When you are a startup founder deciding between a small boutique firm and a big law firm can be tricky. Fundamentally you are shopping for domain expertise and market knowledge. Choosing a law firm that is too big or small for your venture comes with certain risk, as do all business decisions. A framework for thinking about attorney selection is necessary for startups regardless of industry sector.
In the startup and entrepreneur world we tend to talk about finding the right tool for the job. The primary selection errors we see startup founders make are picking a firm that is isn’t the right tool, it’s too big or too small, to meet their needs. Other common mistakes are picking a firm with the wrong specialization, mishandling financials, and not considering the character of the firm or attorney.
There is big…and then there is BIG.
Generally speaking, firms on the AmLaw 100 will employ hundreds (in some cases more than a 1000) of attorneys and take a department store approach to their practices. These types of law firms offer every service and every possible type of attorney for their clients. Although they operate in tech, they also operate in aerospace, banking law, land use, wealth management, securities litigation, and every other conceivable practice area requiring an attorney. For big company clients with a multitude of legal issues or for smaller clients with particularly prickly regulatory needs (cleantech, banking, non-profits, patent trolling etc.), sometimes there is no substitute to the department store approach.
But, the department store approach comes with a variety of risks:
Risk #1 Limited Investment
Big law firms generate millions and in some cases billions of dollars in revenue. They can’t afford to invest time or effort into small tech startups. Less financial interest in the startup market trickles down to mean limited services, lower quality of services and smaller possibilities for growth.
Risk #2 Limited Service
If you actually do find someone at big law firm who cares about startups, he probably won’t have a high enough standing in his own company enough to provide your startup with respect or all of the tools for success.
The situation will probably turn out something like this; your attorney won’t be a senior guy with the firm’s support, he may be a terrific scrappy lawyer, but he probably won’t have access to the highest quality team members or tools your startup will needs. You’ll get stuck with mediocre service regardless of how great your attorney is capable of being, just because your company is a tech startup.
The reality is that an attorney at a large law firm might develop great junior representatives and train them to do great work, only to have them get poached internally to work for partners who are closer to the big firm’s target market. None of this is sinister, it’s just the reality of law firm economics. Larger firms cannot afford to fill build their business on small company revenues and will not give them access to top-tier services.
Risk # 3 Limited Growth
When you wish to do a deal with an existing client of a big law firm ie. Facebook, the NFL, a Casino chain, either for some commercial reason or in the context of the sale of your company, your big law attorney will have to opt out due to conflict of interest. The partner who represents Facebook (or the company you want to do business with) will tell your representative that they are the higher priority and win representation that way. You will find yourself shopping for representation at the time you most need his or her advice.
Risk #4 Limited Quality
You might end up realizing that your big law firm is pretty good at everything and the best at nothing (especially the thing you need them to be best at). Let’s get down to the nitty-gritty here: most of what people in the law field do isn’t brain surgery, but market knowledge and experience can make the difference between good and great outcomes. If the big law firm you engage with doesn’t do startup work typically, you run the risk of getting lousy advice on things like market terms, deal making styles, financing trends etc. The lack of market knowledge tends to make deal-making harder and more expensive. For example, we have to quote two price ranges for financing based on whether or not the investors lawyers know what they are doing or not.
Call to Action
- Take careful consideration of how the size of the law firm you pick will impact your startup. Just because they offer all types of services doesn’t mean that they offer the best expertise, or will have time to invest in your problems.
There are two types of small law firms: the sole practitioner (or a firm that has less than 10 lawyers) and the boutique.
Sole practitioners and boutiques can be really attractive and effective early in your life cycle, -if they have startup experience. Sole practitioners tend to be inexpensive, after all they don’t have any colleagues to support. Some sole practitioners are extremely capable and knowledgable, just difficult to locate.
Boutique firms can be the right move for you if you are attentive to your changing needs as your startup experiences growth. Of course there are just as many risks associated with a law firm being too small, it’s not going to be an easy decision:
Risk #1 Low Quality Attorneys
A lot of sole practitioners are refugees from big law firms or boutiques (like ours) who either 1. decided they didn’t like the rat race of a larger firm, 2. wanted to be their own bosses, or 3. weren’t successful enough to win partnership at a bigger place. If you get someone from category 1 or 2, terrific, you are set. If you get an attorney who wasn’t good enough to succeed at a big law firm or a boutique, there is probably a reason.
Call to Action
- Do research and figure out which category your potential attorney is in. Don’t ask his existing clients, instead ask for references from clients who ‘graduated’ to bigger firms.
Risk # 2 The ‘graduation’ phenomenon
Small boutiques almost always lack the ability to scale with you as your startup grows. You are probably betting on a huge success (why else would you be starting a company?) and that success means growth through life cycles and funding rounds. In the startup world growth is often rapid, inconsistent and non-linear. Your legal needs as a startup founder might change in a short period of time.
Call to Action
- Leave a lot of room for future growth and the possibility that your focus may pivot. As you grow, you are likely to quickly outgrow the sweet spot or expertise of a sole practitioner or small boutique that was a perfect fit the day you formed your company. Much like the big law client who was forced to find new counsel due to a conflict of interest, you are likely to find yourself shopping for a firm that can keep up with your growth. This is not necessarily bad, but you need to plan for it. It will become a tax on productivity and growth if you figure it out during the middle of a contract or deal.
Risk #3 Wrong Boutique
Over 95% of our company clients consume the same legal services from us regardless of what they do. Without regard to sector, startups need to raise funding, sell securities, maintain adequate corporate governance and controls, hire employees, provide incentives for employees, fire employees, negotiate partnering and commercial deals to monetize their IP’s ect. Standard business practices and procedures are necessary, not just for startups , but for varied business models from mobile apps, banking platforms to biotech companies.
Call to Action
- Choose a boutique that understand the problems tech startups face. If you select your boutique because they have a particular background in sports law, casino deals or life science partnering and they have no idea how to help you raise a seed round, you are likely to wind up struggling with the quality of services you receive (like what we discovered from Risk # 4 Limited Quality with the big law firms). It’s going to cost more and be more difficult to get simple critical things done than it should.
Risk # 4 Investing too Much
Running a startup has a lot to do with navigating financial limitations. All of the real players in early stage tech will be willing to do some kind of package deal for you. This includes financing deferral without requiring you to pony up a chunk of your company. If they demand equity you should ask them some hard questions about whether or not they believe in what they are doing, and you should ask yourself some hard questions about whether a 12 month deferral of 25K is really equivalent to 3-5% of your company. If your answer to that question is ‘yes,’ you need to ask some REALLY hard questions about the scale of the opportunity you are working on.
- Do not give away equity for a deferral from your law firm unless it is absolutely necessary.
My last sound bite on attorney selection applies to both big law firms and small ones:
Risk #1 Unprofessional Attorneys
I would like to think that this doesn’t need to be said, but be careful about the professionalism and character of the attorney you pick. Jerks, they can be found everywhere: don’t hire one. You are going to have to spend an unbelievable amount of time working with your company’s early stage attorneys. It is absolutely crucial that this relationship runs smoothly and effectively.
Call to Action
- Hire someone you like and trust. I don’t think you can do this over the phone or without references. Spend the time to meet your proposed team and follow-up with other clients in your network. It’s well worth the research time.
Regardless of what type of attorney you choose to represent your startup: finding the perfect fit will save you both time and money. Be careful and analyze your options thoroughly whether you choose representation from a big law firm, sole practitioner or boutique.
Leave a comment below and let me know what kinds of experiences you have had with attorneys as a startup founder. What kind of attorney do you like to work with? Have you had any of the experiences I mentioned? Please share your stories in the comments below.