Selling legal services to startups

The practice of law has hardly changed over the past decades, from the client’s point of view. Sure, there are all sorts of tools that make it easier to be a lawyer: document sharing and editing, email as opposed to snail mail, and so on.

The basic transaction looks the same. You call the lawyer up and talk to them, for hundreds of dollars an hour. They look at your business problem and tell you what document you need. And then they draft that document, again charging you hundreds of dollars an hour. And then the other side’s lawyer looks at it, and sends their comments. And your lawyer comments on their comments, and at this point almost any document ends up costing you a thousand dollars or more.

A great recent article in the Economist talked about how the ubiquity of cheap software tools are causing a ‘Cambrian’ explosion in startups. This is also, by definition causing an explosion in the number of small businesses being formed. And businesses need legal services. Yet in my experience, because the legal model hasn’t evolved, these businesses are stuck.

On the one hand, they know they’re supposed to use lawyers. On the other hand, the high cost of hand-customized piecework performed by a protected guild gets in their way.

The entrepreneur’s dilemma

Let’s look at things from the entrepreneur’s point of view. People are starting up companies on $50,000 – 100,000 these days, an amount which is supposed to cover the costs of the team over a 9-12 month or so period as you develop your software, start to sell it, and iterate a few times as you optimize it. That means you’re working on a monthly budget of around $5,000 – 10,000.

Founders, new graduates and interns are often being paid on the order of $2,000 – 3,000 per month (any interns reading this are likely raising their eyebrows thinking ‘I should be so lucky’).

Many of these entrepreneurs are young, first-timers. They have never tried to fund a company, been through due diligence, or had embarrassing conversations around ownership of their software in the situation where they didn’t pay their intern, who wrote a quarter of the software and then left.

You can tell them it’s important to get an employment or contractor agreement signed with their intern. And when they find out that it’s going to cost $1,000 for 2-3 hours of legal work, when they can get 2-3 weeks of marketing or programming work for the same cost, they just don’t do it. They do business without a legal agreement. At least, that’s one thing they often do as the default choice …

The power of the internet

Of course, there’s a second thing that people do. They do what they would do if they were writing software: they search online to see if there is an open source version, or a cheap template available.

These are starting to be available. Firms like LawDepot and LegalContracts sell legal documents online, right down to a ‘fill in the 20 questions’ shareholder agreement.

Of course, there is a catch to these documents: they don’t include much in the way of advice. They give you the option of including a ‘shotgun agreement’ as one of the questions … but that doesn’t really help you understand if you want it.

There’s clearly a market niche available for innovative lawyers to give templates plus: a chance to buy a template, plus a reasonable fixed fee ‘reassurance’ that you’re making the right choices. (IncMind is looking for the right partners and ways to offer this service.)

Why lawyers don’t get it

And we’ve had interesting partnership discussions to date, with a few legal firms, on this issue.

It’s funny, the conversations tend to all proceed the same way. We find a young partner who is specializing in corporate work for young, high tech companies. She (in most cases to date) gets very excited over the possibility of a new type of legal service. She understands exactly what we’re saying: that people are doing business without legal documents in many cases, because of the high cost of doing business the conventional way. And that others are finding templates online that are inappropriate to their case, and don’t know any better. We then talk about the advantages of working with us to offer this new service.

She then goes back to her partnership. She often has a senior partner who mentors her, and he (in most cases to date) may even back her. And then they realise they can’t get the subject through the partnership.

Why? I’m guessing that the grey haired men who run most legal practices don’t understand the transformation which is underway. They were raised in a time when the cost of business was more expensive, and the high cost of custom legal services was seen as a necessary cost of doing business. Many of them built relationships in those days with companies who are successful today. When you’re turning over $20 milion dollars a year, it’s easy to write off $50,000 here and there for legal services as the ‘cost of doing business’. And you appreciate the occasional good seats to the ball game.

That’s who these senior partner’s clients are. That’s what the partner thinks business is about.

This Cambrian explosion of internet startups? It doesn’t really make sense to them: they’re pre-Cambrian. And they just think life will keep going the way it always has.

What the future holds

In some ways, they’re right. The traditional legal model still makes sense for larger, established companies. The larger they get, the sooner they hire an in-house corporate lawyer, who brings all their templates and precedents along with them. A lawyer who is paid a flat salary, no matter how many hours they work. And they use external counsel as they should: for the special issues, where custom services from a highly experienced external expert really matter.

The fact that this model doesn’t work for the run-of-the-mill basic legal work that all small businesses need doesn’t really matter. In some ways the needs of these small clients is almost incomprehensible to traditional lawyers, whose clients are by definition NOT these small startups.

Innovation will continue at the bottom end, and winners will emerge. And the traditional legal firms will continue to do business the traditional way, fighting each other for a slowly declining bunch of existing clients. As internet retailers kill conventional retailers, that pool will slowly dwindle. And firms will struggle, merge and disappear.

Young partners looking for business will follow their elders’ advice, and will keep coming to the watering holes where entrepreneurs gather. They will keep trying to win the business of clearly successful entrepreneurs over cocktails. And that will work for a while, since to date only small lawyers serve firms in the early days, and firms ultimately grow beyond the lawyer who serves them at the beginning.

And then one day a big firm, who can grow with their clients, will wake up. Or a small firm will quickly grow big. Then entrepreneurs can be served from inception through to acquisition by the same legal firm. We see rumblings of this already in Silicon Valley (where Wilson Sonsini spent over 30 years as one-office, initially very small, Silicon Valley lawyers … and now have 600 professionals in 14 offices, and a worldwide reputation among entrepreneurs – partly through having shared their financing template document for free online).

Lawyers in the rest of the world should watch out. The same thing is coming in your market too!

P.S. If you read this and you’re an entrepreneur doing business without using a lawyer, look out for our legal templates, coming soon to subscribers on IncMind.com.