5 Tips for Choosing Startup + Early Stage Counsel
I’ve seen this topic pop up a few times recently, so I thought it was time to write about it and distill what I’ve learned over the years into a few bullet points. Hiring a lawyer (especially for a first time founder) can be a bit overwhelming, but having a systematic approach can do wonders.
Here’s what I recommend to founders (first time or otherwise) hiring counsel for a new venture:
Make sure the lawyer or firm actually focuses on early stage companies and startups. This is probably the most important factor and the most common mistake we see founders make. Often times, firms will market themselves as catering to startups or offering startup packages without having a lot of actual early stage experience. Sometimes, there’s a natural inclination to work with someone in your pre-existing network who offers to take on the work (uncle with a general law practice, college roommate who went to law school, etc). Just like other professions, skill sets and experiences vary greatly among specialties and sub-specialties. In some cases, even the most experienced/talented general business lawyer may not have the skills or approach necessary to guide founders through the early stages of a new venture.
Ask the lawyer about their specific startup experiences. The best approach here is often to ask discrete startup-centric questions. For example:
♦ What vesting schedules do you recommend for founders?
♦ When granting stock to founders, when is an 83(b) election necessary?
♦ At what stage do you recommend a 409A valuation for early employee equity grants in lieu of restricted stock grants?
♦ What trends have you noticed in your recent early stage financing deals? What are the tradeoffs you see in a C-Note round vs. a priced seed sound?
♦ Can you talk about any of your clients’ successful exits or raises?
The point is not necessarily their exact answer (sometimes there may be reasonable but differing approaches to the same topic), but you should be able to gauge their familiarity with the topics and their ability to give somewhat concrete advice in the moment. There will always be some element of “it depends on the situation” for any legal issue, but you should be able to get a sense of their experience, skill set and startup knowledge by asking the right questions.
Ask other (relatively successful) founders for recommendations. In general, recommendations from founders who have raised a few rounds of capital should carry the most weight as those sort of transactions are the most important of a startup’s early life. While it’s always good to hear from people who have had a good general experience with their lawyer, discount those who have just had a lawyer do the initial corporate set up work since they haven’t yet “gone into battle” with their attorney.
Price is important, but it should not be the only (or close to the most heavily weighted) factor in the decision-making process. I always use the analogy of finding a good tattoo artist. No one wants to overpay, but the cost of under-paying can be far worse. If someone offers you a complex tattoo for you $25, you’d think twice about it. Just like getting a cheap tattoo, cheap legal work can be way more costly and painful to fix later than to do it right up front . Lawyers who live and breathe in the startup space understand the need to be cost-effective and will do everything they can to build a long-term relationship. Even if the initial rate or fee is higher than others, they can usually offer much more value and save money in the long run. At the end of the day, we only succeed when the client succeeds so the last thing we want to do is hamstring the company financially in the beginning. No startup lawyer is going to retire off of an incorporation package, so we are always really betting on clients’ long-term success and often take losses and give time off the clock during the early stage of a relationship.
Personality and “fit” matters. Find someone you like working with and is equally as excited about your venture as you are. You’ll likely go through some dramatic times together and a great working relationship can be incredibly valuable along the way.
There are some truly great startup lawyers in the Philly region. I like to think that we all push each other to get better and that we tend to be more collaborative than competitive. Conversely, I think there are firms that market themselves to startups without really having the substantive experience necessary to add value. The latter does a grave disservice to founders.
We are all trying to build a great ecosystem here and want founders to find the right fit (even if it’s not our firm). We are always happy to provide recommendations or intros to other startup lawyers we really like and have had great experiences with. We know some truly great ones.
Onward and upward,