The Only Three Things to Look At When Hiring a Startup Lawyer

There are only really three things to look for when hiring a startup lawyer. But actually these three are the only three things anyone looks to when hiring any business, company, etc. I’ll go through them here in this article. In order to not do some nonsense and make you wait til the end of the article to “find out what they are!!” the three factors that you need to look at when hiring a startup lawyer are these:

1. Price
2. Trust
3. Product

That’s it.

That’s all there is.

Everything else is fluff. Watch out for fluff in lines when people talk about their business. The fact of the matter is that people try to complicate everything. All of this stuff is quite simple really. Have you seen companies that say things like: “A global innovator in business”; “a true leader in vision”; “a legal tour de force”? Yadda, yadda, yadda. You know what I’m talking about. There’s a reason why no one cares for talk like that. Because it doesn’t mean anything.

So let’s talk about what actually means something.

The things that mean something when it comes to hiring a lawyer, company, whatever are price, trust, and product.

It is extremely difficult to find a business that really nails all three of these categories. And if you think a company does, there may be a shortcut that they are taking somewhere that you’re not seeing. Maybe they’re selling data you give them in ways that push the boundaries of what is and what is nonconsensual (that’s a big thing these days—watch out for this). Or maybe they are screwing over their employees or committing some unethical act.

People love taking shortcuts here and there. But legal matters is not where to take such a shortcut. Shortcuts will catch up to you. It’s the same as eating properly. The fact of the matter is that to eat well takes plenty of time, energy, and money. There is no way around it. Taking a shortcut will catch up to you in pretty awful ways. So if you can’t take a shortcut when it comes to legal matters, what do you do? You understand and focus on the only things that matter, in this case, price, trust, and product and make sure that it’s a good fit.

Let’s go through each of these:

1. Price

Hiring an attorney costs money.

There’s not any real way around this. And if there is—be careful. A lot of people avoid talking about pricing and legal fees; but let’s not beat around the bush—price is a factor that people think about.

If you find an attorney that is willing to do the job extremely cheaply—beware. Quality costs money. Like I said, there’s no way around that. However, a good attorney actually saves you money because it keeps more costly mistakes from happening later down the road. I’ve had to correct mistakes before made by other attorneys. It’s not cheap. As I’ve said before, few attorneys actually give numbers for things like this. For actual numbers regarding legal fees of lawyers in Houston and Dallas see this post.

So a lawyer and legal costs are pricey. But there are ways to mitigate that. Here’s how:

Hire a startup lawyer earlier in the process

The earlier you do this in the process the less costly it ends up being. It’s easier and it’s cheaper to have an attorney start you off with a few documents than it is to hire an attorney in year 5 and have a ton of documents for the attorney to go through just for something simple. That gets costly. And it takes a lot of time.

I’ve noticed that a number of entrepreneurs have the attitude that they’ll get legal on board when their company has grown a bit and when more funds are available. I get it. Money can be tight at the beginning, but this is the wrong attitude. It’s better to make sure that mistakes don’t get made from the get-go. At the very least, get the conversation going with an attorney. Some guidance is better than none.

Understand the structure of legal fees

There are different ways to structure attorney’s fees. It’s possible that an hourly rate for your matter doesn’t align incentives the best for all of the parties. In that case, a fixed fee or unbundled fee can make sense. There are all sorts of mechanisms available. Work with your lawyer. Tell your lawyer what kinds of costs you are expecting and how that fits into your budget. See if they can unbundle certain fees and such.

2. Trust

Trust is a huge factor.

Take a look at a company like Amazon. People love, or at least, order from Amazon in part because they can trust them. It’s easier to order from them than some site you’ve never heard of. Why? Because of trust. You can trust that they’ll ship the product when they say they will. You can trust that you’ll get it in 2 days like you want.

In the legal profession you will not be able to get that level of commitment with a promised result; and in fact there are attorney ethical issues about promising certain results. So what does trust mean here? It means the following:

Do you trust their decision making process?

There’s definitely a right and wrong way to make decisions. There’s a whole field of study dedicated to decision making. There are some good books out there on this topic. If you’re interested in this, and if you’re making decisions you should be: check out this book by the Heath brothers: click here. It’s about how to make better choices.

Look, no lawyer has the answer for everything. No person does either to be fair. The question is if this lawyer doesn’t know the answer to the question, will they be able to figure out the answer to the question. It’s not about having every answer. It’s about trusting the person to go out and get the right answer. Do I trust this person to do that?

Doing that requires good decision making skills. Do you trust your lawyer to know how to make decisions properly?

