Don't waste your money on lawyers

When I started my first company Openvote, I asked my lawyer's advice on every legal matter.  I thought it was essential that he be involved in everything that could one day come back to haunt us.  He prepared us with NDA templates.  He explained every detail of the articles of incorporation and the bylaws.  He did an incredible amount of work for us.  He was not the most expensive lawyer by the hour, but we used him a lot.  

I had budgeted $12,000 of credit card debt to get us to a prototype.  The bill from the lawyer before we'd barely written a line of code?  

$9000!  Holy Shit!

Of course, I negotiated it way down, but still, I had screwed up.  It was my responsibility to manage his time.  A lawyer is a service provider.  The entrepreneur has to manage the costs associated with his work.  When we started FlightCaster, I worked incredibly hard to learn as much as I could on my own time.  I figured that with enough blog reading, friend-bugging, and advisor counseling, I could get away with only the bare minimum in paid counsel.  

Funny thing happened though.  All this extra work on my side meant that I could now afford to hire the very best!

You should insist on working with incredible people in all aspects of your business.  If you only hire world-class engineers, apply that same demand for quality to your accountant and your lawyer.  There will be times when they prove their value.  Our legal and financial counsel contributed an incredible amount to FlightCaster's success and I'm certain that, without them, our result would've been substantially worse.  And because I only used them for the most important questions and tasks, their overall impact on our cash flow was actually reasonable.  Most importantly, I put the effort in to self-educate, which helped me make better decisions overall. 

Asking your lawyer questions about general startup stuff instead of doing your own homework is just pure laziness.  And worse, your lawyer will give you advice that is the absolute most conservative strategy you could possibly pursue.  It's like asking the referee how to play football.  You need to learn the game from other players and coaches.  Use your lawyer for the really hard-to-figure-out stuff.

In order to use your financial and legal counsel less, you're going to have to self-educate.  The following links and several weekends of your time should get you started.

Startup Legal and Financial Resources:

This site flat out rocks.  Read every word on it.  Twice.  It'll teach you all the basic of dozens of legal issues that will come up with your startup.  Everything from 83b to vesting to IP.

I just love these guys.  They are doing so much to help the entrepreneurial community, and in ways that are good for everyone.  In addition to running Angel List, they've written and collected some of the best resources on the web.  Everything from equity to board seats to due diligence.

This is the blog and startup resource center run by Brad Feld, of TechStars and Foundry Group.  While there are now hundreds of VCs with blogs, Brad's is one of the most comprehensive set of concrete resources out there.  He also uses Lijit to power search of both his blog and other top blogs.  It' s a powerful way to find high quality, curated advice on any startup topic.  Everything from 409a to financial statements to negotiations.

Y Combinator worked with Wilson Sonsini to create a solid set of equity financing documents that startups and angels can use as templates.  They're neutral, vetted, and free.  Even if you're not using them, reading through them is a great way to educate yourself about all the topics you'll face during a financing round.

At some point you'll need top quality advice to supplement all of your hard-earned learnings.  If you're doing a startup that is poised for big things, I can't recommend anyone better than the professionals we used for FlightCaster:

Part-time CFO: Betty Kayton

Neither are cheap on a per-hour basis, but both are the absolute best value overall.  Please only contact them if you're serious about working with (and paying for!) top quality professionals.

Find discussion of this post on Hacker News

 

******************
I'm Jason Freedman.  I co-founded FlightCaster.  
You can, if you like, follow me on Twitter: @JasonFreedman.
Or send me a Linkedin request or become my bff on Facebook
11 responses
AWESOME post. You're all over HN lately :) Seriously though -- great shit. Much appreciated.
Great post, Jason. I think a lot of entrepreneurs are very frustrated working with lawyers -- and I actually wrote a post on VentureHacks discussing the “Top Ten Reasons Why Entrepreneurs Hate Lawyers” (see http://bit.ly/53SB5a). Indeed, thanks to Nivi’s advice, we have put together a “Startup Package,” which includes all of the documents startups need to button-down the key legal issues (including Delaware incorporation, vesting, IP assignments, etc.) for a low fixed fee; and it includes unlimited phone calls and emails so there are no $9,000 surprises like you experienced.

Having practiced corporate law for over 17+ years, I agree with you that it is very important for entrepreneurs to educate themselves and to try to understand the key legal issues, particularly in connection with a major transaction. That being said, it is imprudent (and often disastrous) for entrepreneurs to try to play lawyer by, for example, pulling forms off the web and revising them. Of course, this may sound a bit self-serving, but I can’t tell you how many calls I get a week from entrepreneurs having messed things-up by playing lawyer. In fact, I recently received a call from a potential client who tried to play securities lawyer and is now being investigated by the SEC.

