Legal Technical Debt
“Siri, please amend my charter to authorize a Series AA round, prep me an offer letter for a CTO, issue options to 3 recent hires… oh and review/execute that stock purchase agreement with my accelerator. Keep the fees under $500.” — Not too far off from how a (confused delusional) segment of the startup community thinks startup/vc law should work.
Imagine if advisors told startup founders that, in order to conserve cash, they should aim to spend as little as possible on developers. Find cheap ones. If the non-technical CEO can code something himself to get by, do so. Just get it done. Don’t overpay. In fact, if we can automate our development process, do it. Keep cash spend on ‘the business.’
Anyone with an ounce of experience in building successful tech companies would recognize this advice as absurd and dangerous, as if quality and accuracy are irrelevant. Yet every so often I hear about advisors giving this exact advice to founders, about legal spend. And while fewer may acknowledge it, such advice is equally as absurd.
Of course you’d say that, Jose. You’re a startup lawyer.
Well, maybe. But let’s process it a bit.
Why would minimizing your spend on software development (like legal services) be stupid and dangerous?
It can be explained in part with the term ‘technical debt.’ via Wikipedia:
“Technical debt… is a recent metaphor referring to the eventual consequences of any system design, software architecture or software development within a codebase. The debt can be thought of as work that needs to be done before a particular job can be considered complete or proper. If the debt is not repaid, then it will keep on accumulating interest, making it hard to implement changes later on. Unaddressed technical debt increases software entropy.”
While I’m not a developer, my general understanding of the term is that bad coding becomes more expensive to fix over time, in an almost compounding way. And there are even circumstances in which it is so bad that nothing short of a complete re-write will make it scalable and useable. In other words, going cheap on developers just means you are compounding your cleanup cost and headaches for the future, and even threatening a complete shut-down of the product.
Minimizing legal spend works exactly in this way, but magnified 10x. I frequently write on SHL about the many parallels between complex contract drafting/VC law and top software developers. Both groups involve highly skilled people capable of analyzing, managing, and manipulating large amounts of complexity. Both implement changes for which the stakes on a company are very high. Both expect to be compensated well for their skill set.
Software developers produce the code base on which your product runs. Lawyers produce the code base on which your company, including its relationships with investors, board members, executives, and employees, runs.
A crucial difference between software code and legal code is that bugs are far easier to find and fix in the former than in the latter. Software code is constantly being revised, with thousands or millions of users revealing bugs on a regular basis. Legal code (contracts) are executed and then put away, often to be reviewed only at high-stakes moments, when fixing them is extremely expensive or even impossible.
Unlike software code, you can’t unilaterally issue ‘updates’ to executed contracts. Any experienced lawyer has seen a deal cost 6-figures more than it should have, or even completely die, because of legal mistakes made earlier in the company’s history. So think of contract drafting for a scaled startup as high-stakes software development for which virtually any material bug is completely unacceptable once the code is shipped. Still want to ‘minimize’ legal spend?
Law is Code; Not Product.
In my experience dealing with many many sets of founders, a part of the startup community carries the very deep misconception that startup/vc law has been, or even can be, completely productized. Want to ‘just’ issue some stock, grant some options, close a seed round, etc? It’s been done hundreds of times before, so it must be all ‘standard’ by now. Just click a few buttons, fill in some names and numbers, and you’re done.
This is the attitude of someone using a product for which clean, standard, predictable, pre-defined features are already in place. “Just” issuing a service provider some stock should be like ‘just’ moving some files around on Dropbox, right? There’s a serious flaw in this thinking. The clean, standard, predictable company and contract history simply does not exist, and hence full automation is pure fiction.
- What state are you located in? Laws vary, even if you’re a standard DE corp.
- Are you a C-corp? S-corp?
- Are there protective provisions that need to be complied with?
- Any anti-dilution protection?
- Enough authorized shares in the charter?
- Enough reserved equity in the equity plan?
- A well-documented value of the equity?
- Is there a written agreement explaining the consideration and complying with securities laws?
- Is the recipient an individual or an entity?
- Board approval?
- Are we confident the composition of the Board is well-documented?
- Is stockholder approval necessary?
- Any specific thresholds?
- Acceleration? What kind?
- Any other special provisions/requirements implemented by past investors?
- etc. etc. etc.
