As I have previously discussed, I began my legal career as a corporate associate at two major law firms in New York City.  After nearly eight years, however, I realized I wanted to spend the rest of my life helping entrepreneurs (like my father) — not executing large, complex transactions for multi-national corporations and private equity funds.

I also saw a big problem in the legal marketplace: entrepreneurs and their companies were paying a small fortune to have their legal work done by junior associates getting on-the-job training; or, put another way, the big-firm template just didn’t work for entrepreneurs.  (I discuss this issue in detail in the video on our home page.)

Accordingly, I decided to open my own shop in California, the land of the entrepreneurs.  So in 2005, my wife and I headed west; and, after passing the California Bar exam (and getting the lay of the land), I launched Walker Corporate Law Group, a boutique corporate law firm specializing in the representation of entrepreneurs.

“The NYC Tech Scene is Exploding”

But a funny thing happened while I’ve been out here in California: the startup scene in New York City began “exploding” (to use Chris Dixon’s term).  Indeed, super angel Ron Conway wrote in an email to Chris about a year ago:

The pace of innovation in the New York area is very impressive right now. Some of the top entrepreneurs in the country are building and scaling companies in the NY ecosystem.

Paul Daversa, CEO of Daversa Partners (an executive search firm to VC’s and the start-up community), wrote a few months ago that:

[F]or the first time in my 20 years of search, the deal flow and investment lines have begun to blur as NY has become a hot-bed for building great tech companies, and leadership talent is migrating to New York.

And just a couple of days ago (in an article about Jonathan Teo, formerly of Google), Joel Cutler, managing director of General Catalyst Partners, stated that:

New York’s start-up culture is booming, and there’s so much brilliant talent that it’s attracted one of the Valley’s rising stars.

Not to mention all the emails and phone calls I was receiving from New York City entrepreneurs, who were all saying the same thing: “if you only had a New York office.”

OK – I cry uncle.

Our New New York City Office

Welcome to our new office on the 26th floor of the Seagram Building at 375 Park Avenue in Manhattan.  Welcome also to my two new colleagues in New York: Daniel Chakrin and Philip Kahn.

Daniel is great and is already helping me with an exciting, new client in Manhattan named Cheek’d — a cool, online dating service.  He has 10+ years of corporate law experience, including nearly five years at Skadden, Arps, Slate, Meagher & Flom LLP and 2+ years at Schulte Roth & Zabel, LLP.  He also has a strong accounting background, having spent two years as a certified public accountant at Deloitte & Touche, LLP prior to attending law school.  Daniel graduated from the University of Pennsylvania, Wharton School of Business (B.S. in Economics, cum laude), where he was a Joseph Wharton Scholar and Benjamin Franklin Scholar, and New York University School of Law (J.D., cum laude).

Phil is also great.  He has 15+ years of corporate law experience, including as (i) a corporate associate at Debevoise & Plimpton and Akin Gump in New York City; and (ii) Associate Counsel at Major League Baseball Enterprises.  Phil has extensive experience in mergers and acquisitions, public and private financings, joint ventures, securities law matters (including distressed-debt trading), and corporate governance matters.  Phil graduated from Vassar College (B.A.), where he majored in History and minored in Economics; and Benjamin N. Cardozo School of Law (J.D., magna cum laude), where he was Editor-in-Chief of the Cardozo Law Review.

Conclusion

Here’s a shout-out to all the entrepreneurs in New York City: there’s a new law firm in town, with a new business model that is designed to help entrepreneurs succeed.  If you’d like to grab a beer with me or one of my colleagues, just call me directly at 212-631-4221.  Cheers, Scott

www.youtube.com/watch?v=cYhNQ8vDlAs

About once a week, I receive an email or phone call from a law school student asking for career advice and specifically inquiring what it’s like working at a major New York City law firm (as I did for nearly eight years).  I discuss below the good, the bad and the ugly.

The Good

New York City is the capital of the legal profession.  Accordingly, there is no better place to launch your legal career than at a major New York City law firm, particularly if you’re interested in practicing corporate law.  As a corporate associate, you will be working on some of the largest and most complex transactions in the world (often covered on the front page of The Wall Street Journal).

