I previously posted an article called “Why Start-up Lawyers Frustrate Me.” In only my 4th post on my new blog, I managed to piss off nearly every friend I have who works for a major law firm. There has been a ton of press and I think my IT guy is ready to shut off my email account. On the other hand, I got a lot of support from entrepreneurs, venture capitalists and in-house counsel who feel the pain of the current state of affairs for legal fees. So, I’ll take credit in generating discussion about a very real problem and hopefully my friends will still let me in their front doors of their offices.
First of all, let me make a couple of clarifications and observations on my prior post:
1. The article was directed toward start-up general corporate lawyers and specifically costs of getting relatively simple financings completed. While all lawyers are expensive, what really frustrates me is recent experiences of having 5-20% of the VC proceeds going right back to the lawyers when we consummate small, early-stage rounds. I’m not attacking all legal practices, as I realize how complicated litigation, M&A, etc. can be. That being said, startups are finding it increasingly difficult to afford all legal services;
2. While I’ve gotten flattened by some in the press, several partners at big firms have called me to tell me that they agree with me. Quotes range from “I can’t make a practice out of start-up work at my firm given billing rates and compensation structure and that is what I want to do” to “you are right but we don’t know how to fix it.”;
3. Not all law firms are “evil.” I received many comments that I was damning all law firms. It is clear that some are much more aggressive in what they charge. While all the big guys pay approximately the same for associates, some are much more efficient on project and reasonable with discounts. Yes, there are some firms that despite lofty associate salaries have done a reasonable job controlling fees, although this is clearly not the norm;
4. I have limited experience with smaller firms, so they may or may not be exempt from my frustrations, although by the amount of emails I received from smaller firms stating their billing rates, they certainly charge less per hour. That being said, I can’t vouch for their ability and efficiency to get a deal done and so a pure hourly rate analysis may be irrelevant. (I will add that one of the most expensive hourly rate lawyers I know, a litigator, is the most efficient attorney that I’ve ever worked with). Some comments from the VC sides of the discussion has said they believe the largest firms perform the highest quality work;
5. Sometimes you do get what you pay for. Most of the truly exceptional lawyers that I’ve worked with do work with larger firms. That being said there are very few exceptional lawyers, even at these larger firms;
6. Many assumed facts not presented into evidence, specifically that my experience with legal fees had to do with my companies and myself being “poor consumers of legal services,” asking for changes in documents and having unreasonable expectations. This simply is not true. These cases were friendly deals with returning entrepreneurs that we had long time relationships with. We both were sophisticated and did our best to minimize lawyer time;
7. There seems to be a pretty big difference in fees charged on the east coast (more) than the west coast. Given that the majority of our deals are not on the east coast, I’ll refrain from making any major conclusions, but point out that comments made to me where dollar figures were mentioned as “reasonable” all had a material premium coming from the east coast; and
8. On a humorous note, I love press pieces that imply that they’ve spoken with me, or spent any time actually reading my blog and can’t even get my name or work-related information correct.
Don’t think that I am taking back anything that I said in the prior post, rather given the amount of traffic that ended up in my email inbox, I thought I’d make some clarifying comments.
While everyone likes to be a critic, I suppose that I owe some potential solutions to the fee problem. So I’m going to do it. I’ve done my best attempt at creating the “Law Firm 2.0” business plan. Some suggestions are easy, some are hard, and some may be completely unrealistic, but since I’m starting with a blank piece of paper, here goes. Given the length, I plan on breaking the sections into separate posts over the next week or so. I look forward to a healthy discussion.
Jason is a co-founder and managing director of Foundry Group, a Boulder, Colo.-based venture capital firm focused on early-stage IT opportunities. This post first appeared at his new blog, Mendelson’s Musings.