Do you trust them to be a reasonable person?

I’ve had people come to me and show me what some other lawyers charge and what was completely out of line. You need to find someone who is fundamentally a reasonable person. I’ve not had a single billing issue/dispute/problem with a single client. If there’s an issue, will they handle it and talk to you about it in a reasonable way? Or will they just tell you to stuff it?

Being reasonable also extends to other matters. When a lawyer says they will contact you at a certain time, do they? One of the biggest grievances against many lawyers is that they avoid emails, phone calls, and other forms of contact. You need to be able to trust your lawyer that they’ll be reasonable with these kinds of things. Trust goes beyond just what the attorney produces.

Do you trust this person to be diligent?

You have to trust that this person is a diligent person—that this lawyer keeps updated with the ongoings with the law and the field in general. This kind of thing is important.

3. Product

Legal work product is inherently extremely intangible.

So it becomes difficult for many lay people to understand the quality of a legal product. This is unlike many other fields such as consumer goods. If you have a crappy camping stove, it’s probably not difficult to tell. It doesn’t feel right in the hand. Or it breaks quickly. Or it seems unpolished. The legal field isn’t like that. In the legal field, it can just be difficult to ascertain the quality of work. It’s just very intangible.

Because of this intangibility there is a trap that’s there. And it’s this: even though it can be difficult to see the differences in attorney work-product, don’t mistake that for there not being any differences—subtle or otherwise.

Subtle differences make a big difference. An attorney who really focuses on startup law will have differences in their work-product than an attorney who doesn’t.

Let’s say that two attorneys are 80% the same in their approach to a document. That means that there’s a 20% difference. Now if you consider that the attorney is preparing for you hundreds of pages of documents over a number of years—that 20% difference really makes a real difference as it adds up. Small improvements collectively add up.

Quality work product is also not just throwing every thing under the sun into a document. There’s a real art to this. At the law firm I worked at in Tokyo, I really understood what this meant. Some lawyers, particularly in the U.S., try to put too much into their agreements and make documents hundreds of pages long unnecessarily. There’s actually a legal movement here in America to reduce all of that excessive legalese type of work. I applaud these efforts.

Given the intangible nature of legal work, here are the qualities to look for in order to understand the quality of work-product:

What type of work does this person do?

Is there an air of polish? You know what this means. Does stuff just look . . . sloppy? The product should also be clear. I’ve had clients come to me and complain that other lawyers they’ve worked with left them confused and didn’t properly explain matters to them. Look at how a lawyer you’re going to hire answers your questions and concerns in discussions, conversations, emails etc. Are answers clear? Remember—how they do anything is how they do everything.

Does this person have the experience for this type of work?

There are a lot of lawyers out there. Find one that focuses on the particular area of law that you are involving yourself in. If you’re in the maritime field in Houston, maybe you shouldn’t hire a Texas startup lawyer and should look to a lawyer in the maritime industry. Each practice area has it’s own best practices and methods of accomplishing tasks.

Does this product work for me?

If some lawyer is located in Argentina and you’re trying to create your startup in Dallas or Houston, then maybe their product, while it may be an otherwise awesome product, might not be the best fit for you. So this is a personal matter on some level. The product needs to be a proper fit for you.

Make sure the product is right for you.

Conclusion: the only factors that really matter when hiring a startup lawyer is price, trust, and product. Focus on getting that right balance. Beware of those that attempt to take shortcuts. Legal is not the place to do that. Like I said—you can keep eating garbage/processed food, but it’s going to catch up to you.

What is the Most Important Consideration When Giving or Selling Equity in Your Startup?

The most important consideration to make when giving out or selling startup equity is:

Will this person create value and grow the company?

What does this mean?

It means that equity should only be given to those who you foresee as creating value down the road. You need to give equity to those who will grow the company.

The problem is that a lot of founders think of giving/selling equity from a compensation perspective when the emphasis should actually be from an incentive perspective to create value down the road. The emphasis isn’t something nebulous either like “I want to incentivize this guy to do better for the company.” Don’t be vague. Be specific with it. The emphasis needs to be will this incentivize this person to create and grow the company. The small shift in mentality makes a huge difference. The emphasis is the key.

Startups are often using equity simply to solve an immediate issue. In the context of an equity priced round such as a Series A, when equity is sold to an investor in exchange for funds to be used by a startup, go one step further and make sure that investor relationship is a strategic one that can help grow the company (more on this below). Be forward thinking with your equity. Equity and the disbursement of equity is the most powerful tool that your company has. And if it’s not, then it should be. Why? Because it represent the company itself.