The environment is intense; the partners are demanding; and work day is long.  Indeed, as a junior associate, you can expect to work 15+ hours per day and, if a deal is hot, much longer.  All-nighters are not uncommon; for example, my former colleague’s best friend started at Wachtell Lipton (a top M&A shop), and within the first six months he had done 30+ all-nighters (defined as not sleeping).

The most significant benefit of this work environment is that you will be developing a strong, foundational skill-set.  You’ll be working under very smart, talented and experienced lawyers, and you can’t help but absorb some of their analytical skills and sound judgment; it’s like a rookie training with the Yankees or the Steelers.  You will also begin developing strong drafting skills, which is critical to a corporate lawyer (not to mention learning the importance of meeting tight deadlines and responsiveness).

The Bad

One of the major downsides working as a junior corporate associate at a major New York City law firm is the excessive number of hours spent doing tedious, mind-numbing work.  I remember my first deal as a junior associate.  My firm was representing Sony in connection with its $2 billion acquisition of CBS Records.  I was assigned to a 20-lawyer due diligence team and ended-up spending about 16-18 hours per day for three weeks reviewing corporate documents at the headquarters of CBS Records.  Other than drafting closing documents, this is generally how you will spend your first couple of years at the big firm.

The other significant downside is the extraordinary pressure to bill.  Your job security depends upon meeting certain minimum annual billing thresholds; and bonuses are tied to thresholds as well.  Accordingly, the entire business model promotes inefficiency and padding.  This may be good for the law firm’s bottom line; however, it leads to over-lawyering and the inability to prioritize issues.

The Ugly

The ugly is pretty ugly – and you have to develop some thick skin to survive.  Simply put, at times you’re going to feel abused as a junior associate.  It will be tough enough pulling all-nighters and doing piles of scutwork, but the false deadlines, disrespect and personal insults can be a lot to handle.  (For example, some partners will not even acknowledge you in the hallways or bathroom or will curse at you and/or belittle you in the presence of other lawyers.)

This abusive treatment always seemed quite short-sighted to me for several reasons: first, the firm was driving good associates away; second, many associates would go in-house and would eventually have an opportunity to forward business back to the firm; and third, why not have a great reputation for treating associates well and thereby become a magnet for law-school graduates.

So why does this go on at most of the major New York City law firms?  My conclusion: partners abuse associates because they can; or, to put it another way, this is the way they were treated and so they continue the vicious circle.  Believe me, the same thing goes on at the big New York City investment banks — as attested to by my friends (and discussed in the book “Monkey Business: Swinging Through the Wall Street Jungle”).

Conclusion

Like anything in life, there are pros and cons to starting your legal career at a major New York City law firm; however, I strongly recommend it – particularly if you’re going to practice corporate law.  The training you will receive there will be invaluable.  Moreover, you will have lots of career opportunities after a few years.  As the song goes: “If you make it there, you can make it anywhere.  New York, New York.”

Craig Johnson

Background

I began my legal career as a corporate-transactional lawyer at two major law firms in New York City.  After nearly eight years, however, I realized I wanted to spend the rest of my life helping entrepreneurs (like my father), not executing large, complex transactions for multi-national corporations and private equity funds. So I moved to California and launched my own boutique corporate law firm specializing in the representation of entrepreneurs.

The first thing I realized here in California was that my role as a corporate lawyer representing entrepreneurs was far different than the role I played in New York.  Indeed, I had not developed the skill set to effectively represent entrepreneurs.  Accordingly, I started searching for books, articles and other resources that might be helpful in connection with my new role.

That is when I found Craig Johnson.  He wrote a chapter in the book, The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship.  The chapter is entitled “Advising the New Economy: The Role of Lawyers.”  In fact, I was so impressed with Craig’s insight and advice that I contacted him via email.  Here is our initial correspondence:

Hi Craig — I just wanted to drop you a note to tell you how much I enjoyed your contribution to the above book.  I particularly appreciate the line “starting companies is a lot like launching rockets: if you’re a tenth of a degree off at launch, you may be a thousand miles off downrange” — which strikes a chord with the engineers.  I am a former big-firm New York corporate lawyer and moved to SoCal approximately two years ago to devote my practice to helping entrepreneurs.  Many thanks for your insight.