Virtually every VC, angel group, accelerator, large company, etc. has its unique variances in the contracts it executes/negotiates. States have different requirements. Laws change. Reality: people are not standardized. They have their idiosyncrasies, and people determine what does and doesn’t get signed; what gets added to the code base.
Even if companies share 90% of the same legal DNA, the 10% variance is a massive wrench that makes automation, or even any kind of significant simplification, impossible without taking on enormous legal technical debt. That statement is not coming from a luddite lawyer who hates technology, but from the CTO of a startup/vc law practice that I am 100% certain is on the cutting edge of legal technology (the kind that actually works) adoption.
Telling a VC lawyer that you ‘just’ want to issue some stock is not equivalent to ‘just’ using a pre-coded feature in a product. It is far more like telling a software developer that you ‘just’ want to add a feature to your existing, non-standard, unique code base. Imagine telling that developer to do it as quickly and cheaply as possible. Imagine hiring the cheapest developer you can find to implement that feature.
The contract that actually issues the stock may be 99.8% standard, but it has to be implemented into the historical set of contracts/context without blowing anything up. Contracts and laws do not sit in little, isolated modules without any impact on the other. They’re all inter-connected, with a change in one potentially resulting in a cascade of effects in others. Hence the code base analogy. The larger, more complex the code base (set of contracts, number of jurisdictions, people involved), the greater the skill and experience required to work with it safely. And having a well thought-out, well-designed architecture implemented from Day 1 dramatically impacts the scalability and resilience of that code base.
So when a client says they ‘just’ want to issue some stock, all they might think about is opening a word document, filling some names, and signing. Of course that can be automated. What often isn’t considered is the lengthy, complicated list of steps and analysis needed to fit that template document within the Company’s existing legal history. That, not the template stock purchase agreement, is what lawyers do, and software cannot do.
De-Valuing Law, like De-velopers, is De-lusional.
Anyone who sells a product or service into a market learns that not every buyer is willing to pay the cost necessary to deliver that product or service in an efficient manner, within the bounds of physics/reality. Some buyers simply can’t afford it. But many others just don’t value the product or service enough to pay even the lowest possible price. As a lawyer, I learned very early on in my career that this is the case with founders looking to engage lawyers.
If I’ve been sold the lie that startup/vc law is a completely commoditized, standard product, I am going to shop for lawyers, and assess cost, the way I would for any other commoditized, standard product. I “just” want to issue some stock. Like I “just” want some toilet paper. There are founders (a minority, but many) who understand very quickly why they need to pay good compensation for software developers, and yet will question every single invoice from lawyers.
While I’m always more than happy to walk through an invoice when it makes sense, MEMN’s client intake process has been deliberately designed to filter out clients who, for whatever reason, de-value lawyers in this way. Our website’s home page says “World Class Counsel, Brought Down to Earth.” Translation: top lawyers who are more efficient, responsive, and accessible than the large firms where they’ve historically been found. We compete with other firms who provide top-tier legal counsel to scaling tech companies; not with the unrealistic price expectations of people who, through inexperience or delusion, want Teslas at Kia prices.
The seed-stage period is the toughest time for startup legal budgeting. Things are starting to get more complex, but with only a few hundred thousand raised (let’s put aside California ‘seed’ rounds), every dollar paid hurts. Fixed fees, flexible payment arrangements, deferrals (but be careful), and good old-fashioned budgeting are the key to getting through that period with your lawyers. Any experienced set of startup/vc lawyers will know how to be flexible for seed-stage companies. Just always remember that flexibility (and efficiency) does not mean defying the laws of physics to get things as cheap as you’d like them to be.
At the level of law that scaling companies require, technology will forever (or at least into the very distant future) remain a complement and not a replacement for lawyers. Yes, the legal industry as a whole is and will continue to undergo disruption as software eats up the more routine, commoditized parts of the profession. But VC-backed companies are not dealing with commoditized lawyers, and talented, creative VC lawyers are hardly, not even remotely, underemployed. If anything, those of us who adopt new tools as they are developed have found our practices enhanced, not diminished, by technology. It allows us to deliver more concentrated value with our time, which means a healthier attorney-client relationship overall.
If you engage your lawyers as the developers of an important foundation for your company — expecting effectiveness and efficiency, but staying realistic about the amount of complexity and value actually underlying their work, you’ll be surprised by the rewards. For those who continue fantasizing about replacing lawyers entirely with apps, nothing will provide a better education than the moment the debt comes due.
Originally published at Silicon Hills Lawyer.