Hiring a startup lawyer can be confusing for many first time early stage entrepreneurs and founders. It is a classic information asymmetry, where the party that knows less usually gets the worse deal. Unfortunately, usually, that is you, the startup founder.
As a corporate lawyer that has worked with both bootstrapped startups to venture backed companies, I have worked and interacted with startup founders in addressing their legal challenges in their entrepreneur journey. Through these experiences, I’ve taken an approach to help manage legal fees which you can use to help you get the most from the money you invest toward legal fees.
How do lawyers usually charge?
In Malaysia, there are usually only two common legal fees structures: flat and hourly fee. Interestingly, Malaysian lawyers do not generally charge for initial or first time consultation meetings (though, it may be a good idea to call up first and ask if this is indeed the case). In other words, as a startup founder, you may ask for several meetings with two or three different corporate law firms and decide which firm that you feel you may wish to hire as your startup lawyer.
I know in Silicon Valley, there are law firms there that will be open to accepting some kind of deferred compensation like delayed payment until future fundraise or equity instead of upfront cash for the legal work. In practice, lawyers are generally risk averse creatures – so many may not even offer this as an “option” (I mean, you can’t “eat” equity when times get tough or the odds are usually stacked against you when you are just starting out your startup journey).
Fixed or flat fees. Generally speaking, a flat fee structure may be the best way for you to hire a startup lawyer. The usual and routine legal tasks like entity formation and equity issuance, standard IP assignments, employee handbooks and preparing employees shares compensation plans, trademarks and so on.
Bootstrapped entrepreneurs will appreciate cost certainty when hiring a service provider like a lawyer or company secretary so fixed fees should work well for most of the legal work when you are just starting out a company. Additionally, a company can hire a lawyer on an adhoc basis as and when the company needs a legal work done or on a retainer (very rare for early stage companies as the startup is usually on a tight cash runway).
In practice, even lawyers find it hard to come up with a fee quote. There’s even a debate among the legal fraternity on whether quoting fees is an art or a science that can be learnt. I know saying “it depends” may not be what you are looking for but that may be the most correct answer here. The legal fees will be based on the lawyer’s work experience on the legal work, additional work needed for your transaction, and so on. For example, setting up a new private company in Malaysia usually cost around RM2,000 to RM3,000 all in, but a seed round financing (assuming the usual legal documents are used) can be anywhere from RM5,000 to RM20,000 depending on the complexity of the funding deal and whether the startup lawyer needs to be involved in the negotiation meetings.
Hourly fees. In major corporate law firms that deal with large deals and cross border transactions, hourly fees are usually the preferred way of billing for most corporate lawyers. The idea is not really because these hourly fees can generate more total fees, but the lawyer can have visibility that he may not end up working “for free” when a client calls up with some questions or makes any sudden changes on the working draft. Or even ask any legal advice on related topics outside of the main scope of work.
How much the hourly rate again will depend on the lawyer’s experience (usually calculated based on this metric known as PQE, or ‘post qualifying experience’). The hourly fee can be anywhere between RM250 to RM500 per hour for most solo practitioners, boutique corporate firms can charge between RM300 to RM1500 per hour and large firms charge anywhere between RM750 (junior legal associates) to RM5,000 (experienced partners) per hour.
There is another fee structure known as ‘contingency fees’ (around 30 percent to 40 percent of the value) of a case. In practice, the Malaysian Bar has been discouraging this practice as it causes conflict of interest issues for the lawyer being engaged by the client. For this reason, we are only looking at flat vs hourly fees.
How to save money on legal fees for startup founders
Now that I’ve covered the basics, there are several things that you can do to help keep your legal fees in check.
1. Get a lawyer who has the experience that you need him to perform. Most lawyers have a specialty of some sort (can be broadly defined) in which they are most familiar and therefore efficient. The last thing you want to do is hire and pay a lawyer to teach themselves in a new practice area. Lawyers usually will put up their core practice areas on their website, and usually in these areas they are most likely to be good at. It will be a good idea to get someone with the experience working startups especially with at least 7 to 10 years work experience.
2. Get yourself educated on the deal so that your lawyer knows you know the basics. Nowadays there are many high quality, free templates that you can find for the most common legal tasks involving startups. If you need a new terms of service, for example, it may be a good idea to look for an existing online platform that may be similar to your business, and make comments where you think fit and share on the tracked changes draft of your thoughts to your lawyer for final drafting. Generally, your startup lawyer would appreciate that you know the crucial commercial terms for the deal and basics of what the legal work entails. This could improve your fee bargaining position.
3. Ask for a “startup” legal package. Nowadays corporate lawyers are finding startups as a “sexy” or “emerging” niche practice to be involved and willing to provide significant fees reduction to smaller companies. In the case of larger firms, to attract the most venture backed startups; and in the case of smaller outfits and solo practice, to capitalise on their primary clientele – small, bootstrapped startups. Just remember that most solo practitioners are themselves self employed entrepreneurs with huge skin in the game of launching their own startup businesses (although a law firm) so they are surprisingly empathetic to other founders in the same scenario.
4. Get regular billing updates. If you decide to choose hourly billing, it is a good idea to get informed of where exactly you stand in the billing. Although coming up with the detailed billing can be a burden for lawyers, most lawyers will oblige and it never hurts to ask your lawyer for time and cost estimates before starting legal work. In fact, you can agree to “cap” the legal fees so that you can get the lawyer to notify you if the fees will exceed their estimate.
5. Get visibility on costs, expenses and disbursements for other charges, etc. One reason why startups may want to work with medium or large firms is the comfort that the person attending your task is backed by staff assistants, paralegals, junior and senior associates, all of whom support them as partners of a legal firm. This also means that the billable rates range from lowest to highest respectively. Whenever possible, do request that paralegals or junior associates do the usual routine (and time consuming) work, but leave critical negotiation meetings to the partners and high level drafting agreements to senior associates. Also, make sure you know in advance what costs and expenses the firm will charge you (eg, photocopying, postage, couriers, travelling). Whenever possible, ask if these disbursements can be reduced or waived.
6. Ask for deferred fee structures. This may be a long shot tip but deferred fee structures usually involve remunerations in something other than cash or payment to your startup lawyer at a future date. For example, the legal fees will be delayed until the next fundraise or sweat equity in lieu of cash (eg, legal fees). I know of a lawyer who agreed to accept a painting as full payment for legal fees in a transaction. In practice, although deferred fee structures may work well for cash strapped startups and risk tolerant lawyers, I would carefully consider you to consider carefully if you wish to work out this structure because of the potential misalignment of incentives or interests.
Follow these tricks from the early beginning and with some guidance you should be able to hire a good startup lawyer and save money on legal fees.