Startup Lawyers: A Founder’s Guide for Finding a Law Firm

Startup lawyers: How to find a law firm

Author:

The Carta Team

|

Read time:

5 minutes

Published date:

July 3, 2019

Learn what to look for and how to find the right startup lawyer or law firm to assist you through the process of forming and financing your company.

Contents

From raising financing to finding product-market fit, founders have a lot on their plate. Most founding teams will have to start thinking of their legal needs once they’re ready to accept a check from investors. Having the right startup lawyer to assist you through the process of forming and financing your company can make a big difference in your ownership and control of the company going forward.

In this article, we'll cover a few things to keep in mind when looking for the right startup lawyer or firm to partner with.

Recognize your company’s needs

For founders that feel like it’s too early to engage a lawyer, a lot can be achieved through self-serve platforms-like Stripe Atlas or Clerky—including formation and initial fundraising documents. These tools help automate some of the common legal needs at the pre-seed stage.

But as you begin to hire, develop intellectual property (IP), or take checks from more than just friends and family, you may want to get representation for the company. A big firm will usually have higher hourly billing rates, but they are built for efficiency and have experts in many of the areas that typically come up for early companies (like IP, compensation, terms of service, regulations, commercial contracts, and patents). A single lawyer or boutique firm might not be able to cover as much ground, but they may be more cost-efficient.

Find the right legal and business fit

Cost should not be your only concern, though. Sara Mauskopf, CEO and co-founder of Winnie, says it’s important to view your law firm as a partner-one that can be beneficial to your business as it grows. “Don’t focus so much on the money,” Mauskopf says, “because it’s not going to be the legal fees that make or break your company.”

Some of the things to keep in mind when evaluating a firm include:

Remember, firms are interviewing founders, too. You may even have to provide references (investors, other founders, previous lawyers you’ve worked with) before they’ll agree to represent you. “We’re seeking people that have a good sense of how to get products out there in the market,” says Andy Bradley, partner at Gunderson Dettmer, who gets most of his clients through a wide referral network.

Know your first priorities

Peter Werner, a partner at Cooley, says there are hundreds of questions founders could have when starting a company, but during the pre-incorporation phase there are three critical things that most founders should be concerned with:

  1. IP ownership. Peter says legally documenting the “chain of title” of the company’s IP- documents that demonstrate the company’s ownership-at the outset is easier when the startup isn’t worth much because there’s less to fight over. This will also help you avoid potential lawsuits from people who were around early in more amorphous roles.
  2. Equity. Waiting until you get a term sheet to set up your cap table gives founders and early hires time to rethink a verbally-agreed upon equity split. According to Werner, it’s a good idea to create your cap table and formally issue equity to the founders early on, and then have some time before raising your first round of financing. If founders buy their founder stock and then raise money at the same time, they might have to explain to the IRS why the common stock that was worth fractions of a penny was suddenly worth a lot more after the raise.
  3. Roles and the board. Before working with a set of founders, firms like Cooley and Gunderson Dettmer will often give them a questionnaire (here’s one from Orrick) to help them think through some crucial topics such as: who’s CEO, who’s on the board, how the cap table will be allocated, as well as founder vesting and acceleration. Founders should have these (sometimes difficult) conversations early on to identify any potential sources of friction relating to ownership, control, and decision-making.

Communicate clearly about fees and expectations

In the late 1990s, companies were going public at an aggressive rate and some law firms would ask for equity in the company as part of their fees. Sometimes they asked for stakes as high as 2.5%. While firms will occasionally ask for equity, they often don’t for such a high percentage anymore. Also, many law firms have small investment funds of their own for participating in clients’ financing events. If a firm brings up the topic of ownership, it’s up to you if you want the lawyers to have “skin in the game,” and you can treat them as you would any investor.

Here are some of the common fee scenarios for early-stage startups hiring law firms:

  1. A flat fee. This would cover basic formation services you need to get up and running.
  2. A deferral. This happens when a law firm agrees to delay payment until a certain amount of money is raised or achieved in revenue.
  3. A discount. Another approach firms might take involves providing a discount on a specific amount of services for the first year (example: a 10% discount on the first $100K of services). These discounts can include clauses that let a firm’s venture fund invest a small check in the first few rounds of financing. Having this shared benefit in your company’s success can be beneficial in creating a foundation of mutual trust.

Remember that most law firms bill by the hour, unless you have a flat fee arrangement. Be sure you have a clear understanding with your firm about how they’ll bill against one-off requests for help or “quick question” emails. Choose a firm that’s looking for more than just billable hours—that they’re interested in creating efficient workflows for their clients. Remember to communicate how you retain information as well, as many conversations with lawyers can get nuanced and complex, and you’ll likely need to consult the advice a few times before you make a decision.

Ask for help

Your law firm is one of the first major outside partnerships you will establish as a founder. And it’s not one you can source via an online list, Yelp, or even your friends. While it’s good to ask your network (especially any lawyers or founders you may know), it’s important to find an experienced team or individual that’s comfortable working with startups in all their ambiguity and growing pains, as well as the industry your company is entering.

If you’re getting ready to raise financing and need a referral to a law firm, let us know by writing to partnersales@carta.com and we’ll do our best to help.