Best regards,

Scott

Scott,

What a nice note!  I’m no longer practicing law and am doing seed VC investing in Palo Alto.  See www.c2cventures.com.  When you’re next in Palo Alto give me a call and maybe we can get together.  Note my new email address – craig@c2cventures.com.

Best,

Craig

Who Was Craig Johnson?

As this Wall Street Journal article reports, Craig graduated from Yale University and then served in the Peace Corps in Ethiopia, where he distributed smallpox vaccine.  He returned to the United States in 1970 and worked as a computer programmer at Burroughs Corp. in Pasadena before enrolling in Stanford Law School.

Craig’s legal career began in 1975 at Wilson Sonsini Goodrich & Rosati in Palo Alto.  In 1993, he quit Wilson Sonsini with 13 other attorneys to launch Venture Law Group, which exploded with the tech boom and grew to more than 100 lawyers — raking in millions of dollars with its investments in clients like Yahoo and Hotmail.

Venture Law Group stuggled when the bubble burst and was acquired by Heller Ehrman in 2003.  Craig then became a venture capitalist and launched Concept2Company Ventures.  It was in 2007 that I contacted him and later learned, much to my surprise, that we shared the same vision: a new business model for the legal profession.  Indeed, we both realized that if you stripped-out the huge overhead costs of the traditional law firm (i.e., fancy offices, large support staffs and expensive associates), you could pass the substantial savings onto your clients.  I figured this out in New York; he figured it out in Silicon Valley.  I launched Walker Corporate Law Group; he launched Virtual Law Partners.

What Did I Learn From Craig?

Craig identified five key roles that the startup lawyer must play.  Below are excerpts from his book chapter.

1)  Business Advisor.  As Craig noted:

Although start-up lawyers in Silicon Valley draft documents and follow form books . . . , they usually play a much larger role in the businesses being started.  They are often dealing with people with very limited or no business experience.  These people need help in defining and pursuing their business goals. . . . How should the founders divide the initial stock ownership? Who should be on their board of directors? Which financing sources should they consider?  At what valuation and on what terms?  Is their business strategy sound?  How should it be modified?  What should they do first?  Second?  Not at all?  The start-up lawyer is writing on a clean slate, and there are no clear rules.  Most of these questions have significant legal components, so the entrepreneur tends naturally to seek out the lawyer’s advice first.

2)  Legal Advisor.  This is obvious, but Craig stressed that:

Seemingly minor structuring or strategy mistakes at the beginning of a business can have very adverse effects later on. . . . [S]tarting companies is a lot like launching rockets: if you’re a tenth of a degree off at launch, you may be a thousand miles off downrange.

3)  Coach.  Craig discussed the emotional support a startup lawyer must offer his clients and pointed out that:

A good lawyer for an entrepreneur should play the role of coach. . . . It’s often lonely and frightening to the founder and their families to start a new business.  They are giving up the security of well-paying jobs to live off their saving and seed capital.  They need someone who has been successful with other businesses to believe in them and give them hope when things look bleak (as they will for almost all businesses some time or another).  The relationships between the young clients and their lawyers are often emotionally close.

4)  Networker/Introducer.  Craig discussed the importance of a lawyer’s contacts and explained that:

A would-be entrepreneur (many of whom come from other countries) often lacks credibility and has great difficulty reaching the right people who can help the new business.  By enlisting the services of an experienced business attorney and law firm, the entrepreneur can be introduced to potential investors and board members who otherwise would not be willing to spend the time.

Silicon Valley can be thought of as a network of networks, with certain people acting as gatekeepers.  The successful business lawyer is one of the gatekeepers.  Others in the network value their judgment and experience.

5)  Facilitator.  Finally, Craig emphasized the important role of facilitator that a startup lawyer must play:

A lawyer in a booming economic environment must facilitate transactions, not obstruct them.  In more mature economic settings, in which fighting over the pie is more important than creating it, a litigator’s attitude and an ‘I win/you lose’ mentality may be common.  But in environments like Silicon Valley, where wealth is being created much more quickly than it can be divided, lawyers are prized for their ‘win/win’ attitude and an ability to keep everyone focused on common goals and make things happen smoothly.

