It is relatively easy to find information on substantive legal matters on the Internet. However, it’s harder to locate useful guidance regarding how, when, where, and why to engage an attorney and what to expect when you buy legal services. This Buyer’s Guide aims to provide exactly that information.
As you proceed, please be aware of three important points. First, this guide primarily is designed for a founder or startup company who may be engaging an attorney for the first time, so it may not be useful for the experienced buyer of legal services or someone seeking litigation assistance. Second, because there isn’t a “one size fits all” solution for all legal needs, this guide serves only as a general overview that may help you make a more informed decision if and when you engage an attorney. Finally, this guide is not intended as legal counsel or advice and does not establish an attorney-client relationship.
When you hire a developer, marketer, or CFO, you know what to expect – tangible results such as source code, a slick advertising campaign, or financial statements that make sense. But, what are you getting by engaging an attorney? Generally speaking, you are buying:
In addition to the above benefits, by engaging an attorney, you are entering into a relationship with a professional who is held to certain standards unlike most other service providers. First, attorneys must be licensed by the state in which they practice, and to be licensed, an attorney must pass a state-administered examination and continually participate in further legal education. Second, attorneys are bound by a code of professional conduct, which, among other things, governs how an attorney engages a client, the fees they may charge, and the standards of their performance, as well as maintains that their representation is free from conflicts of interest.
Like so many answers you will receive from a lawyer, the answer to the question of when you should engage a lawyer is, “it depends.” Ideally, you would be able to engage an attorney and other professionals at the outset of your business activity and all along the way. But, in the real world of cash constraints and allocating resources, it can be more difficult to determine when and how to spend money on legal services.
To start, there is no substitute for educating yourself on the basic legal issues that your startup may come across. Our guidance section provides a fairly digestible overview of key issues that you may encounter when starting and running your business, and there are plenty of other free resources on the Internet. You do not have to become an expert in any particular area, but you can save yourself significant time, money, and other resources if you gain a general sense of when you need to address legal issues with an attorney.
A useful way to think about engaging an attorney is to compare it to how and when you might see your doctor. Though attorneys and doctors serve very different purposes and solve different problems, they both are trusted advisors who keep your communications and issues private, and they can be available to address issues proactively or reactively.
You may be a person who values preventative medicine and proactively sees a doctor for annual physicals and other regular health checkups. During these visits, your doctor assesses your personal situation and may give you a clean bill of health or advises you to take certain action (e.g., monitor your cholesterol, exercise, or get a mole further examined) with the aim of warding off more significant health issues. As with your personal health, you may engage an attorney proactively to check your “business health” and to discuss your business plan, evaluate alternative courses of action and possible consequences of each action, and to help mitigate risks of future liabilities, obligations, or expenses. For example, you may seek legal counsel proactively to:
If you miss your “annual checkup” with a doctor, you won’t necessarily be struck by illness. Similarly, just because you don’t engage an attorney proactively doesn’t mean you will make a big mistake or find yourself in a legal dispute. In both cases, however, evaluating and addressing issues up front is often far less expensive and time-consuming than having to tackle a problem after it arises.
Nevertheless, sometimes people wait to act until after a problem has arisen. They go to the doctor only after adverse symptoms manifest, hoping the doctor can “reactively” address their illness. Depending on the situation, the costs of caring for the problem at this stage can be significant, or even worse, the doctor sometimes cannot provide a cure. The same is true with legal services. If you are inclined to seek legal counsel only after problems arise, the costs likely will be much greater and, in some cases, there may not be a solution to the problem. For example, you may seek legal counsel reactively when:
Of course, as with personal health, sometimes even the most prepared businesses will face unavoidable issues or issues outside their control, and seeking counsel reactively is the only choice. But, when there is a choice and when budgets permit, preparedness usually is the right approach. And, while there is no “rule” as to when to engage an attorney, here are a few common examples of when a new or growing company likely will want to engage an attorney:
Taking risks is the name of the game for most entrepreneurial ventures and, in a perfect world, there would never be a problem. But, as with paying health insurance premiums in order to have some protection for potential problems, it’s often better to seek counsel along the way in order to help reduce the possibility of ending up with a much more expensive problem on your hands.
