It’s amazing how quickly legal costs can add up. If you’re running a startup, it’s possible that your legal costs are second or third highest amongst all of your expenses. And just like medical bills, they always seem to be higher than you imagined possible. Even if you don’t like the lawyer you are using, you know you can’t do without one. So what can you do to control your legal costs? Here are 10 ideas to try.
There’s no need to start from scratch for basic legal documents. Even your lawyer doesn’t do that. They use templates so why can’t you? You just need to get your hands on them and realize that even a template needs modifications. In addition to the blank spaces that need to be filled out, it is likely that additional tweaks will be needed to have the template best work for your company. But once the template is modified, you can use it over and over and over again.
Below is a list of templates you should try to get your hands on. How do you get them? When interviewing attorneys, ask them if they will provide a set of templates in exchange for gaining you as a new client. If not, what does that tell you? And if you already have an attorney, ask them for a set of templates to help keep your legal costs down. Of course, you can also talk to other companies that operate in your state/country or you can search the Internet. Just remember those templates probably need some adjustments before you start using and that might cost you a little money. Here’s a checklist of templates to pursue:
- Offer letter for employment
- Intellectual property assignment agreement for new employees
- Contractor/consulting agreement
- Termination notice – one for employees, one for contractors/consultants
- Confidentiality agreement (aka non-disclosure agreement or NDA)
2. Online Legal Services
This segment is young but exploding and is sure to have an impact on the legal industry as a whole. And although you almost certainly wouldn’t want to outsource everything to “lawyers in the cloud”, they can serve as a very effective tool to help control legal costs – especially on basic tasks that don’t require deep knowledge of your business or vision and don’t require much in the way of interaction.
Several years ago general-purpose, online legal services started popping up. Now they are starting to specialize and one named Clerky has a focus on startups. For stock option plan administration and 409A business valuations, there’s eShares. The list will grow dramatically as this segment evolves, so do your homework and even ask your attorney for an opinion. Some are willing to collaborate with these legal services in order to help you keep your costs down. I personally think this can present the best of both worlds because you still get expert oversight from someone who should know your business, vision and appetite for risk.
3. Billable Levels & Specialization
There is a hierarchy of billable rates in the legal industry. Paralegals cost less than junior attorneys, who cost less than senior attorneys, who cost less than partners. Why have a senior attorney review changes requested to your confidentiality agreement when a paralegal or junior attorney is just fine? It is OK to ask your attorney, “Is this something your paralegal can work on?” Of course, don’t ask that for critical things like closing a financing round or finalizing a critical strategic partnership agreement. And if you use a freelance attorney, ask if they ever partner with junior attorneys or paralegals. They probably do.
Startups should try to find an attorney that focuses on legal activities and issues that relate to company formation, fundraising and early stage company growth. But even with that focus, they still probably don’t know enough about intellectual property law or advanced employment law. So instead they will either subcontract a specialist or refer you to one when you have needs in those areas. The billable rate for the specialist might be high but if they can do the work in 1/4 the time your startup lawyer could do it, you definitely save money in the long run while getting the best work and advice possible.
4. Convey Significance
If you don’t otherwise give guidance, your attorney will almost always give their effort to fully protect your company. But what if the project relates to something that will never have a significant impact on your company? All you wanted was a “sanity check” but instead got a bill for $1,000 and a document with tons of mark-ups and comments. Or perhaps the project is a global distribution agreement with a multi-billion dollar company. Closing the deal significantly benefits your company and you already know they aren’t going to concede on very many of your requests. So what you want is protection against things that could really harm you during a future fundraising event, acquisition or IPO and you are willing to concede on all of the basic things.
Make sure your attorney understands the level of significance or impact to your business and let them know your willingness to accept risk. This will influence the level of precision and protection they try to achieve with their work. And if they feel you are willing to concede too much, they will let you know and you can discuss.
