rate: Lawyers will respect you for this
I always negotiated legal fees even though I used lawyers on a regular basis at my startup. An old adage applies here: If you don’t ask, you don’t receive. Because I asked, I was able to reduce our company’s legal costs by 25% to 30%.
Although it may seem counterintuitive, negotiating legal fees can serve as an entry point to a collaborative relationship. Lawyers will respect you for this. By openly discussing fees and expectations, both parties can get a greater understanding of each other’s priorities and set a budget within those priorities.
You may find a lawyer who isn’t open to negotiating their fee. For the most part, though, I’ve found fee negotiation is common and ends up benefiting both you and the attorney: You save, and the attorney gains a grateful client.
Keep a hawk’s eye on the clock
Whether you’ve successfully negotiated a flat fee or you’re being billed hourly, carefully manage the time you spend with lawyers. Start by coming to meetings prepared and organized. Being armed with key points ahead of each meeting will help you stay focused and efficient.
Some lawyers talk a lot — that’s what they’re trained to do. Those who bill by the hour do so in 6- or 10-minute increments. If your lawyer seems wordy and spends too much time in what you feel is superfluous discussion, watch the time and keep them moving toward the end goal of the conversation. By going into an attorney meeting with this awareness, you’ll minimize your attorney’s “on-the-clock” time.
One attorney I worked with had a particularly slow talking tempo. It took him 30 minutes to say something he could have said in five. It felt as if he was maximizing his billable hours. I discussed the issue with him, making clear our talk would be off the clock. He was unable to change his style, so I terminated the relationship and selected another equally qualified attorney who was considerate of our budget and economical with his words.
Know not to call your lawyer for advice that you could be seeking elsewhere. I’ve seen too many entrepreneurs make the mistake of looking to their counsel for assurance or support, then be shocked to receive a $30,000 invoice at the end of the month. Instead, go to your advisors and board members for guidance and support; they’re there to help you.
Require itemized billing
Itemized billings give you a detailed picture of the work your legal team has handled for your startup during a particular time period.
Be sure your agreement with the law firm calls for itemized monthly billing statements indicating work performed, time and who did the work, as well as any additional fees. Scrutinize invoices to ensure you’re not being overcharged or billed for unnecessary items or expenses you haven’t agreed to. This is particularly important at the beginning of a relationship as a way to establish what you will, and won’t, pay for.
Never be shy to question anything on a bill that doesn’t seem right. And if time spent discussing the bill shows up on the next month’s invoice, remind your lawyer that time spent discussing an invoice is off the clock.
Knowing when you don’t need an attorney
Deploy a strategy where you know ahead of time you won’t need to engage your lawyer.
For example: Consider whether you can repurpose a contract your attorney helped create and use it in similar situations without reengaging your lawyer. You let this contract serve as a template where you replace names and other details without revising the legal terms. I regularly repurposed contracts at my startup and only brought in lawyers when we ran into unusual legal questions.
We had over 500 contracts; 90% of them were repurposed. These are the steps to take after you’re certain you understand the “boilerplate” contract:
- Identify changes needed (parties involved, state or country, territory, etc.).
- Review scope of work.
- Establish payment terms.
- Draft the changes.
- Send to the other party for consideration.
- Secure signatures when each side is in agreement.
- After signing, ensure the contract is securely stored and easily accessible.
If you’re not sure whether a particular contract involves more complex legal issues than those addressed in your template agreement, or you’re uncertain about possible legal ramifications of an unusual situation, consult your lawyer. This will ensure that you protect your interests and that the modified contract is legally sound.
You’ll save a lot of money if you adopt a mindset to be strategic about when to seek legal help. For those times when you’re not sure, consult first with your board and advisors. They’ll know whether it’s an issue you and your team can handle or whether it’s indeed time to call your lawyer.