Attorneys are not the same. Licensed attorneys studied a handful of core legal tenets in law school and have passed the bar exam, but that’s about where their similarities end. Like doctors, attorneys have highly varied training, experience, expertise, and competencies. Whereas some attorneys have a general practice, with skills and experience across a broad array of subject matter, other attorneys have narrow and highly specialized expertise. This is similar to the difference between a primary care physician and a brain surgeon.
Some attorneys may be more experienced, have better judgment, or be much more efficient with their work product. As with other markets, those attorneys may be in higher demand and may command a higher price for their service. You may prefer those attorneys for high stakes or highly technical legal matters. In contrast, more “junior” attorneys often have less seasoning or experience and may be in less demand, and, therefore, they charge a lower billing rate. Yet, they may be the appropriate attorney for a lower stakes matter, such as an entity formation filing, or a legal research project.
In the end, attorneys are different, and determining who is the “right” attorney for your legal matter will largely be a function of what your legal matter is and what attorneys are available in the geography where you legal need is to be met.
Generally, the price for legal services is dictated by the applicable market and is driven by competition and supply and demand. In addition to these market principles, the attorneys’ rules of professional conduct require that attorneys charge only “reasonable compensation” for their services. Yet, in reality, what is “reasonable” can be wide-ranging. A few rules of thumb as to pricing of legal services are:
The way legal fees are structured and paid has changed over the years. For many dozens of years, the prevailing pricing model for legal services has been one of two types:
Though those are the two most common forms for establishing legal fees, some attorneys will offer various alternative fee arrangements, especially for startup companies. Let’s take a closer look at both the traditional legal fee structures and some alternative fee structures.
The prevailing “time and materials” model is based on a simple equation. The price for legal services is equal to the hourly billing rate of the attorney performing the work multiplied by the time incurred on the project. Billing rates vary from lawyer to lawyer, but are established based on market factors and the law firm’s particular structures as well as the unique personal attributes of the attorney, such as the attorney’s experience, competency, and efficiency. Time is usually billed in six-minute or fifteen-minute increments and invoices are usually sent on a monthly basis.
Some benefits of the time and materials model are it is simple, it lends itself to an extremely detailed accounting of the lawyer’s time, and it provides a great deal of information to clients about the work performed. On the other hand, each hour of a lawyer’s time may not be equally valuable, and although attorneys are bound by ethical rules and should be driven to be efficient to provide the best value to the client, charging by the hour may not incentivize efficiency in performing and completing a project. Moreover, each minute of an attorney’s day has an opportunity cost, so the attorney may record and bill you for small increments of time spent on your project, which is ethical, but seeing bills with such small increments may be frustrating to you.
Unlike the billable hour, a flat or “fixed” fee is a structure whereby a single price is established for the entire project, irrespective of how long the project takes. The amount of the fee will be determined based on many factors, including the anticipated complexity/sophistication of the work, the expected time to complete the project, the experience of the lawyers, and certain other variables.
An attorney may be more inclined to accept a fixed fee on projects that are predictable, well within the lawyer’s area of expertise, and don’t involve extensive negotiations with or reliance on third parties. Or, with slightly more uncertain or complex projects, an attorney may accept a fixed fee range (i.e., a fee banded by a “collar” or “cap”). In any event, it’s customary for a fixed fee engagement to include an adjustment provision, in case the scope of the project changes. And, in any case, per the ethical rules, the attorney must carefully define and identify what tasks in the project must be performed for the fixed fee to be earned.
A client may like the fixed fee, as it provides budget certainty for the project and seemingly controls the legal expense. Yet, under certain circumstances, a fixed fee may actually result in a higher legal charge than the more customary hours-based model (e.g., if the actual time to complete the project is less than the hours that were assumed to establish the fee). Furthermore, an attorney may not be incented to give more attention to the project than necessary (even while staying within the ethical boundaries) when the fee is fixed or capped.
