When I was working at a law firm in downtown Tokyo, Japan, my team and I produced the highest quality legal work you can find. I was even impressed with myself. It was flat-out precise excellence.
What does this have to do with startup attorney fees in Texas? Good question. I’ll get to that in a bit.
But first, let me ask you a question: would you rather be paid a fixed fee for your work or be paid hourly?
Similarly, should startup attorney fees be fixed or hourly?
The right answer of course is that it depends on the circumstances. This isn’t about maximizing revenue or anything like that. It’s about what is appropriate and what makes sense. It depends on the nature of the task, the scope of the task at hand, and other factors.
So the annoying answer is that “it depends.” In this article I break down fixed fees—what they mean, and when to think about fixed fees or hourly fees regarding startup legal fees.
A few quick notes: (1) the client generally does not have a choice between paying fixed fees or hourly. That is set by the attorney. This article is to help you in thinking about when what makes sense; (2) attorneys do NOT give discounts. This is a professional industry and discounts just generally don’t happen. Have I seen it before? Yes. But it’s definitely not the norm.
I. What are Fixed Legal Fees?
Fixed legal fees are a fixed priced for attorney’s services in completing a certain task. Fixed fees have existed in the legal industry for a long time, but they have really expanded and exploded in the legal industry over the last 20 or so years. They are often called by other names. From time to time fixed fees are called project-based billing. Other times they are called flat-fees, bundled fees, or other similar names. These types of structures might have some subtle differences but for the most part they are pretty much the same.
Examples
What might a fixed legal fee look like?
The most basic type of fixed fee would be something simply stated such as a fee of $X to complete a project. Often there will be restrictions on the fixed fee such as it is only for certain tasks A, B, and C but not D or E-Z or other matter.
A fixed fee may come with other provisions that provide limits. A fixed fee can have a maximum amount of hours worked for the project. For example, the fixed fees can be $X amount for the project as long as the project doesn’t take more than 50 hours to complete. If the project takes more than 50 hours to complete then the fees shift into a different type of billing method.
Capped Fees
Capped fees, as opposed to fixed fees, are a little different. Capped fees cap the maximum fee that a certain matter will be billed for, as opposed to the definite fee for that matter. In a capped fee, a matter will be billed hourly and the total bill for the project will reach a maximum of, for example, $20,000. It may cost the client less depending on the hours worked, but the bill will be no more than $20k.
Usage of Fixed Fees in Texas and Law Firms
Fixed fees are used at all sorts of firms doing a variety of legal work. The usage of fixed fees also varies greatly depending on the area of law. It also depends on the geography. In startup law or entrepreneurship law here in Texas, it’s used with some frequency particularly at the beginning stages of the company around formation time. See Phase 1 of this website on the sidebar. In something like immigration law, which I’ve been involved with in the past for some clients, fixed legal fees are used more frequently. Other areas use them even more and some not at all. It just depends.
II. Benefits of Fixed Fees
The biggest benefit of fixed fees for the client is the predictability of attorney fees. People don’t like surprises, and particularly don’t like surprises that mean that they have to pay more than they initially anticipated. But it is definitely true that one benefit of fixed fees for clients is that with fixed fees there is more predictability when it comes to costs.
Another benefit is clarity. A lot of uncertainty is often at play for a client in a legal matter. The pinpointing of how much a matter will cost with a fixed fee structure brings more clarity to how much a matter will cost a client. This can be helpful to that individual.
III. Problems with Fixed Legal Fees
There are some very valid reasons why fixed attorney fees are not the way to go. They include the following:
A. Fixed fees do not capture the idea that higher quality work requires a disproportionate amount of time
The fact of the matter is this:
High quality work requires a lot of time.
There’s a non-linear curve to professional legal work. This is true for all types of work. In order to do a “good” job on some task it will take you an ample amount of time. To do an excellent job it will take a disproportionately longer amount of time.
For example, if you want to complete a task sufficiently, where sufficient means completing the task at an 80% quality level it may take you say 2 hours to do so. If you want to hit that 100% quality level, then it might take you an additional 8 hours of work. When you get to reach the highest qualities of work, it takes an extraordinarily long amount of time. The refinement and perfection part of the work that is needed to get near that 100% takes the most time and diligence.
To paint the picture more vividly—let’s say you want to be a gymnast. If you start training and train for 1,000 hours, your gymnastic capability will be better than 80% of people out there. To get to that 90 percentile you may have to put in another 1,000 hours. So essentially just to see an improvement of 10 percentile points you would have to double the amount of work. To get to that 99 percentile you would have to maybe increase your input by 10,000 hours. To get to 99.999 percentile you may have to put in 20,000 hours,
This type of disproportionality is real. I’ve experienced this and seen this really put to the test in my work.
I mentioned at the beginning of this article that I’ll come back to talking about Japan. When I worked at a law firm in Tokyo, Japan I worked with an excellent, older professional. This attorney was an old-school Japanese lawyer. He would tell me stories of his time as a civilian living in Tokyo during World War 2. Any way, there were a lot of long hours in that office, but the quality of our legal work was just awesome. It was pure legal excellence.
