While law firms may negotiate a fee arrangement with an entrepreneur, the legal fees may still be a significant part of the operating expenses. Thus, the entrepreneur should try to avoid unpleasant surprises and keep legal fees to a reasonable amount. Attorney's fees are either time-related or non-time-related. Most of the fees will come from time-related fees.
Billing Time Costs
Attorneys generally use four types of fees: hourly, flat, contingent and deferred fees, and retainers.
Law firms usually charge by the hour, and hourly fees can vary from $100 to $500. Any time an attorney or paralegal spends on the entrepreneur's affairs can be billable time. The time spent in meetings, on the phone, legal research, and writing memos and other documents can be billable. The entrepreneur should ask in advance what services are billable.
An entrepreneur can arrange flat fees for discrete tasks such as drafting a contract or filing a trademark application. Under these circumstances, an entrepreneur pays a fixed rate no matter how long it takes.
Under a contingent-fee arrangement, an attorney does not get paid until the entrepreneur receives a certain payment. This occurs typically in a trial setting such as a personal injury case, where the attorney might receive 40% of the settlement or damages verdict. An entrepreneur may want to make payment contingent on receiving venture capital or other investor funding, especially if he or she wants to test the feasibility of the venture.
Attorneys may defer billing rather than agree to a contingency fee. They may also accept stock in the business in exchange for deferring the billing. Note that this would make the law firm an investor in the business, and can create a conflict of interest.
Some attorneys ask for a retainer, an up-front payment that ensures they are paid. Entrepreneurs should resist this arrangement since they are often cash-strapped at the beginning, and instead agree to advance out-of-pocket costs like filing fees as they are incurred.
By being organized, prepared, and proactive, an entrepreneur can use an attorney more efficiently. Some attorneys will be willing to attend one board meeting a month free of charge. This will keep the attorney updated on business developments and able to render some free legal advice.
Firms will also charge for other costs such as making photocopies, word processing, online research, toll calls, faxes, filing fees, travel expenses, and messenger services. Entrepreneurs should determine for what services the firm will charge, and negotiate how the firm will bill for incidental costs.
While an entrepreneur may have met only one or a few attorneys, some of the work may be delegated to others in a firm. Senior attorneys are usually better at assessing the big picture and setting up the business structures, while mid-level associates tend to be better at preparing documents. Junior associates usually work under the direction of more experienced attorneys to gain experience. An entrepreneur may not want to pay for this training, and should thus find out if anyone is unnecessarily involved and who is paying the cost.
Drafting a document that covers all possible outcomes and has all the necessary nuances can be difficult and take time. The entrepreneur usually knows the business issues, and the attorney will know the legal issues. Understanding both sets of issues is crucial to drafting certain documents. While most law firms will have standardized forms for many documents, some customization for each entrepreneur's situation will always be necessary. Even if the customization is not extensive, the entrepreneur should understand the significance of the terms and how they apply, because the documents will become legally binding.