Selling equity strategically is all part of the proper growth mindset. This is one of the fundamentals of startup development. This whole site is structured in a way for you to easily understand the fundamentals of startups and startup law. You have to pay attention to fundamentals regarding your startup, and this is a huge fundamental that many founders either don’t realize or don’t take the message home hard enough.

Don’t be stingy with startup equity. Be smart with it.

One thing investors repeatedly tell me is that they are wary of founders who are not willing to share equity. Look. I get it. When it comes to a financing round, investors and founders are on opposite sides of the table (though I would argue that that’s a pessimistic and limited way of looking at it). Both sides want equity. The point is not to give out a ton of equity. Nor is it to be stingy with it. The important thing is to be smart with it and to be reasonable with it.

So realize that you have to share equity and you have to do it intelligently. You could do it alone and own your company alone, but not for very long and your competitors will out compete you. How do you do share equity intelligently? By focusing on sharing equity with those who will help the company grow.

If you adopt the mentality that future equity rounds and stock options are for the purposes of really growing the company two things will happen. First, you will suffer less dilution. The reason is because you’re less likely to be willy-nilly in your equity disbursement. You will become more thoughtful about the process. And second, when you do get diluted, it will be for a good reason. It will be to grow the company.

So here are the main points to have on your mind when you’re giving out equity in the hopes of future growth:

Pay attention to who you’re giving startup equity to

Ask yourself whether this person or this investment will really go to create value for the company. The fact of the matter is that unless you’re getting a great investment deal (and which funds you can use to add value and grow the company) then if the person/investor is not creating value/not making the company grow, then don’t use equity in the deal or simply don’t do the deal.

The shift needs to happen between “awarding or giving equity to this person for compensation” to something more along the lines of, “We are giving this equity because this person will create value in the future.” Make that shift happen and consider who you’re sharing equity with.

Find out what startup investors can do beyond money

I’ve said this before and I’ll say it again. There are lots of investors out there. Always ask, “What can this investor do beyond writing a check?”

Look—investors are not going to do everything for you. In fact, one of the most important things investors tell me that they look for when making an investment in a company is: “Does this founder know the market?” “Does this founder have the contacts?” “Does this founder team know the industry?” But even though the investor expects the founders to know the market well and to have a handle on it, know that there are things that an investor can do besides money.

A lot of individuals and groups can write a check. And if your startup is awesome, there will be a lot of options as far as who can write that check. Writing a check can be pretty powerful, but see if there’s something beyond money that the investor can bring to the table. Are there any distribution channels that the investor can open up? Any strategic partnerships? Product networks? Anything like that? Find out what they can do beyond money. These are the things that will help the company grow.

Understand startup math

This is the most important thing you can do to really understand just how value of the company works in relation to the ownership of the company.

When you understand how startup math works, then you get a better idea of how ownership is being dished out of the company. It gives you a more technical, fundamental understanding of all of this.

Read and understand this article https://www.startuplegalstuff.com/startup-math/

Give stock options appropriately

The fact of the matter is that there will be a number of individuals on your team that are helpful with your company. They’ve worked there. They’ve done things. They’ve smoothed things out.

That’s all well and good. You need people like that on your team. And they should be properly and well compensated for it. But should they be given stock options and equity?

Maybe. Maybe not.

If you don’t need to give options, don’t give it. If you feel like you can properly compensate and incentivize your employees with cash and you have cash, then just use cash. If you feel like that giving out stock options to this person can really make this person add value and grow the company in the future then go for it. The important thing is to be smart about stock options and stock option allocation.

Understand that dilution happens

A lot of founders are extremely paranoid about dilution and tell me they don’t want to be diluted. The problem is that they have this fear because they don’t understand dilution and how it works.

If, as a founder you are raising money, you will be diluted. There is no question about it.

The trick is to control how much you’re being diluted by being smart about how you’re raising the money, about the terms that you’re negotiating, and the type of anti-dilution protection that is on the table.

But one the most important items to consider with equity and dilution is the topic of this article. And that’s that when you DO give equity, yes you will be diluted, but make sure that the equity creates value moving forward. The person who is giving you equity should either directly or indirectly be able to help grow the company.

At the end of the day, you can either have a lot of pie that is worth nothing, or have a small amount of pie that is worth a huge amount. You want the latter.

Key takeaway: you will have to share company equity. Dilution WILL happen. Be smart about it. Make sure those that receive equity will create value for the company and will help grow it.