A Founder’s Guide to Legal Fees

About 30% of our clients at Story LLP come to us after having a bad experience with a “startup deal” some law firm offered. We’ve found that most founders have no idea how lawyer billing or law firms work when they get started. This information gap harms founders who come from less-privileged backgrounds most. We’re always looking to level the playing field for humans who need legal help, so we want to demystify these billing arrangements to help founders make smarter decisions when they’re choosing whether (and how) to hire lawyers.

Here are the different type of lawyer billing arrangements you may see in your startup life:

• Hourly, in arrears. The vast majority of lawyers, and almost all transactional lawyers, bill you by the hour when they work on your matter. In these circumstances, pay attention to the minimum billing increment. Sending one quick email could cost you 10% of an hour or 25% of an hour depending on the minimum — there’s no billing you just for the 15 seconds it took to write your response.
• Retainer. There are two types of “retainer.” One works more like a security deposit that you get back if you don’t spend it. The other is a payment you make periodically to “reserve” a lawyer. The former is a way for lawyers to be sure they can get paid, and is most often requested for litigation that’s heating up. The latter periodic payment usually goes to fancy criminal defense lawyers or divorce lawyers when rich folks want to keep the other side form hiring the best. Remember that retainers are NOT fixed fees. Even if not refundable, there is often some hourly charge ON TOP of the retainer. Don’t think that because you paid a certain amount up front that’s the only thing you have to pay — unless your lawyer specifically told you it was a “fixed” or “flat” fee.
• Fixed Fee. Where you pay a set amount for a given task. Lawyers are likely to offer this when they do the tasks so much that the fixed fee is less than what hourly would be to do it the fist time, but more than doing it the 50th time — and they have a cushion in case of something unexpected. You’re not likely to get a lawyer to bill a fixed fee for anything that could become a ton of work — like litigation or an open-ended deal negotiation. If a lawyer offers you a fixed fee for something, you should carefully explore exactly what that fixed fee does and does not include. Often clients think a fixed fee takes them to the end of a story but it only actually opens the book. For example, a fixed fee to FILE a trademark application usually won’t include future interactions with the USPTO to get the mark approved.
• Contingency. Where you agree with a lawyer that they get to keep a % (usually 30–50%) of whatever damages they win for you in exchange for NOT being paid by the hour. The % take is so high because the lawyer is not just fronting their time, but also possibly paying significant expenses to keep litigation moving. Be careful if a contingency lawyer ALSO wants you to pay expenses, beware (in these cases, you might ask if you can pay them hourly out of your winnings instead of giving them a % if they win enough). Expect these arrangements only in litigation — don’t expect a lawyer to help your business write a contract for free just because you can’t afford to pay hourly.
• Pro bono. These are volunteer lawyer hours. Most only work for people living in poverty and/or nonprofits, though some serve non-economic groups like survivors of domestic violence. I’m constantly amazed by how many people come to us with a matter they have no budget to pay for, but which is commercial or cosmetic in nature, and expect to get free lawyer advice. Free (quality) lawyer advice is something you probably only get if you’re worth eight or more figures or you’re a venture capitalist.
• Deferred Fees. This is where a firm offers you a deal where you’ll agree they get to do all of your legal work through at least a significant transaction but they “defer” your payment of fees (or waive some part of it). Every lawyer at the firm still bills you at their full hourly rates (think $800/hr for a novice lawyer who just graduated law school), and they tend to send you the bills to show you how much “value” you’ve gotten deferred — which also serves to limit your ability to challenge those bills later. You just pay them later. This is really not much different from the “buy now, pay later” deal that a used car salesman offers to convince you to take the used Audi over the used Civic. The difference is that if your company fails early, you’ll never pay.

I personally advise startups to avoid deferred fee arrangements. Here’s why:

Only big, fancy law firms are generally in a position to offer these. Deferred fee arrangements are mechanisms to train novice lawyers on your dime (the most risky dimes that law firm has, because the bigger clients pay in full every month). You’ll be billed for every second their most junior lawyers spend, at $800 per hour, learning how to form a company from paralegals, or getting training from partners who charge $2000 an hour to provide that training. These associates make a lot of mistakes as they learn. They’re paid bonuses based on how many hours they bill, so they’re incentivized to bill every second. Often, partners are penalized for “writing off” excessive associate time. The result: deferred fee arrangements are the perfect storm of perverse incentives to run up a “pay later” bill with time you would probably resist paying for now if you knew better.

Whatever the fee arrangement, the biggest tragedies arise when the startup is pursuing a novel business model in a legal gray area. Often the entire $10–30K of deferred fees get eaten up with a very expensive senior lawyer looking at the business for ten hours and deciding they don’t have a strategy they’re comfortable offering to help make it happen. Seriously. I see a LOT of clients come to me with $20K+ in debt to law firms where they burned through all the deferral by asking small questions that got circulated to 5 expensive lawyers for analysis but were never actually answered, or got a long, detailed summary of possible risks from a firm that wasn’t comfortable talking about what risks might make sense for the business to take. I see a lot of bills for a lawyer at $900 to review a form document her law firms’ own software spit out based on the client’s form inputs and make no changes. Waste is waste, even if its cost is deferred.

At the end of the day, spending $8000 on a flawed incorporation is too much even if you don’t pay that $8000 for two years. Even a really complicated incorporation shouldn’t cost more than $2500 (reach us at help@storyllp.com to see if we can do yours for less).

DO ask for a fixed fee or advance estimate when you can. Most tasks won’t be appropriate for one, but in understanding why, you will get a MUCH better idea from the lawyer you want to hire about what the process for the task looks like and how costs might go up or down. Sometimes the lawyer can limit what they do to meet a budget cap you have, if you’re willing to take some extra risk because they did less research or proofreading. But, you probably shouldn’t expect a lawyer to spend unlimited time for limited money — that’s not likely to happen in any area of law.

Read more about what you can do to make your lawyers more efficient here, and check out our guidance on vetting lawyers and understanding legal fees.