Wondering why you’re paying so much to have routine legal documents prepared? The question lies at the heart of the business model of a start-up company called InCloudCounsel, which has caught the eyes of early, savings-minded clients such as The Carlyle Group, NEA and Oak Hill Capital Partners.
Founder and CEO Troy Pospisil pondered the question while working from 2011 to 2014 as an associate in the San Francisco office of buyout shop H.I.G. Capital.
Buyout shops such as H.I.G. Capital, he said, handle their legal work in one of two ways, either retaining an outside firm to do the bulk of it or hiring an in-house counsel for the task. Both can be expensive. Outside firms can easily charge upwards of $1,000 per hour for legal work, while do-it-yourself-minded sponsors might pay an in-house counsel anywhere from $300,000 to $500,000 per year, Pospisil said.
No one begrudges highly compensated senior attorneys advising on complex tasks like negotiating a first-time limited partnership agreement. The problem, Pospisil said, is that sponsors find themselves paying the same high prices even for routine, high-volume, repetitive tasks such as the negotiation and signing of non-disclosure agreements, or NDAs. Making matters worse, outside law firms may well assign routine tasks to an associate with limited experience, raising questions about quality; meantime, sponsors may have trouble getting document-related questions answered, such as how many NDAs they’ve signed over a given period of time, with what investment banks.
Enter InCloudCounsel, which Pospisil launched on a part-time basis for its first client about three and a half years ago and which he and co-founder Ben Levi, who worked as a corporate attorney at Kirkland & Ellis for five years, started working on full-time earlier this year. The firm offers a document management system that automates the process of document creation and negotiation—a process that more typically today is handled by a clunky combination of e-mail and Microsoft Word. The system speeds document processing. It also lets sponsors generate statistics and answers to questions such as how many companies they have non-solicit agreements with, and for how long.
For the legal work, InCloudCounsel contracts with a network of some 40 attorneys around the country. These tend to be experienced corporate lawyers who set up private practices in the suburbs to spend more time with family and enjoy a higher quality of life. According to Pospisil, they carve out some 30 percent of their time to work with InCloudCounsel clients, and they develop such expertise for particular documents that they can do in, say, 30 minutes what it might take a less-experienced associate two hours to complete.
The upshot for sponsors? They pay InCloudCounsel on the order of $250 to $275 per document, compared with the $1,000 to $1,500 per document they might pay an outside law firm. For sponsors signing hundreds, if not thousands, of NDAs per year, the savings can be significant. And that doesn’t count non-reliance letters and other common documents the company handles.
InCloudCounsel has about 25 private equity clients, more than 20 of whom signed up this year, said Pospisil. The ramp-up has been so fast that the three-executive company (Lane Lillquist is chief technology officer) already generates a profit and plans to hire additional software engineers to help develop new features, such as electronic signatures. The company also is looking into raising its first round of venture capital.
(Clarification: Some information related to the firm’s plans for raising venture capital were removed from the headline and text of the original article. The company did not wish to disclose this information.)
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