In our recent discussion on his blog about the appropriate cost of legal documents for startups (which he argues is zero), Bill Carleton posed an interesting question about the role of lawyers in the early lives of startups.
Bill reasons in his post that startups are in a somewhat unique situation — at least compared to businesses in other contexts requiring legal services, such as acquisitions — because their legal needs are standard. According to Bill, “[E]ntrepreneurs do not want the relevant legal documents – charter, bylaws, stock subscriptions, assignments of invention – to be unique or to feel customized. They want them to read like everyone else’s.”
In fact, this attitude reflects a general “ecosystem of efficiency.” Commenting on the role of lawyers, Bill states that “lawyers need to participate in that ecosystem of efficiency; if they do not, entrepreneurs and the ecosystem will find ways to bypass them.” Then he asks “Is a startup ecosystem without lawyers a good thing or a bad thing?”
By “participate in that ecosystem of efficiency,” I believe Bill is suggesting that we’d better get with the program, begin to reflect the values of our startup clients, and start doing things more efficiently — and less expensively. Otherwise, they’ll vote with their feet and find other means of meeting their needs for legal services.
Startups have already bypassed lawyers
My initial thought is that startups have already largely bypassed lawyers — unfortunately, not by using alternative providers, but by do-it-yourself lawyering. I don’t think that’s a good thing.
In my mind, I divide startups into three categories: nonfundable startups (those that will never be seeking equity funding beyond the proverbial friends, family, and fools), fundable startups (startups whose business plan requires investment by angels and maybe venture capitalists), and high profile startups (fundable startups whose founders are stars in the national startup community and who expect to attract funding from high profile venture capitalists).
I’d be shocked to learn that more than a tiny fraction of nonfundable startups seek legal help at all when they set up their companies. LegalZoom claims to have been a part of the formation of more than 20% of California LLCs during the last ten years. Most nonfundable startups that don’t use services like LegalZoom prepare their documents themselves or have non-lawyers such as CPAs do it. By and large, lawyers don’t care about these companies because they represent very little fee potential. I think that’s unfortunate, partly because the legal needs of nonfundable startups are as real as the needs of other startups, but more selfishly because they represent a huge potential market that we’re almost completely ignoring.
On the other end of the spectrum, high profile startups have their legal needs met by large law firms and high profile startup lawyers. These companies don’t have to worry so much about the cost of legal fees because they can often get their work done for free or at a deep discount as a loss leader in the expectation for well-paying work as the companies’ founders go through the arc of raising money, building the business, and eventually exiting. Or they can defer payment of legal fees until they have money. Or they can pay their lawyers with equity. Whatever the structure, high profile startups can get help from high profile lawyers because they have money — either in hand or on the way.
Lawyers should be a part of the ecosystem, but not a large part
I think Bill had the run-of-the-mill fundable startup in mind when he spoke of an ecosystem of efficiency. I think we should be a part of the early lives of companies because we are valuable aids in helping business people think through their business and legal situation to come up with a prudent course of action. Our perspective is unique and valuable as we view issues through the lens of the law and consider the legal relationships that are involved. In my experience that “partnership” between business person and lawyer is very valuable, and it’s obviously not possible when the lawyer is excluded.
Although lawyers are valuable, there’s a lot of work we do that could be done better by someone else. Of all the people in a law firm who provide services to business clients, lawyers are invariably the highest-cost providers. Paralegals, administrative assistants, IT folks, and vendors are all less expensive than lawyers. And there are vendors that can do things traditionally done by law firms faster, better, and less expensively than lawyers do, and they can be engaged directly by companies without having to go through a law firm. Plus, there’s an amazing amount of information about the law available for free on the internet, so companies don’t necessarily need their lawyer to write a memo about a legal issue — a link or two to relevant content on the web might be better, and it would certainly be less expensive.
So while I think lawyers should be a part of the startup ecosystem, we need to re-think what our role is and strive to do a better job of meeting the needs of startups in terms of the services we provide, how we provide them, and the cost. Whatever that role is, it should involve fewer lawyer-performed tasks than it has in the past.