Conclusion

I leave you with a few quotes about Craig from The American Lawyer:

“He was constantly innovating, constantly thinking of new ideas and new systems dealing with startup law. . . . Every time I saw him he was working on something new — it was very much an ‘on the back of the napkin’ type of thing.” -Larry Sonsini, Chairman of Wilson Sonsini

“Craig was a pioneer in Silicon Valley, and his vision helped drive the growth of the technology industry.” -Jerry Yang, Co-Founder and former CEO of Yahoo

And my favorite: “He may have been a lawyer, but he was an entrepreneur at heart.” –John Dean, VC at Startup Capital Ventures.

Thanks, Craig – I’m carrying your torch.

The purpose of this post is expand upon my answer to the question on Quora:

“What should you do as a startup when a Bay Area VC insists that you use their expensive legal counsel?”

Mark Suster, a VC at GRP Partners, has also written and spoken about how he likes to “share” his legal counsel with the startup in which he is investing.  My advice to entrepreneurs is clear: push back hard on this issue and choose your own strong, independent legal counsel – i.e., a law firm that’s going to work hard to protect you and watch your back.

Types of Conflicts of Interest

There are two types of conflicts of interests that need to be addressed when startups are pressured to use an investor’s law firm: ethical and business.

Ethics Rules.  Potential conflicts of interest that arise in the course of a law firm’s delivery of legal services are governed by applicable State Bar ethics rules, with which lawyers are required to comply.  As the Preamble to the ABA Model Rules of Professional Conduct provides in relevant part:

In the nature of law practice . . . conflicting responsibilities are encountered. Virtually all difficult ethical problems arise from conflict between a lawyer’s responsibilities to clients, to the legal system and to the lawyer’s own interest in remaining an ethical person while earning a satisfactory living.  The Rules of Professional Conduct often prescribe terms for resolving such conflicts. Within the framework of these Rules, however, many difficult issues of professional discretion can arise. Such issues must be resolved through the exercise of sensitive professional and moral judgment guided by the basic principles underlying the Rules.  These principles include the lawyer’s obligation zealously to protect and pursue a client’s legitimate interests, within the bounds of the law. . . .

In the event there is a potential conflict of interest between or among clients, most State Bar ethics rules require each client to consent in writing to the attorney’s representation — after full disclosure and consultation.  Indeed, each client must be able to appreciate the situation and have enough information to make a reasonable and informed decision as to whether or not the legal counsel can provide fair representation.  The consent of the client must also be entirely voluntary and not given under any pressure whatsoever, by the attorney or anyone else.

Business Conflicts.  Assuming that law firms are complying with the foregoing ethics rules, there is another issue that needs to be addressed: inherent business conflicts of interest.  This, to me, is the crux of the problem with entrepreneurs using law firms that also represent the investors.

As I noted on Quora, for many of the big Silicon Valley law firms, the venture capital firms are their gravy train and the big law firms need to play ball with them.  This is not to say that any lawyers at these firms are unethical (or that the law firms are not complying with applicable State ethical rules).  Instead, this is about the realities of the economics.

Let’s take a simple example:

Vinny VC meets with Eric Entrepreneur and gets very excited about Eric’s new venture; so excited, in fact, that a few weeks later Vinny presents Eric with a term sheet for a $750K seed financing.  Vinny advises Eric that this is his standard term sheet for seed financing and recommends that he retain Larry Lawyer at the ABC Law Firm to process the documents.  “Larry is great,” Vinny explains, “and we have some lightweight seed documents that we have put together with Larry’s law firm and used with other startups, which will make the process relatively quick and inexpensive.”

“Sounds good,” Eric says, and he meets with Larry Lawyer and signs an engagement letter (with the appropriate waiver of any potential conflicts of interest).  Now here’s the problem:

If Larry Lawyer and his firm are being sent a lot of work from Vinny VC and his firm, Larry is obviously not going to rock the boat and start pushing back on any key issues.  Why?  Because if he does, Vinny will just send his future work to the five other lawyers on his list.  This is not to say anyone is unethical here – this is just common sense.  Vinny wants his deals done quickly and cheaply (and on the forms that Vinny and Larry have created); and Larry wants Vinny to send him lots of legal work.