The “deferred fee” is not an alternative to the amount of the fee, but rather when the fee is payable. With a deferred fee arrangement, the lawyer will permit the client to defer payment of all or a portion of the fee until a later date or when a specified milestone is reached. For example, a lawyer may agree to assist a client with a financing transaction, but agree that the legal fee is not payable until the client closes the transaction and receives the funds.
For startups, deferring payment until achievement of a specified milestone (e.g., closing of a financing or a revenue milestone) is most desirable, as it better aligns the company’s cash expense with cash infusion. In contrast, the attorney may prefer that payment be due at a definitive time, given the risk of the startup not achieving the particular objective. Ultimately, deferring payment may signal an attorney’s understanding of the startup’s reality and may be a good faith measure to solidify the relationship and gain more trust and work over time, but because it involves the attorney taking more business risk, the attorney may ask for additional compensation for taking such a risk.
In a contingency fee or “success fee” arrangement, the lawyer is only paid when the lawyer secures a certain outcome for the client. In litigation, the contingency or success fee tends to be a percentage (e.g., 25-40 percent) of the amount the client receives.
While the contingency or success fee may be applied in certain business transactions, the most common application is in a personal injury matter. For example, when a lawyer is representing a bicyclist hit by a car that ran a stop sign, the lawyer may agree to be paid only if the driver is found liable for the injuries caused to the bicyclist and pays the bicyclist for such damages. Such an arrangement is beneficial to the client because it aligns payment of the fee with receipt of funds, including not paying if the client doesn’t win the case. With such an arrangement, the attorney is taking far more risk by working the case without being paid along the way; however, if the client wins the case, the attorney often reaps the reward for taking such risk.
Though much less common, some lawyers may accept equity stakes in a client’s company as compensation for legal work in lieu of (or in addition to) the typical cash fee. The lawyer may receive either a grant of equity from the company or the right to buy equity in the company at a discounted rate. As a result of this arrangement, the attorney becomes a co-owner of the company, in addition to being its attorney.
While most states permit this form of legal fee, ethical rules require that the attorney tread very carefully if the attorney is to take equity in a client. For example, the legal fee – even in the form of equity – must be reasonable. Since a startup’s equity rarely has a ready, reliable valuation, it can be challenging to determine the value of the fee being charged. In any event, the amount of equity to be issued to the lawyer for services should take into account all of the same factors that a cash fee would, including the sophistication of the work, the time required to complete the work, and other relevant factors. The ethical rules usually require an attorney to fairly and clearly describe the arrangement, and to give the client an opportunity to have independent counsel review the engagement. Practically speaking, these ethical strictures may impose burdens and costs (e.g., negotiating the equity arrangement, valuing the equity, and engaging additional counsel for review) not experienced with a traditional cash-based fee.
Nevertheless, a startup may appreciate paying for a legal fee with equity. While granting equity to pay for legal fees will be dilutive to the startup’s other owners, it enables the client to preserve its precious cash during its infancy. As any startup knows, without sufficient cash, there may be no company! On the other hand, if the startup grows and becomes a thriving business and its equity value increases exponentially, it may seem that the legal fee paid (in equity) to the attorney was much, much more expensive than had the startup simply paid cash for the legal services. Of course, that’s with the benefit of hindsight!
So, if startups would prefer paying with equity, why do many lawyers not accept equity as a form of payment? There are two primary reasons. First, the ethical rules require an attorney to avoid conflicts of interest in representing you, and if an attorney is both your advocate and a co-owner, there is greater potential for the attorney’s ethical duties and economic interests to diverge or conflict. Second, when an attorney receives equity, the attorney must pay income tax on the value of the equity, just as if the attorney had received cash. The rub is the attorney must come up with cash from another source to pay tax on the illiquid “piece of paper” the attorney received.
While equity may seem like a desirable alternative fee arrangement, there are plenty of pitfalls and shortcomings for both attorneys and clients, so it should not be established without careful consideration and discussion.
Today, there are more options for legal and related services than at any other time in history. As mentioned above, there is no “one size fits all” solution for legal needs; what may make sense in your startup phase may not suffice when you have 100 employees.
