Three ways startups can cut legal fees in half

A reader asks: We launched our company about six months ago, and we’ve been using a big Silicon Valley law firm to handle the legal work. The problem is, we’re getting killed with the fees. We just closed a $250,000 convertible-note financing, and the bill was almost $13,000. When I reviewed the invoice, I saw the partner was billing us at $740 an hour, a senior associate at $595 an hour and a junior associate at $350 an hour. We like them and think they’re doing a good job, but we just can’t pay this much for legal work. Could you please give us some advice on what to do?

Answer: Legal fees can add up fast, especially for a startup just getting off the ground. But there are ways to keep them under control. Here are three suggestions: 

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1. Negotiate Lower Rates

The first thing you should do is call the partner and tell him or her you have a problem with the fees. Most partners at the big firms have the authority to drop the hourly billing rates for startups (or to cut the bill). As a negotiating tactic, you should try to get the partner excited about your venture and convince him or her there will be lots of juicy work down the road.

You also should push to have one lawyer (preferably the partner) handle all your work going forward, not three. Remember, lawyers are selling time. The more time the lawyers bill, the better their sales numbers. This business model rewards inefficiency, which is exasperated as you add more lawyers to your project.

You should also tell the partner you don’t want any junior associates handling your work. With junior associates, you’re basically paying for their on-the-job training. Plus, there is extraordinary pressure on associates to meet annual billable hour thresholds and bonus targets. I saw all this first-hand as an associate for nearly eight years at two major law firms in New York City.

2. Don’t Use a Big Law Firm

Big firms are great for huge, complicated corporate projects — like an initial public offering, a tender offer or a public company merger. These types of projects require a large team of lawyers (often with different specialties).

On the other hand, most of the legal work for startups (whether it’s a financing or a partnering agreement) can be handled by one experienced lawyer. If you get push-back from the partner, go out and find a strong startup lawyer at a boutique firm (or a solo practitioner) to help you. There are lots of good startup lawyers with 10 to 15 years’ experience who can handle your work at the same billable rates as junior associates at the big firms.

If you’re uncomfortable not using a brand name law firm, or if your investors push back, you can keep your big law firm for the big stuff, and use the startup lawyer to handle the day-to-day things.

The bottom line is, startup legal work isn’t rocket science, and using a big law firm is overkill. It’s like using a jackhammer to clear hair out of your bathtub drain.

3. Request Fixed Fees

Finally, you should think about requesting fixed fees for your legal projects in order to align the law firm’s interests with yours company’s. The big firms loathe to agree to this — but many innovative law firms (including my own) are disrupting the profession with this model.

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It’s such an elegant solution: No more incentive for the law firm to be inefficient; no more overstaffing of projects; no more associates banging the file to meet their annual minimum billing requirements or bonus targets; and the best part for you, no more surprises at the end of the month when the invoice arrives.

Imagine if you had negotiated a fixed fee of $6,500 for your convertible note financing (which is quite reasonable); you could have cut your legal fees in half. 

Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs. He submitted this column to VentureBeat. Have a question for Scott? Leave it in the comments.

[Image via StanOd/Shutterstock]

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