Startups Need Specialist Lawyers, But Not Big Firm “Lock In”

TL;DR Nutshell: In the course of your startup’s life, you’ll need perhaps a dozen or more different kinds of specialist lawyers. There is very little about the practice of law today that requires you to source all of those lawyers from one firm when the “right” lawyer (experience, rate, culture) may be a solo, at a boutique, or at another large firm. Yet traditional law firms continue to push the “one firm for everything” full service model because it allows them to mark up specialist lawyers whom startups could otherwise hire for several hundreds of dollars less per hour.

Background Reading:

Most people have a good understanding of the importance of specialist doctors; that if you have a serious skin issue, you call a dermatologist, but if you have a serious heart issue, you call a cardiologist. Biology is far too complex, and the stakes are simply too high, to rely on a single generalist who, while valuable at coordinating specialists and keeping an eye on the forest relative to the trees, couldn’t possibly be smart enough to cover every specialty without repeatedly committing malpractice.

Generalists v. Specialists

New founders typically have less of an understanding of how this generalist v. specialist divide also exists for lawyers. If you’re a 3-person coffee shop that isn’t playing on a national scale, it may be OK to rely on a single general lawyer to incorporate you, file your trademark, and maybe handle your lease. But if you’re a scaling startup seeking VC funding and making decisions on Day 1 that will influence your company’s prospects when it hits $25MM in revenue, you need solid specialist lawyers.

The category of “startup lawyer” is itself a specialty. It means a corporate lawyer who (you hope) specializes in working with early-stage technology companies and has closed so many angel and VC deals that she doesn’t need to be “educated” when your investors show up with a term sheet. Startup lawyers also play the role of a generalist, sourcing and quarterbacking specialists as needs come up for their clients.

Here are just a few examples of specialist lawyers that startups often require as they grow:

  • Patent Prosecution — which itself contains dozens of sub-specialties depending on the type of science/technology. You don’t hire a patent lawyer with a background in organic chemistry to draft your IoT hardware patent.
  • Patent Litigation
  • Commercial Litigation
  • Trademarks
  • Tax — U.S., and Country-Specific
  • Tech Transactions — (Licensing, Reseller Agreements, OEM, Distribution Agreements, etc.) — subspecialties include hardware focus, SaaS focus, etc.
  • Data Security / Privacy — subspecialties include financial data privacy, HIPAA, etc.
  • Open Source IP
  • International Trade / Export Compliance
  • Employment / Labor Law — federal and state-specific
  • Employee Benefits and Compensation
  • DE Corporate Governance
  • Environmental
  • Real Estate
  • Securities Regulation
  • Immigration
  • Mergers & Acquisitions (M&A)

One of the main points that I’ve driven home in many SHL posts, and around which MEMN’s tech practice has been built, is that no single law firm can or should attempt to employ all, or even most, of the specialist lawyers that a technology company needs over its life cycle. Apple is massive and employs dozens or hundreds of different types of engineers and executives. Why? Because without doing so it could never produce the iPhone 6. Take any specific type of developer or engineer out of Apple and have her work alone or at a much smaller entity, and she couldn’t possibly produce as much value as she can being integrated at Apple.

This is just not how law practice works. Lawyers in various specialties absolutely do collaborate to ensure clients are well-represented and that work performed by various people doesn’t conflict, but with today’s SaaS/collaboration tools (which weren’t available a few years ago), that collaboration occurs just as easily (and depending on the firm, more easily) between focused, specialized firms as it does under the same massive, bureaucratic structure.

I can call a top trademark lawyer at a 5-person boutique or a similar lawyer at a 1000-lawyer firm, and their capacity to handle 99.9% of my client’s trademark needs is virtually the same, though the boutique lawyer will be $250+/hr less (yet make the same or more per hour), and generally give my client more attention. The core value produced by large law firms is concentrated in individual professionals who, unlike people working at integrated companies like Apple, hardly become less valuable when you change their address and sig block.

The Driver of Big Firm “Lock In”

So why don’t large firms simply break up, allowing their lawyers to drop their rates and stop wasting clients’ money? Aside from fear and inertia, there is one very serious “glue” keeping BigLaw together: origination credit. In law firm economics, lawyers make money not only from the work they do, but also from a % (their origination credit) of the work done by other lawyers in their firm for clients they source. If I’m a startup lawyer at a large firm and can push my client to use my firm’s trademark lawyers, patent lawyers, litigators, etc. etc., I get a cut of all those fees. I don’t get a cut if I send them to another firm with better lawyers, lower rates, and more appropriate skills.

Many founders are shocked to find out that, for the vast majority of lawyers in BigLaw, maybe 20–25% of the amount they bill ends up in the pockets of the lawyers doing the work. You’re billed $650/hr for a patent lawyer, but maybe $175 gets to that lawyer. Most of the rest is: (a) bloat (see above), and (b) markup to feed the origination pyramid.

Putting aside how much this screws clients (founders), you cannot possibly understand how badly specialist lawyers would love to be able to bill clients $300/hr less, without taking a cut in their compensation. But many of them can’t, because leaving their large firms means being cut off from the deal-flow. The only specialists who are able and willing to break free are the ones with enough client loyalty (and chutzpah) that they can take clients with them. And those are the specialists MEMN likes to work with.

Boutique Corporate Lawyers and the Specialist Ecosystem

When a startup works with a startup lawyer in a large firm and needs a specialist lawyer, 99% of the time the startup lawyer will push work to his own firm’s specialists. Never mind that the specialist he chooses may be over-kill, or over-priced, or simply a poor fit. That’s his firm’s specialist, and the firm expects him to “cross-sell” into other specialties. He wants his cut.

When a startups works with an MEMN startup lawyer and needs a specialist lawyer, we assess the various options in our network (or elsewhere) and let the client choose what he/she thinks is the best fit. For example, we could go with a solid solo lawyer billing in the $200s who’s excellent for straight-forward work. If it’s a more serious issue we could go with the slightly more expensive boutique w/ high-end specialists in the $300s or low $400s. Or if it’s a bet-the-company issue we could go with one of the top specialists in her field who formed her own firm recently and bills at $500/hr (she was $800 at her former firm).

Granted, sometimes the absolute right lawyer is, unfortunately, still in BigLaw, and we work with her, but every year that becomes a rarer occurrence as the specialist ecosystem grows. And I always favor lawyers outside of BigLaw because of the risks they’ve taken, the better attention they give to clients, and the fact that they are building a legal market that is less soul-sucking for the country’s top legal talent.

The point is that we leverage our vetted network of specialists to ensure clients get “full service” legal counsel, without misaligned economic incentives muddying the relationship. Clients aren’t “locked in” to any particular set of specialist lawyers, so we’re free to choose from a much broader pool. While this represents a loss in origination credit for our lawyers, it also significantly enhances their value proposition to clients, helping overall with business development. Short-term loss, long-term gain.

Founders should be mindful of the incentives behind how their startup lawyers source specialists, because they can and will have an impact on the bottom line, and could even result in major screwups from a mismatch between what the startup actually needed and the specialist who was put on the job. While the overall market is evolving to favor flexibility, transparency, and efficiency, a lot of traditional firms still tout b.s. about the importance of “big firm resources.” Smart founders know that “big firm resources” is, for the most part, just code for “we’re going to keep milking clients with overpriced specialists until the music stops.”


Originally published at Silicon Hills Lawyer.

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