Startup Guide — Choosing your Attorney

Here’s an excerpt from an upcoming Startup Guide I’ve been working on.

Let’s talk about choosing an attorney

Choosing an attorney is a critical decision, and one that can make or break the future of your company. There are literally thousands of attorneys, some in small practices, some in large corporate practices. Almost all of them make their money by charging for time spent advising you; this includes talking with you ,working on documents for you, emailing you, and even reading your emails. Occasionally you can find an attorney that will do certain activities for a fixed price, this is good to consider if the attorney is a specialist in that activity AND is known to be good at the activity.

It is clear from the above model that you should pick an attorney that already is an expert in your area of law and business, and who has a general wealth of knowledge in the area of business you are in.

For patent related work, I work with one specialist that I have met over the years; he does fixed price patent filing work for me. This includes the provisional filing, the drawings and the detailed efforts associated with properly filing for a provisional and follow on utility patent. He’s really, really good at what he does, and has been very efficient in getting this work done in a competent and professional manner. I really will only work with this one attorney because he is so good at this specialty area of law.

For my general business attorney, I have chosen one attorney who has worked with me on a few of the companies I have started over the years. He is really good at startups, is brilliant at negotiating, and is extremely capital efficient for me, knowing that in the early days of a startup, preserving capital is necessary. He does this by using paralegals for the simple stuff, has a wealth of basic business related forms, templates and terms that he and his teams are experts with and only gets involved in a billing capacity for the important stuff. He has done hundreds of startup financing deals and acquisition deals, so is intimate with all of the important elements of technology startup formation, capitalization and acquisition. Even more important to me was the fact that he had worked with the VC’s and the large corporations that worked with companies in my particular technology space (Enterprise Software). Unfortunately, most startups do not get connected with the right attorney when they get started. Let’s go through some best practices in finding your attorney.

My first startup attorney

When we started Nukona Inc., my co-founder and I were very worried about the cost of hiring an attorney. We knew that we should work with an experienced attorney to help with the growth of the company, but thought we could save allot of money by using a cheaper private attorney for the “simple stuff”. The rates for most experienced attorneys ranged from $400/hour to as much as $800/hour. This is a crazy amount of money, and of course, when it’s your own savings being spent it seemed far more than was reasonable. His friend’s sister was a small attorney (with her own firm) up in San Francisco, who agreed to do our initial work for $250/hour. We were working at a coffee shop in Solana Beach, and spending our savings, so this seemed like a great deal. We wanted to incorporate and then issue some convertible notes for friends and family (and ourselves) to help fund the company. Using a low-cost attorney with these simple tasks should have been a snap. This was a MISTAKE. At the end of the day, the attorney was telling me that we needed to spend thousands of dollars in each of the states where my note-holders lived, simply to take on the notes. She charged for research on these states, and then crafted her own notes and founders agreements. I got charged for lots of hours (to the tune of well over $17,000), and we were doing the wrong thing. When I received the second bill and started asking what the activities were, I realized that we had made an expensive mistake that could threaten our very future. I went through the paperwork with a fine-tooth comb and ultimately fired her. I was much more successful in my search and retention of the attorney I’ve used ever since. One realization was that the false sense of a low-billing rate did not pay off if the attorney was not already in expert in the activities I wanted performed.

What’s crazy about my first mistakenly hired attorney experience is that I did this even though I knew better. I had operated as a senior executive for many years and worked on many complex business deals, acquisitions and other contractual matters. That said, we still made a mistake, we hired an attorney based on expedience not expertise. We were under lots of pressure to get our company going with little to no money, so we went the easy and low-cost route. By my own calculations, this misstep cost us thousands of dollars and several weeks of concerted effort to correct the mistakes made by choosing the wrong attorney.

What should we have done to get the right attorney

Here’s a list of steps that we’ve used ever since.

() Identify practice(s) known to work in your area of expertise

We looked for attorneys and practices that specialized in the formation and representation of high-growth software startup companies. There were a number of firms that did this, the largest firms had multiple office locations in key locations (Boston Seattle, San Francisco, Silicon Valley, New York, San Diego). If we had been a Biotech firm, we would have chosen a different set of attorneys.

() Identify the specific physical location you want your firm to be located

We believed that all of our funding, key partnerships and potential acquisitions would be from VC’s and large companies in Silicon Valley. For that reason we wanted to use a Silicon Valley based attorney and firm. You may want one local and close to you. If you are in Biotech you may want one based in an area where lots of Biotech deals are done. It really depends on your focus as a company, and the relationships/knowledge that you expect your attorney to bring to the table.

() Make a list of excellent attorneys known to have represented like companies

You can look at competitors, companies that have been sold in your space before, or even look at the attorneys that have represented companies funded by your target VC’s. I strongly suggest a senior partner in a firm who has the ability to work with unfunded startups. This partner should be senior enough to work without daily and hourly billing pressure. I also strongly suggest someone who has done allot of deals in the space that you expect to operate in. From that short list of potential attorneys, set up interviews with them.

() Get introduced to your target attorneys

Use Linkedin, use social media,call your network of supporters, friends, family and former employers. Call folks in your previous employer’s business development or strategy group. Find someone who can provide a warm introduction to your target attorney. Here’s the thing, if the attorney is excellent at representing startups in your space, he or she will have no shortage of clients. They are most likely NOT going to take a meeting with an unfunded, unknown startup founder.

() Present the big idea and pitch during your phone interview of attorney

Your job in that meeting is to do two things well. First you want to sell them on the viability of you as a founder and your business idea. Secondly, you want to assess whether they have the knowledge of contacts and players in your line of business.

() Choose the attorney, not the firm

After you have met and talked with a few attorneys, you will hone in on one or two that are closely aligned with your business vision and the target relationships you want to see. While it is not important that your attorney has represented firms that have specifically been funded by your target VC firms, it is critical that they have actively participated in Series A, B &C equity funding rounds. It is also critical that they have been the lead attorney representing startups that have been acquired by the folks that are potential acquirers of your business. To be clear here, it is the individual attorney’s experience we are talking about here, not the firms.

It sounds like a lot of legwork simply to choose an attorney, and it is. On the other hand, when you are getting billed hourly for activity on your behalf , it is critical that you pay for expert advice, and the advice of someone who knows all of the processes and activities you are likely to go through. It’s also important that you feel comfortable with the attorney, as they truly will be offering you advice, based on their experience and knowledge of the law. Lastly, the most experienced attorneys have done the normal acts so often (incorporation, stock grants, employee hire forms, NDA’s) that they have standard templates that will help you get things done quickly at very low cost.

Don’t fall into the trap that most founders do when choosing an attorney. Do NOT choose a firm over the actual attorney. Do NOT choose an attorney based on a low hourly rate, as rates are a false estimate of cost. An expert can do work in 5 minutes, while a new attorney may take an hour or more to research and get the work done. In the above case, which one of the attorneys will cost more?