3 Ways For Startups To Cut Their Legal Fees in Halfby Scott Edward Walker on October 13th, 2011
This post was originally part of the “Ask the Attorney” series I am writing for VentureBeat (one of my favorite websites for entrepreneurs). Indeed, I am constantly being asked by entrepreneurs how they can lower their legal fees.
We launched our venture about six months ago, and we’ve been using a big Silicon Valley law firm to handle our legal work. The problem is we’re getting killed on fees. We just closed a $250,000 convertible note financing, and the bill was almost $13,000. When I reviewed the invoice, I saw the partner was billing us at $740 an hour, a senior associate at $595 an hour and a junior associate at $350 an hour. We like them and think they’re doing a good job, but we just can’t pay this much for legal. Could you please give us some advice on what to do. Thanks!
Here are three suggestions:
1. Negotiate Lower Rates. The first thing you should do is call the partner and tell him that you have a problem with the fees. Most partners at the big firms have the authority to drop the hourly billing rates for startups (or to cut the bill). As a negotiating tactic, you should try to get the partner excited about your venture and convince him or her that there will be lots of juicy work down the road.
You also should push to have one lawyer (preferably the partner) handle all your work going forward, not three. Remember that lawyers are selling time. The more time the lawyers bill, the better the sales numbers. This business model thus rewards inefficiency, which is exasperated as you add more lawyers to your project.
You should also tell the partner you don’t want any junior associates handling your work. With junior associates, you’re basically paying for their on-the-job training. Plus, there is extraordinary pressure on associates to meet annual billable hour thresholds and bonus targets. I saw all this first-hand as an associate for nearly eight years at two major law firms in New York City.
2. Don’t Use a Big Law Firm. Big firms are great for huge, complicated corporate projects – like an initial public offering, a tender offer or a public company merger. These types of projects require a large team of lawyers (often with different specialties).
On the other hand, most of the legal work for startups (whether it’s a financing or a partnering agreement) can be handled by one experienced lawyer. Thus, if you get push-back from the partner, go out and find a strong startup lawyer at a boutique firm (or a solo practitioner) to help you. There are lots of good startup lawyers with 10-15 years’ experience who can handle your work at the same billable rates as junior associates at the big firms.
If you’re uncomfortable not using a “brand” name law firm or your investors push back, you can keep your big law firm for the big stuff, and use the startup lawyer to handle the day-to-day stuff.
The bottom line is that none of the startup work is rocket science, and using a big law firm is overkill. It’s like using a jackhammer to clear hair out of your bathtub drain.
3. Request Fixed Fees. Finally, you should think about requesting fixed fees for your legal projects in order to align the law firm’s interests with your company’s. Indeed, it’s time to destroy the billable hour. The big firms are loathe to agree to this – but many innovative law firms (including my own) are disrupting the profession with this model.
It’s such an elegant solution: No more incentive for the law firm to be inefficient; no more overstaffing of projects; no more associates banging the file to meet their annual minimum billing requirements or bonus targets; and the best part for you, no more surprises at the end of the month when the invoice arrives.
Imagine if you had negotiated a fixed fee of $6,500 for your convertible note financing (which is quite reasonable); you could have cut your legal fees in half.
Obviously, the foregoing is a bit self-serving; however, it’s important for entrepreneurs to understand how the big firms work and alternative billing arrangements. Please shoot me any questions you may have in the comments section – or feel free to call me directly at 415-979-9998 (San Francisco) or 310-288-6667 (Los Angeles). Many thanks, Scott