5. Everything is Billable
At the start of calls and meetings with your attorney, do you ask how their family is doing or what they did on their recent vacation? That chit-chat is often billable. It is only fair to the attorney that they bill for their time. That is how they make their money. The time you took to chit-chat is otherwise time they could spend with other clients. It’s not that they don’t enjoy a little social interaction and for sure they want to get to know their clients, but just assume you are “on the clock” from the minute you shake hands or they answer the phone. If you want to get to know your attorney better, and I recommend you do, invite them to happy hour and avoid asking legal questions during that time.
6. Educate Yourself
Since you know that all time with your attorney is “on the clock”, why waste time having them educate you on basic things that you could learn on your own time before the call/meeting? If you are about to start fundraising, educate yourself on convertible notes (see related article titled “Convertible Note Basics”), cap tables, preferred stock, etc. If you are entering into a strategic partnership, educate yourself on indemnification, trademark rights, limitations of liability, force majeure and jurisdiction. Where can you go to educate yourself? Start with Google (or other search engines) and legal blogs (startups should check out one hosted by a fellow Austin blogger and attorney named Jose Ancer. It’s called Silicon Hills Lawyer). Also look for online courses or local workshops and meet-up groups that you can get involved with.
In addition to educating yourself, you should prepare for any interaction with your attorney because it will reduce the amount of time you need to spend with them, which thereby reduces the billable hours. Make sure they know what the purpose of the call is, send them an agenda and any needed material ahead of time. Also be ready to describe the level of significance of this project and be ready with a list of questions. Have everything needed in front of you or accessible with the click of a button.
8. Be Organized
Where do you keep all of your legal documents? And when I say “all”, I really mean all. You should have a repository and possibly an online repository that is shared with your attorney. Come up with an organized hierarchy of folders that make it easy to find things later.
As you file your documents, think about how to name the file for easy searching later and come up with standards so that all documents of the same type (offer letters, NDA’s, etc) use the same structure. You should also put a date code (or at least the month and year) at the end of the file name for easier identification later. For example, during fundraising or due diligence you might get a request to provide copies of all license agreements executed in the past three years. Click on the graphic to the right for an example folder hierarchy for this legal archive.
9. Ask About Costs
As you describe a project to your attorney, it is completely acceptable to ask for a cost estimate. The answer will usually be a range, depending on how many iterations are expected and things like that. But if even the low-end of the range is much higher than you expected or budgeted, let your attorney know that and ask if there are creative ways to reduce the cost. Similarly, if you get a bill that is considerably higher than you expected, politely ask for an explanation. Just understanding what caused the bill to be higher than you expected is educational and will help you budget better in the future or identify things you could have done differently to reduce the cost.
One legal activity all startups go through is company formation. Regardless of the type of legal entity you choose to start with, doing it right and in a way that allows your business to grow will involve some legal help. Pay close attention to what is included in the “legal formation packaged” quoted by your attorney. If it includes various reusable templates or other things that save you money in the future, you might be willing to pay a little extra.
10. Incubators and Accelerators
Often times these programs and organizations have ways of keeping your legal costs lower than what you could do on your own. Many of those things are covered in this article. For example, most of them offer legal templates, educational workshops and mentorship from experienced entrepreneurs and sometimes attorneys. If you are considering application to an incubator or accelerator and are concerned about legal costs, ask what they offer to help keep costs under control.
What About Fee Deferrals?
I want to make a quick comment about fee deferrals. Some law firms offer to defer a certain amount of fees in exchange for something. Perhaps they get a little equity in the company and require payback upon raising a Series A. Every firm that does this is a little different.
I would not put this in the category of controlling legal costs because it’s just a deferral that you’ll eventually have to pay if you survive long enough to pay it. For those of you that know about the Popeye cartoon, a character named Wimpy would always tell Popeye “I’ll gladly pay you Tuesday for a hamburger today”. Entering into such an agreement comes with strings attached. Make sure you understand those strings and make sure to call this what it is – a deferral.
I hope you discovered at least a few new ideas to start practicing. Eventually you might find that you have enough regular legal work to hire a legal counsel as a regular employee. Even then you’ll still need outside help in particular areas. But in all cases there are things you can do to keep your legal costs under control and at least more predictable.