The key is to know when something is good enough and to know when perfection is necessary. In Japan, we were often shooting for that 100% perfection and that took an extraordinary time and diligence. We were shooting for that because our clients demanded it, we demanded it of ourselves, the nature of the legal work demanded it, and the culture demanded it.
The point is—to achieve the highest quality of work you have to put in a disproportionate amount of time and effort. Fixed fees do not capture this idea.
B. Fixed fees do not provide proper incentive
Real talk: individuals will not shoot for that high quality of work unless there is some incentive. This is less intentional and more subconscious than you would think. A lawyer has a duty to do a professional job, they won’t leave the matter hanging. But they will not push for that 30 hours level of diligence in order to create truly excellent work if they are getting paid the flat fee of 2 hours worth. It’s just not going to happen.
Fixed fees shift the risk of time uncertainty from the lawyer to the client. The question to ask yourself is—is that something I want? The amateur will say yes, of course. The experienced individual will have hesitation. Make sure proper incentives are in place.
C. Beware of the efficiency trap
The fact of the matter is that if you strive for the most efficient system, you will not get the best output. Yes, efficiency is important and often desirable but some times those extra hours researching a giant legal tome makes the big difference.
What is the efficiency trap? The efficiency trap is the misguided notion that striving for the most efficient system is the optimal way to product the best results.
Some clients believe that fixed fees for legal services would be the best method for legal services because it theoretically incentivizes for the task to be completed efficiency (particularly in the manner of time).
But this is where the trap is. In contrast, there are large perceived inefficiencies in organizations that are actually incredibly polished. These “inefficiencies” account for human nature and other types of issues. People are not robots so therein comes some inefficiencies and a lot of intangibles. Look at a company like Apple. Many of their products are extremely polished (though not perfect). But looking deeper into the company, there are a lot of inefficiencies and a lot of waste-age. The fact of the matter is that these perceived or real inefficiencies work to create a more efficient end product or end result.
One of the most organized, if not most organized, and highly efficient organizations in the world is in the U.S. military. If as a tech startup or otherwise you have to deal with the U.S. military you will note that the decision making processes and tree is extremely and unbelievably organized. This is true more so than dealing with any company. In fact, even dealing with a large public company with a stellar reputation you will see a lot of inefficiencies creep up; and a lot of decision making being done that seems off-the-cuff. You will not see this type of lack of organization with the U.S. military; however, you will still see inefficiencies (particularly when it comes to finances).
What does this all mean? It means this: some of the most polished systems in the world have inefficiencies, and often those inefficiencies account for and work to buffer in creating an extremely polished result and operation. A lot of this is by design.
When excessive efficiency comes into the equation, micro-shortcuts are taken. Small little compromises are made. Those add up. Over time and for more complicated operations those little shortcuts add up to create a diminished product and result.
When it comes to top quality work, individuals, companies, investors—anyone—will pay for it regardless of if it’s flat fees, or hourly or whatever—even if that means it’s not the most efficient system. This happens why? Because people want high quality work. And they know that wanting high quality works means that they have to pay for it.
IV. When do attorney fixed fees make sense?
As mentioned, the fee structure will largely be dictated by the attorney. Here’s when fixed fees make sense and when you’re most likely to see them being used:
A. When the legal matter is of a predictable nature
Certain matters are more predictable than others. These are few but they exist. By predictable nature I mean that the scope, the length, the overall plan of the matter can be predicted. I’ve had to do a few agreements for some clients that were pretty clear cut and simple. Those can easily be done on a fixed fee—no problem. But it also depends on the general set up. Predictable matters are an unusual circumstance.
B. Complexity is low
Younger companies have lower complexity than established companies that have been around for at least a few years. If your company is less than a year old, then it’s more likely that the complexity for certain tasks is low—this is where fixed fees can come into play. But this isn’t always the case for young companies. I’ve had to form companies that right off the bat have a huge number of players and millions of dollars of assets. Those matters can become complex.
When operations are bigger, when there are more moving parts, that means that there is more complexity. Fixed fees are and should be avoided when more complexity comes into play.
C When you’re doing something not novel
Fixed fees can be reasonable if you, the entrepreneur, are doing something cookie-cutter that has been done thousands of times before and the matter is not novel. If you’re getting a simple agreement drafted that is the type used in your industry all of the time, then that is not novel. On the other hand, if you’re in unusual setup with a transaction that’s not very common, then fixed fees are less reasonable to use.
D. When the quality of the work demands it
Look—I’ll be frank with you. Some deals are more important than others. Some go to the heart of what the company is and what the company is doing. I’ve discussed similar concepts before. In the contracts checklist analyst article I discussed how some items are more important than others. Some times the underlying deal is just worth more and in those cases you ought to give it the time, attention, and resources that are appropriate in allocating.
As I discussed above, the highest quality of work will come with hourly fees. This is serious stuff, and high quality of work is appropriate.
V. Conclusion
There are times when fixed fees are smart and times when they are not. There are some benefits with fixed fees—particularly when it comes to predictability of costs, however there are some major downsides with fixed fees. Talk to your lawyer to see what is most appropriate for your situation.