Accordingly, (i) Larry Lawyer is not going to suggest to Eric Entrepreneur that he talk to other investors and test the market prior to executing the term sheet; (ii) Larry is not going to raise issues such as doing convertible debt in lieu of a preferred stock financing; (iii) Larry is not going to push back hard if the liquidation preference includes some form of participation; (iv) Larry is not going to push hard to cut back on any of the protective provisions; and (v) Larry is not going to suggest that the company doesn’t need investor representation on the Board at this early stage.  In short, Larry is going to play ball because if he doesn’t, Vinny VC will stop calling.

As Antone Johnson, a smart startup lawyer, aptly points out in the comments to the Quora question:

My former firm ([Wilson Sonsini]) gets accused more often than any other of being in the pocket of the VCs, thanks to the “gravy train” alluded to in Scott’s answer.  It does have a vested interest in maintaining strong positive relationships with the VCs that feed it deal after deal.  I never met a lawyer there who wasn’t cognizant of his or her duties to represent the client zealously (meaning the company, not the investor), but I did feel there was a tacit understanding that pissing off the VCs would be a bad career move.

The M&A World

This inherent conflict of interest is not relegated to the VC world.  Indeed, I experienced it first-hand shortly after moving to California — when I got pulled onto an M&A deal at an LA law firm that I had just joined.

The managing partner of the firm was good friends with a middle-market investment banker, who recommended our firm to the client in connection with a complex leveraged buy-out.  I was tapped to quarterback the deal in light of my strong M&A experience in New York.

You have to understand that a middle-market i-banker’s entire year can be made or broken based on whether or not he can close one or two deals.  Indeed, he only gets paid if the deal closes.  Accordingly, like with the VC’s “recommended” or “preferred” legal counsel, we were supposed to play ball and make sure the deal closed so that the i-banker got paid.

Unfortunately, I’m not very good at playing this kind of ball – particularly when there were significant environmental issues that were not being adequately addressed.  The i-banker wasn’t too happy and, in fact, stuck his finger in my chest and warned:  “We’re going to get this deal done despite you fuck’n lawyers.”  He then vigorously complained to the managing partner that I was blowing-up the deal because I had retained special environmental counsel from my old New York City law firm and we were pushing too hard on the environmental indemnity.

Good work by the i-banker (and cheers to my former managing partner) for getting the deal closed by watering down the environmental indemnity: less than six months later our client’s company was indicted for significant environmental problems that it had assumed (by operation of law) as part of the acquisition.

Conclusion

Look – my goal here is not to point fingers and claim that anyone is being unethical or doing something wrong; this is the way business works.  There are inherent conflicts of interest in certain business relationships, and entrepreneurs need to have someone in their corner to point that out to them and to watch their back.  I am proud to play that role.

The Market Problem

As I tweeted a couple of days ago, I recently received three telephone calls over a three-day period from entrepreneurs looking for a new law firm because of the excessive fees of their current law firm.  Two of the three entrepreneurs advised me that they were reluctant to even call their lawyers with a question because of the fees.  I thought to myself:  I get it! 15 minutes = $125-175 for most partners (and those phone calls add up).

In fact, it can be worse than that.  Often clients can’t get ahold of the partner in charge so they’ll call the associate directly; and often the associate doesn’t know the answer so he’ll have to talk to the partner; and then the partner and associate will call the client back together; and here’s what the billing statement looks like for one question: 

Attorney     Date           Hours    Description of Services                  Rate               Fee

How do I know this?  Been there, done that.  Indeed, I worked for nearly 8 years at two major law firms in New York City.  This is how phone calls from clients often play-out.  The same inefficiency exists for the drafting of agreements: a junior associate spends a lot of time preparing the initial draft (pulling together different forms, learning on the job); a senior associate and/or partner reviews and revises the draft; the junior associate meets with the senior associate and/or partner to discuss the revisions; and then the junior associate finalizes the agreement and sends it out.

The bottom line is that the traditional law firm model – i.e., the billable hour – rewards inefficiency, overstaffing and padding.

