Behind The Big Law-Firm Curtain: The Good, The Bad, The Uglyby Scott Edward Walker on October 27th, 2009
I’ve been doing deals as a corporate attorney for over 15 years now, including nearly 8 years in the trenches at two big law firms in New York City. Accordingly, I thought it would be helpful for entrepreneurs if I briefly peel back the curtain of the big law firm and explain how these firms work (i.e., the good, the bad, the ugly) so that entrepreneurs can make an informed decision as to whether it makes sense to be working with a big law firm with respect to a particular corporate project. Obviously, some of this is a bit self-serving, but entrepreneurs need to understand that the assumption “the bigger, the better” — i.e., the bigger the law firm, the better the representation — is not necessarily the case. The video version of this post is set forth directly below.
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, 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 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.”
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.