26 Sep Recovering lawyer offers legal advice to entrepreneurs
As a recovering lawyer myself – I spent eight years in Silicon Valley and North Carolina’s Research Triangle region representing technology-based entrepreneurs and venture capital investors – as well as an entrepreneur and venture capitalist for another dozen plus years, I’ve got a few opinions about what Silicon Valley Class technology entrepreneurs should expect from their lawyers.
Let’s start with when you should add outside counsel to your team. It’s the easier question. You should engage counsel before you do anything that could in any way limit your future legal options. That is before you organize your business; before you disclose any proprietary information to third parties; before you make any “arrangements” (even verbal “ideas”) with partners, co-founders, advisors, etc., whether as regards to equity, compensation, employment, etc.; in short before you do anything beyond coming up with your idea and writing an executive summary for it. (You’ll want that summary to, among other things, share with potential counsel.)
Why the urgency? Because one of the most frustrating things I’ve had to do as an early-stage investor is tell an entrepreneur that an otherwise interesting deal is not fundable because the intellectual property ownership has been compromised, or the capital structure has been fouled up, or there are too many people who think they own a piece of the business that don’t – well, the list goes on and on. It’s something I’ve had to do all too often. And the foul-ups are almost always the kind of things that any competent lawyer would have counseled against.
I had a client once – one who ended up doing quite well – who interviewed potential lawyers, engaged me, and went through the basics of corporate organization more than six months before he knew what the business was going to be. He was out of pocket maybe $500 to get the work done. While this example may be extreme, the early investment was very cheap insurance.
Now for the harder question: How do you choose a lawyer. That is a difficult question, particularly here in northeast Wisconsin where the number of lawyers with meaningful experience representing Silicon Valley Class entrepreneurs is limited. The critical criteria for evaluating potential counsel are as follows:
- Has counsel “been there, done that” in terms of a track record representing Silicon Valley Class entrepreneurs and investors. Experienced counsel is critical for several reasons: (i) An entrepreneur’s choice of counsel is something that potential investors will use to evaluate the entrepreneur’s judgment and situational awareness; (ii) Inexperienced counsel will put the entrepreneur at a disadvantage during the term sheet and documentation stages of any deal; (iii) Inexperienced counsel will increase expenses, as, at best, counsel will be learning the ropes on the entrepreneur’s nickel; and (iv) Experienced counsel is one of the best sources of, and introductions, to prospective investors.
- Does counsel understand your business model? Most – there are some exceptions – big company lawyers are quite conservative in offering legal advice, and seldom offer business advice. They are conservative because most of there clients are (at least compared to high risk/reward entrepreneurial businesses). They shy away from offering business advice because most larger companies are well-staffed with business managers: Most high risk/reward entrepreneurial businesses, on the other hand, are chronically short of staff.
- Does counsel understand the risk/reward profile of Silicon Valley Class entrepreneurs? As a generalization, the high risk/reward entrepreneur needs counsel that understands that most of the time 90 percent of the answer in 10 percent of the time and cost is preferable to a 100 percent/100 percent model – but also has the judgment to know when the 100 percent/100 percent approach is really needed.
- Is counsel flexible on billing? While it is not unreasonable for counsel to require some good faith pay-as-you-go fees and expenses, lawyers that focus on representing Silicon Valley Class entrepreneurs invariably offer some payment breaks for such clients. A lawyer that does not offer any such breaks either doesn’t “get it” or, if they do, is in effect signaling the entrepreneur that counsel has a very low opinion of the entrepreneur’s potential for success. In either case, the entrepreneur is better off somewhere else. In terms of what kinds of breaks to expect, look for deferral of payment of a good portion of fees until the client has raised some funds, and flexibility thereafter based on cash flow. It is also a plus for counsel to offer converting some fees into equity, preferably on the terms (including price) that third party investors pay. Beware of counsel that asks for equity “up front” but don’t rule it out in small quantities if the fit is otherwise good.
- Finally, look for counsel that you are comfortable with personally. Beyond making the basic legal work smoother, most of the “extras” a good counsel can offer in terms of business advice, investor referrals, team building leads, etc. will only be realized if the client and counsel understand each other, share a mutual respect, and enjoy working together.
Dearth of attorneys
Such are my thoughts on choosing counsel for the Silicon Valley Class entrepreneur. A final piece of advice. Given that to date there has been very little “Silicon Valley Class” entrepreneurship in the New North, the number of Silicon Valley Class counsel in the region is limited. Don’t be hesitant to look elsewhere – Madison and Milwaukee, of course, but also farther afield. When I co-founded a Silicon Valley Class biotechnology firm in North Carolina in 1990, we chose a Silicon Valley law firm as outside counsel, and the relationship worked out very well. Later on in the 1990s, as local firms gained relevant experience (albeit not at our expense!) we shifted some work to some of those firms.
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The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.