The Solution

So what’s the solution to all this?

One solution is the advice given by Bram Cohen, a smart entrepreneur, in the comments section of my post on VentureHacks entitled Top Ten Reasons Why Entrepreneurs Hate Lawyers:

“Associates doing work is a real problem. I’ve found that insisting that all work be done by partners results in better work for less money in the end, even though the nominal hourly rate is much higher, because an associate will bill for several hours researching a subject which the partner already knows off the top of their head.”

That’s great advice – and that’s why my firm has no associates and each attorney on my team has 10+ years’ experience, was trained at big law firms and has stellar academic credentials.  But even that advice doesn’t completely solve the inherent problem of the billable hour model because inefficiency is still rewarded: the longer the project drags on, the more the law firm is paid.

There’s only one solution: fixed fees – i.e., the law firm and the client agree beforehand how much the project will cost.  This is the dagger to the billable hour model.

No more incentive for the law firm to be inefficient.  No more overstaffing.  No more associates banging the file to meet their annual minimum billing requirements or bonus targets.  And the best part from the client’s perspective: no more surprises at the end of the month when the invoice arrives.

Conclusion

It’s time to destroy the billable hour.  If entrepreneurs cannot call their lawyer with a question, there’s obviously a problem in the marketplace.  The solution is easy: a fixed fee (which includes unlimited phone calls and emails).  That’s what we’re doing – and that’s why entrepreneurs love us.

httpvhd://www.youtube.com/watch?v=Kcty5PrNaxs

The Good 

Big law firms are very good in connection with billion dollar acquisitions, public offerings and any complex, bet-the-company type transaction (e.g., hostile takeovers).  Indeed, when money is not an issue and/or where the client needs lots of lawyers (i.e., lots of bodies), it may be prudent to retain a large law firm with strong experience to handle a particular corporate project.  I remember doing billion-dollar acquisitions as a corporate associate in New York, where we often had diligence teams of 10+ lawyers and transaction teams of 30+ lawyers.  Moreover, big law firms are also good (particularly in places like Silicon Valley) at making introductions for entrepreneurs to investors and the like. 

The Bad

The bad, of course, are the huge legal fees that big firms charge.  As I have discussed on the video on the home page of my website, there are lawyers at certain major national law firms billing out at $1,000 per hour; and there are first-year associates at big firms billing out at $300 per hour.  (Just to be clear: we’re talking about lawyers with no experience, fresh out of law school billing clients at a rate of $300/hr.)  The bottom line is that legal fees are through the roof. 

Now, in billion-dollar deals, legal fees are generally not an issue; indeed, they are just another line item in the list of transaction expenses (and generally pale in comparison to what the investment bankers are getting).  But in small deals or in connection with general corporate work, fees are often a significant issue to entrepreneurs.   

The Ugly

The ugly with respect to big law firms is pretty ugly from the entrepreneur’s perspective – and I’ve seen this over and over again.

The reality is that the smaller the client – the smaller the transaction — the further down the ladder the work gets pushed at the big law firms.  That’s the way these firms work.  The entrepreneur may meet the senior partner at the first meeting for his $15 million acquisition or $3 million financing, but that partner then goes back to his office, calls the assigning partner and gets some young associate to start cranking out the work.

I experienced this first hand as a young associate at a big, New York City law firm.  I can remember is like it’s yesterday: you get the call from the senior partner’s secretary to come up to the senior partner’s office; you run up the stairs or to the elevator; you bring your legal pad; you’re nervous and you sit down in the partner’s office (sometimes he’s on the phone and you’re sitting there for 10 minutes); and then if it’s a small deal that you’ve been tapped to handle, he either just flings a copy of the term sheet at you or just flies through the terms, hands you the form he wants you to use and then tells you to “go, get it done”; and as you’re leaving his office, he screams out “call me if you have any questions”  — which really means “don’t bother me with this little, bullshit deal — I don’t want to see you until the closing.”

 Conclusion

The takeaway here is that the big-firm template generally only works for the big deals and the big clients, and the entrepreneur needs to understand that.  I hope the foregoing was helpful.  If you have any questions or comments, please send them to me through the comments section of this post.  Thank you.