5 Ways to Stop Legal-Fee Madness
As a former (or maybe I should say “reformed”) lawyer, I understand the financial and other pressures on the legal profession these days, and I sympathize with the need to make a living. But I’m also aware that even as we try to make it simpler, faster, and easier for startups to raise money (thru the JOBS Act, among other initiatives), the lion’s share of lawyers working with new, early-stage businesses and entrepreneurs still pretend that they need to redraft and reinvent the wheel every time they create a set of totally boilerplate Seed or Series A investment documents. Worse, they charge way too much for their services.
That's not the end of the problem. Many investment communities are just beginning to fully embrace and encourage more centralized and concentrated efforts (as well as physical locations modeled after our 1871 startup facility in Chicago) that are intended to channel, support, and promote the growth and innovations inherent in entrepreneurial businesses. But in many cases these communities lack the institutional knowledge, professional networks, and standard business practices (for better or for worse) that companies tend to have when they do business with venture firms on either coast.
As a result, even after your new business has spent a small fortune (certainly in your eyes) on a set of basic corporate and investment documents, you may find yourself paying for an even more costly (and less beneficial) process in which competing lawyers on multiple sides of even the simplest investment seek to justify their fees (and their existence) by engaging in stupid, irrelevant, and time-consuming nit-picking and fly-specking of the same documents that people and businesses in exactly the same circumstances as yours have successfully used without changing a single word or provision for many, many years.
It's wasteful, offensive, and presumptuous, and now is the time to put an end to it.
The truth is, as far as Seed round and even Series A investment documents go, there's really nothing new under the sun. So the sooner we all agree (city by city, state by state, or whatever) to a standard, universal and stipulated set of basic documents that can be made available to all parties at a realistic (and modest) cost, the sooner we’ll stop ripping off young, eager entrepreneurs and their backers and investors and let everyone focus on building their businesses.
You can get this movement started now. You would be amazed at how effective it can be for an entrepreneur, regardless of the amount of leverage he has (or lacks) in a negotiation, to simply say to his counsel (and to the other side) that these are the documents that everyone uses and he doesn't want to doctor them up for anyone's benefit. What could be smarter, easier, or more efficient? And why aren't we doing it nationwide?
What else can you do to stop the madness? Here are five simple steps that apply to you no matter where you're located or how many deals you've done.
1. Make Sure Your Lawyer Knows His Stuff
Every lawyer says he or she can do anything. They teach you to say that in law school because it's a good practice for getting hired. The truth is that doing deals is a specialized area, and some attorneys do it better, faster, and more regularly than others. Even more important, they know all the other attorneys who also do deals for a living and they know the shortcuts, code words, standard provisions, and restrictions, etc., because they do it every day. Some of them can even help you get your funding by introducing you to their clients. Go with a pro, not some Joe who's trying to learn the ropes on your time and your dime.
2. Ask for Standard Documents and a Flat Fee
Make it clear that your feelings won’t be hurt if the actual forms and paperwork are done by an associate and not by the Big Guy or Gal (which is what’s going to happen anyway). This saves everybody a lot of time and cuts down on costly phone tag where you call the partner (who doesn’t know about the status) and he/she calls the associate and then an administrative assistant calls you back with an update. Just send the admin a little gift and you'll be kept in the loop.
3. Read the Documents, Understand the Documents
You don't have to be a lawyer to understand the elements of a basic deal, and shame on you if you're stupid enough to need to pay your lawyer to read them to you or for you. It's your business and your livelihood that's on the line, so spend the time and get smart at least once on the document package, because (God willing) you'll be seeing the same documents every time you do a deal. You don't have to be Perry Mason or Einstein to figure these things out, and if your lawyer isn't using a set of documents written in plain English that just about anyone can understand (give or take a few special phrases that won’t ever matter to you anyway), then she isn't doing her job.
4. Tell the Guys on the Other Side Exactly What You're Doing
Tell the investors exactly what you're doing and don't be ashamed of the fact that you're being smart and cheap at the same time. If they have any brains they made that same kinds of arrangements with their attorneys a long time ago. And if they're smart they'll understand that it's actually, at least in part, their money that you're spending on legal fees rather than on marketing, product development, or sales.
5. Sign the Papers, Get Your Money, Get Back to Business
Don't be a pig on valuation. Take what they're offering and run before they change their minds. Get back to building your business. Thank me later.
HOWARD TULLMAN | Columnist
Howard Tullman is the CEO of 1871 in Chicago where, at the moment, 260 digital startups are building their businesses every day. He is also the general managing partner of G2T3V, LLC and Chicago High Tech Investors – both early-stage venture funds; a member of Mayor Emanuel’s ChicagoNEXT Innovation Council; and Governor Quinn’s Illinois Innovation Council. He is an adviser to many technology businesses and an adjunct professor at the Kellogg Graduate School of Management. @tullman