Bootstrapping With Legal Advice

Posted on July 16, 2012

0


It would be unfair of me to provide some tangible advice on how to get by in a bootstrapping world if I did not provide some advice on how to bootstrap with your legal professional as well. Certainly, when it comes to lawyers, the adage “you get what you pay for” rings true. However, there are certain things you as a business person can and should do to drive down your legal cost.

While attorneys do not readily admit it, we do judge clients. Personally, I believe you can tell how good a business person is by how they handle their professionals. If you can manage your lawyer appropriately (and more often than not business people cannot), then you will inevitably get more service for less money. More than just cost savings, you will get the right level of value for a lower price, and that is the definition of bootstrapping.

When managing your attorney, keep these tips in mind:

Come prepared. No matter how you slice it or pay for it (flat fee, hourly, etc.1), a lawyer is selling his or her service. When they are selling a service, they are selling their time. When someone is selling their time, the less you use of it, the better off you will be. I had a client meeting and the client had notes sketched out on the various issues she had. We went through them in relatively short order. Some we were able to dispose of in minutes. Others had a little more follow-up work. However, we devised a strategy wherein she would handle certain issues to a point and then would come back and engage me. In essence, she had her stuff together. Because of this, we dealt with several things within the hour that an unprepared client would have not dealt with in the hour. An unprepared client would have had numerous back and forth exchanges which would have increased the attorney work time and would have inevitably increased the attorney cost.

Come at the right time. Knowing precisely when to hire your attorney is more of an art than a science. However, there are certain times when you need to see an attorney and times when you do not need to see an attorney. With respect to the when not to see an attorney, remember that attorneys have limits in their ability to protect and do things. Accept and respect that transaction attorneys do not provide bullet-proof vests; they provide clarity on the rights vis a vis one another. We talk more explicitly about actual transaction events in the next two blog articles.

Come ready to act. A lot of cost and wasted time is spent when you get everyone to the table, have the discussions, get a general consensus but then realize you or one of the parties is really not ready to move forward. When you start talking to attorneys, realize that the meter is on and don’t waste time. If you are using your attorney to posture during a deal, you are increasing the time spent by you, your attorney, the other side, and the other side’s attorney. If you are using an attorney to document theoretical deals that you do not have any sense of whether or not the other side will accept, you are substituting lawyer time for dealing with business issues. Can you do this at a lower hourly rate? Probably.

Come ready to learn. When you talk with your attorney, you want to have good background and a general sense of what you want. One of the reasons I am writing these articles is so business people have some working knowledge. Additionally, I am by no means the only source of information; the information about law and business is endless. If you have just a little background, then you are saving your attorney some time in explaining the issues to you, and remember: time equals money. However, you can take this too far. First, all of the information available is written either in the abstract or because of someone else’s situation. While perhaps analogous, it is not directly applicable. One slight deviation from the fact may alter the advice that is given. Additionally, the information may be dead wrong. Google is a great tool, but it does not differentiate between good legal information and wrong legal information. Believe me; a bunch of it is junk. When you talk with a lawyer, you need to be prepared to be wrong, you need to be open to exploring another route, and you need to be aware that the information and background you used may be inaccurate or incomplete.

In addition to these things that a client can and should do, there are certain things that a business person should not do if they want to save on legal fees:

1) Complicated deal structures or LLCs: While we will discuss this more with choice of entity, one of the beautiful things about LLCs is the flexibility. As with contracts, you can contract for anything. For example, you can contract that you will only get paid after you cluck like a chicken. However, when a lawyer gets a hold of that term, questions arise: how loud does he need to cluck, what is the remedy for failure to cluck, can his brother be a substitute clucker, etc. It sounds simple, but when you dig into it, the deal and the document becomes complicated.

2) Preferred capital structures: These agreements seem simple. The original thinking on these transactions is that there is a sweat equity person and a capital equity person. They will split the profits 50-50, but the capital wants the capital returned first. This is a fairly common and logical arrangement. However, for a variety of reasons, the law does not handle this preferred equity treatment easily. Use shareholder or member debt instead.

3) Ratchets, tag alongs, drag alongs, registration rights: Business people banter these terms around like sliced bread. The problem is that they involve enormously complex documentation. Until you get into the true VC realm, I would stay clear of most, if not all, of these agreements.

4) Employment agreements other than at wills termination: It is difficult to define, tangled up in emotion, and if not handled properly, the relationship can deteriorate.

Now, of course, many business people are looking at this list and thinking, “My goodness, I need to do these things.” Of course, that is fine. However, you ultimately need to recognize that complexity breeds higher cost. While I may agree with you that it is a sad state of affairs that lawyers cannot quickly and efficiently handle the complexity of some issues, business people need to know that some of these terms that are bantered about quite quickly and easily in a transaction are not handled well by the law. Both lawyer thinking and contractual precedence is sometimes swimming against efficiency. I would like to change the world, but it may not happen on this transaction.

One final bit of bootstrapping advice — take your attorney to lunch. They will give you a marketing pitch, but you usually can glean some valuable information.

Mike Goodrich
Goodrich Law Firm, LLC

1 For thoughts on how to structure fees, I am a proponent of doing it strictly by the hour, although some attorneys (very thoughtful and wise attorneys) disagree. For my views on the subject, go to this blog entry.

About these ads