As the saying goes, “you don’t know what you don’t know.” And until an entrepreneur is involved in a major dispute or litigation, he probably cannot appreciate the role a strong lawyer can play to protect him.

Keep up the great work!

Cheers,
Scott Edward Walker
www.walkercorporatelaw.com

Don't save too much money on legal fees. Facebook saved a lot of money in the beginning by not bothering with good legal guidance on papering issues like who owned how much of the stock.

You need just enough to make sure you don't cost yourself dearly later.

Good post Jason. I think you make some really valid points - the biggest one being, know what you are getting into. I have read so many books that say for entrepreneurs who want to pursue funding you "need" the top lawyers available - not for their lawyerliness necessarily but perhaps for their connections or industry knowledge and networking capabilities.

Even with the best lawyers you save money by learning what everything means. Yeah, it's a pain - but you are an entrepreneur, and if you can figure out a company, you can figure out a term sheet, vesting, and option pools too. It's not brain surgery! Knowing even 20% of it will save you a lot of time and unnecessary calls (and billing!)

i am amused that your app states
"we currently do not support international flights"

how can you be so bold to assume that anything not USA is therefore international!

there are so many other countries than USA! Perhaps to some in Europe you are the international!

Agree on fixed fees up front. Do not pay by the hour. the legal time and billing machine will kill your start up. If you are starting up you need a cap table and articles of incorporation. These are boilerplate docs for lawyers and they will have their legal assistants prepare them. Then they will contact their DE. or what ever state you are incorporating in representative (hint their rep will charge way more than one you find online) to file the articles.

Get your cap table and options docs right and don't sign anything that you do not need.

I agree that it is important for a start up entrepreneur to self educate, but at the end of the day, "playing lawyer" for everything except "the really hard-to-figure-out stuff" is really anti-productive for several reasons. 1) Your efforts for the company should be focused on the thing you do best -- whether it's code, design, marketing, whatever. Any serious amount of time or effort that isn't spent there is highly inefficient. 2) Many entrepreneurs who self educate get a pre-fab idea of what they want and what they need. This can be a real nightmare for a lawyer, because we're not "order takers" (would you like fries with that?). It's our job to think outside the box and create something that is best for you, not to do whatever you want. In fact, in many cases, we may not be able to do what you want because we are bound by rules of legal ethics. 3) As Ed mentioned, you don't know what you don't know. You don't know what the hard stuff is. You also don't know how easy it is to screw up the "easy stuff." 4) When you screw up the easy stuff, your world becomes a nightmare. In the last several months I've negotiated partnership buyouts for companies that thought they'd do their own business formation docs years ago to save some money. What was the result? We had practically no leverage to force the sale in circumstances, negotiations took way longer than they should have, and the price was not what we wanted. So the moral is - yes, educate yourself - but you won't be saving yourself time or money if you go beyond education to try to be your own lawyer.
I have LAW FIRMS in my back pocket! Yes, we retain the law firms and they do not look at the clock! How is that possible, contact me.
Well said. But to get an advisor aka mentor, it is not easy stuff. I once got to mingle around successful business people and cant find anyone genuinely want to help to educate others. Maybe not my luck yet.
Jason,

Thank you very much for a very informative post. I am an attorney who specializes in helping start-ups and small businesses. You are most certainly right that a start-up can unnecessarily spending thousands of dollars on legal expenses when starting a company.

However, I would disagree that the solution for most entrepreneurs is to spend dozens of hours self-educating themselves about corporate law.

Entrepreneurs are very bright and most could figure out what I do when I form a new entity after spending a few weekends doing their own research, but this time would most likely be better spent in other areas of their business.

I believe that the most effective entrepreneurs recognize two things:

1. Their most precious commodity is their time; and

2. They need to effectively delegate tasks so they can focus on their
core competencies.

I am biased, but I genuinely believe that most entrepreneurs are better off hiring a reasonably priced business attorney who will provide them a project rate for setting up their company so the founders can focus their time on what it should be spent on - developing their product and clients.

If you are interested, I wrote a post on tips for finding a start-up attorney that some of your readers might find interesting:

http://wp.me/p1ivVG-4X

Thank you again for the great post,
Doug
www.bendlawoffice.com

Jason - would like to reprint your blog post in the NH Bar News, dead-tree edition of our newspaper.
I posted link to your blog on our LinkedIN page and received some interesting replies. I can send you file with your article as we would print it with the three replies. I also would like a one-sentence description of you to include. And, do you have a photo we could use?
Thanks. I need your answer by July 1.