The traditional option for legal services is the law firm. Law firms range in size from one-person “solo” shops to global juggernauts employing thousands of attorneys. Regardless of the size of the firm, firms may specialize in one area of law (e.g., immigration law) or may provide assistance covering all legal needs.
No matter the size or location of the law firm, the value of the legal service to a client is often the same and characterized as the solution provided divided by the cost of the service. The solution likely will be a combination of the competency and judgment of the attorney, speed with which the solution was delivered, and quality of the communication with the attorney, etc. There likely is not one single characteristic that will make one firm “right” for you and it’s impossible to accurately characterize each type of law firm, but the following identifies common characteristics of different law firms:
Sole Proprietor (or few attorneys)
Large National/Global Firms
While the legal services industry has not been transformed or disrupted as much as many other industries have, the Internet, various technologies and globalization have combined to produce new and alternative means of locating and engaging attorneys, obtaining legal information and advice, and generating a variety of legal contracts and instruments, among other services.
Websites like Lawdingo.com, HireAnEsquire.com, and UpCounsel.com seek to connect prospective clients with different legal service providers via modern, web-based interfaces and platforms. These services serve as a conduit for locating and engaging legal service providers, often including geo-location, vetting of attorneys to varying degrees, and providing Yelp-like reviews. Despite advances touted by these websites, at the end of the day, you will still need to engage a flesh and blood lawyer. You will also need to gauge your own comfort with the attorney, the attorney’s competencies, their availability and pricing, and then also pay for the legal service they provide.
Next, as mentioned above, an attorney must be licensed to practice law within the applicable state and/or country. Despite this barrier and other obstacles, technology offerings have made their way into the market to offer certain automated solutions without engagement of an attorney. These services state that they are not engaging in the practice of law (or have licensed attorneys behind the scenes). Websites such as LegalZoom and RocketLawyer advertise services that primarily boil down to document creation services, whose prices often seem less than that of an attorney. For example, need an LLC agreement? Complete a few relatively simple forms on these sites and out comes an executable agreement on the other end. These websites may even help you file the document with governmental agencies.
Though these services may be appropriate in certain circumstances, some drawbacks may not be immediately obvious or could be overlooked by a cash-strapped startup. For example, you may easily complete a document to form an S-corporation, but how did you know that was the right entity for you? What if an investor wants to give you $1 million, but can’t invest in an S-corporation? Or, what if you formed an LLC with a basic formation document, but you now have an investor who demands significant changes to the LLC before providing funding? It is not to say an automated form may not be appropriate in some circumstances, but you should be mindful that you are not getting solutions based on the wisdom and judgment of an attorney who has carefully and critically analyzed your specific plans, facts, and circumstances.
There are likely several questions you will want answered before engaging an attorney. If you have received a reliable referral for an attorney, some of your questions may have already been answered. In any event, any attorney should answer the following for you:
Who actually will be providing the service? You may have been referred to or connected with an attorney who you like and trust. Don’t immediately assume it will be that attorney who maintains the relationship with you and performs the services on your project. You’ll want to know who will be the contact point and who will be performing the work.
Are there any obstacles for the attorney to complete the project in a timely manner? Are there any obstacles for the attorney to complete the project in a timely manner? Attorneys normally have many clients and many projects going at any one time. A seemingly fantastic attorney, who is overly busy and unable to provide appropriate and timely attention to your project, may quickly become unsuitable. You should know if the assigned attorneys have the bandwidth to complete the project timely and efficiently.
Will there be any changes to the fees quoted? You should know any foreseeable changes to the fee structure that you’ve been quoted. For example, an attorney may quote a billing rate and offer a discount, “free hours,” deferral of payment, or other alternative arrangements. That may be a welcome offer! But, if so, you should ask what fee structure will apply to future work, such as financings, acquisitions, an exit event, or other material projects, and know well in advance whether the attorney will apply “premium rates” or other structures in order to “catch up” for the earlier discounts or give-aways. In order to truly assess the fees the attorney will charge you, you will need this information.