Wednesday, November 01, 2006

Startup Lawyer: Why I now retain more than just water

I've been a lawyer for more than 16 years, and this week marks the first time that I have ever had to seriously consider suing a client for non-payment. The client in question is an angel-backed startup which was referred to me by an VC. It had an urgent need for advice and since it was a referred deal, I took the matter on without a retainer as security for payment. Guess how that turned out.

The client had no issue with the amount of the bill or the work that was performed. He just got low on funds and decided that I was some kind of Legal MasterCard.

My late father would tell me that it served me right. His view was, always get the client to decorate the mahogany before doing any work. Nothing was prettier, and made everyone focus better, than a retainer check sitting on his desk.

Now, before you roll your eyes, let me say the following:

  • I agree that companies with less than 250 employees are poorly served by the legal profession. SMEs have the same breadth of legal needs as larger companies - they have on-line sites and stores, and related contest and promotions, to operate; their major customer base is in the US and Europe; they have channel partners to manage - in short, the breadth of their legal needs (if not the complexity of them) is the same as major corporations. But large firms are no longer shy about letting you know that their own rule of thumb is to reject clients who will generate less than $50k a year in recurring revenue. Access is a significant problem.
  • I agree that the legal profession has not kept pace with the realities of Canada's economy. 95% of Canadian companies have 250 or less employees and account for over half of the GDP. Only a fraction of Canada's business lawyers have spent time as part of a business' management team, and very few of those have returned to private practice. Access to lawyers with relevant operational experience also is a critical problem.
  • I even agree that price makes legal services for startups and other SMEs unaffordable. Taking shares as barter for legal services or deferring fees were never good alternatives. Despite what some (and the New York Times) may tell you, virtually no firm in or out of Silicon Valley offers this option anymore, unless a startup is already in the middle of a financing or liquidity event at the time it hires its lawyer. Holding shares in your client creates an untenable conflict, unless perhaps your firm has created a truly standalone investment arm. (I once sat on a call where the company lawyer, also an option holder, refused to accept a purchase offer for his client because at the proposed price, his own options would not be in the money.) Deferring fees makes sense for those few companies where the lawyer believes that the fees later will be recouped by the fees generated by a large funding or a liquidation event. I've never felt comfortable with the idea of lawyers, whose help can have a profound effect on a business' future, making decisions about who to represent based on their own evaluation of the future prospects of a client. The only way to fix pricing concerns is to lower the price.

We've tried to addresss most of these issues at our firm, through Venture Law Line and fixed fee pricing. When our clients have cash flow issues, we work out alternatives, like any advisor would. We wouldn't be in this business if we didn't share risk. But being a risk sharer and being a doormat are two different things.

There's a growing chasm between the numbers of small businesses who need sophisticated corporate advice and the number of lawyers who can accommodate them. Startup savvy lawyers are an important component of any business generation centre. For those of us in this area, trying to attract, retain and train lawyers to meet this need is challenging enough without having to teach them how to collect debts. Cut it out.

Looks like I'm going to have to get a new desk, because from now on, my mahogany will always look pretty, too.