Why Start-up Lawyers Frustrate Me

I’ve decided to start a series of posts called “Why Xs Frustrate Me.” Today, X = Venture Lawyers. In future posts, X will equal academics, entrepreneurs, accountants, venture capitalists, drummers, the patent ecosystem and other targets of my affection.

Given that I used to be a start-up lawyer and that even today more than half of my friends continue in this profession, what better group to complain about? Besides, I don’t get enough negative emails per day, so this will surely help.

My two main gripes are pricing and execution:

As everyone who hires startup lawyers knows, it’s more expensive all the time to get help. $300 hourly rates that were once reserved for partners, are now allocated to junior associates. To put this in perspective, when I started as a venture lawyer in 1998 my starting salary was $71,000. Ten years later first-year attorneys at good firms are starting at $165,000. I was eligible for a 10% bonus back then and have been told the same is true today. So with bonus the spread is $78,100 and $181,500. That is a difference of 132% in ten years! And yes, compensation at all levels in law firms has changed at least this much.

Now, what I find really interesting is to compare this compensation change versus the average amount of money that venture-backed startups raise in their first rounds. According to the latest NVCA yearbook, in 1998, the average company raised $5.1 million in their first round of financing. In 2007, the number was $5.7 million. That is a difference of 11.7% over ten years. Admittedly, in 1999 and 2000 companies were raising two and even four times the 1998 first round amounts, but these numbers quickly fell back into historical averages after the bubble burst.

One more comparison that is interesting: CEO compensation at venture-backed companies. There aren’t consistent professional studies that track the last ten years, so I’ll draw on my own experience, some of which was part of my research for a series on compensation published on AskTheVC.com. in 1998, CEO cash compensation ran was in the $150,000 to $160,000 (median) range while in 2007, the median was $200,000 to $220,000. Even taking the largest spread possible the ten year difference is 46%. I’d also argue that the pool of world-class CEOs has not expanded nearly as much in ten years as the amount of competent venture attorneys.

So these are pretty compelling statistics, right? (If you are like me, you normally fall into the “lies, damned lies and statistics” school of thought). Well maybe, because I don’t see our companies spending 132% more in aggregate legal fees, although the charges for our counsel to help with financings has doubled during the past ten years. What I see is that our companies go the “self help” route a lot more often than the past and do not seek legal help when it actually may be a good idea to do so. Unfortunately, a lot of it ends up on my plate and I end up rendering a lot of “informal” advice. It’s not a great position to be in, as I’m far past my days of being an every-day and competent lawyer, but what can companies do when they can’t afford to call their lawyers? So today, we have the worst of both worlds – disproportionately higher legal spend when compared to other costs and less actual legal counsel on situations that would previous dictate legal involvement.

While my first gripe pertains to nearly all lawyers, this frustration is more particularized to about 50% of the venture lawyers I run across. Simply put, why can’t lawyers know when to leave well enough alone and not feel like every piece of paper needs a mark up?

Especially given how expensive lawyers are these days, why on earth would the culture of “must mark up documents to show value” persist? (Answer: lawyers make more money). Especially in the world of venture financings this is very frustrating. Ten years ago, I admit there was a lot more mystery and uncertainty in getting venture financings done. However, with the advent of the NVCA model documents collection (of which I was a draftsperson), resources like the term sheet series that I co-wrote with my partner Brad Feld and just the sheer number of trained experts in the field, financings (especially early-staged deals) are largely cookie cutter.

Then why on earth did I have to spend last week negotiating registration rights with a partner at a major law firm? In fact, I got to do that twice last week along with other stupid boilerplate language that no one really cares about. Sigh. I got to watch our money that we financed the company with being transferred to the law firm. Perhaps the most annoying comment that I heard last week was from an experienced venture lawyer who told me that he got a set of documents that were perfect and that he and his teamed “struggled” to find things to mark up because they couldn’t just say the documents were fine after round one – even though they were. He had three lawyers on the deal work on the markup. Also last week I got to see a bill that one of our companies received from its law firm: $72,000 for a Series A financing. That was bad enough, but when you figured in the fact that our counsel drafted all the documents and charged close to $15,000, it was especially appalling. These deals are not complicated. This should not happen.

I’d like to point out that not all lawyers are like this – but at least half of them are and the problem is compounded by the compensation trends discussed above. The half that aren’t like this have learned that efficiency and reasonableness is respected more by clients than the optics of needless document revisions.

So what’s the resolution here? It’s a much longer answer than I can provide today. I’ve been working on a thesis for quite some time that the entire business model of law firms is going to have to change, or it’s going to get uglier. Eventually, venture-backed companies are going to have to move away from the traditional law firms that service them these days. In any event, law firms are going to need to realize that the fees charged to startups versus public companies and what fees are reasonable in litigation versus corporate contexts are all different and that “one size fits all pricing” will not work in the long run. If I ever finish my “Law Firm 2.0 business plan,” I’ll be happy to blog about it.

Frustration rant #1 over. Friends and colleagues, fire away…

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.