Chapter 3 - Selecting & Working with an Attorney

A strategically astute attorney can:

enhance the bottom line of the enterprise by helping craft the best structure for the business, providing sound advice regarding the legality of various possible courses of action and acting as a sounding board for both business and legal issues, thereby helping the management team identify and seize opportunities, marshal and redeploy resources, and manage risk

Large law firms and small law firms will differ mainly in two significant ways:

• First, large firms typically employ a variety of specialists, whereas smaller firms often feature generalists.

• Second, large and small firms differ in their costs and billing procedures.

Referrals =

to ask friends, colleagues, and other entrepreneurs in the geographic area who have used a particular law firm and attorney for similar purposes

The choice of the best attorney depends on:

the type of business involved and the entrepreneur’s own business expertise, personality, and skills

Who can also be a good source of referrals?

Venture capitalists

The entrepreneur should find out:

what others like or do not like about their attorneys and what they consider the most important factors in an effective working relationship & they should also ask what bad experiences others have had with a particular lawyer or firm

Community groups or universities may also be able to:

provide good leads

Factors many entrepreneurs consider important in deciding which attorney to retain include the following:

• Experience

• Personality

• Role of Junior Attorneys and Paralegals

• Cost

• Efficient Use of Technology

• Timeliness in Responding to Messages

• Business Acumen and Understanding of Industry

• Information Brokerage and Network

Personality =

look for attorneys who are good listeners, communicate well, understand what the entrepreneur wants from the relationship, and are honest and trustworthy

Role of Junior Attorneys and Paralegals =

the entrepreneur should ask to meet with any associates, paralegals, or others who will be making significant contributions to ensure a good personality fit with the founding team

Experience =

It is especially important for cash-constrained entrepreneurs to ensure that they select an attorney with broad experience representing startups

Cost =

Sometimes, however, an attorney who charges less by the hour may take longer to accomplish a given task because he or she is moving up the learning curve on the startup’s dime. In that event, the “cheaper” lawyer can end up costing more than the “expensive,” but experienced, one. An appropriate way to assess this component is to comparison shop by asking each candidate how much the firm typically charges to do certain basic legal work, such as drafting incorporation documents. The entrepreneur should also ask candidates about their recent experience in drafting such documents and ask how much time they think it will take to create those documents for the new venture.

Having an attorney who:

watches costs carefully and has a good sense of the appropriate amount of time to spend on a matter is critical

Efficient Use of Technology:

Having appropriate computer systems and software and a robust set of sophisticated and customizable forms allows attorneys to rapidly retrieve and modify documents and easily customize standard agreements and forms, thereby creating significant cost savings for the entrepreneur

Timeliness in Responding to Messages:

A timely response from an attorney, ideally within a day, is critical

Business Acumen and Understanding of Industry:

For some entrepreneurs, especially those who do not have a business partner, it is important to have an attorney with whom they can discuss ideas and review the business plan. Rather than simply executing instructions given by the entrepreneur, the most valuable attorneys work with the entrepreneur to determine the best course of action. Entrepreneurs involved in very technical ventures should search for an attorney who understands the technology and industry involved and is therefore familiar with the technical and industry jargon.

Information Brokerage and Network:

Experienced attorneys can serve an important information brokerage function and often have personal and business connections that an entrepreneur can tap

Time-Related Billing Costs:

Law firms typically charge for the time spent by attorneys and paralegals on the client’s affairs

Time-related billing costs fall into one of four categories:

hourly fees, flat fees, contingent and deferred fees, and retainers

Hourly Fees =

Law firms generally charge on an hourly basis

• prices can range from $200 to more than $1,000 per hour

For hourly fees, it is important to:

ask which services are considered billable because billing practices can vary significantly from firm to firm

Senior attorneys are typically more adept at:

looking at the big picture and setting up organizational and deal structures

mid-level associates are typically more efficient at:

preparing documentation

The junior associates gain experience by:

working on assignments under the supervision of more experienced attorneys

Flat fees =

the attorney will charge a fixed rate, barring unforeseen circumstances, no matter how much time is spent on the matter

Flat fees can be charged for:

discrete tasks, such as drafting a specific contract or registering a trademark

Contingent Fee =

the attorney receives a fixed payment or a certain percentage of potential cash flow when a certain event occurs

Although contingent payment structures are most common in:

trial settings (such as personal injury cases), where, for example, an attorney may receive 40% of the settlement, they can be used in many noncriminal cases

Fee deferral =

the attorney continues to bill at the normal hourly rates but does not expect payment for the bulk of the fee until (and perhaps unless) the business receives venture capital or other investor funding

Because of the risk this arrangement poses to the law firm, most firms will only consider fee deferrals for:

a startup with a financing event on the near horizon

Retainer =

up-front payment

Non-time-related costs may include:

charges for photocopying, online research through legal subscription services, scanning, faxing, long-distance telephone calls, messenger service, travel, and filing fees

it may make sense for the entrepreneur to prepare a first draft when:

When preparing letters of intent, term sheets, contract proposals, portions of patent applications and certain other types of documents

The attorney should review the draft to:

ensure legal compliance and confirm that all material legal and business issues are adequately covered

Entrepreneurs can also save money by finalizing standard employment forms, such as:

offer letters, assignment-of-invention agreements, nondisclosure agreements, and certain stock option agreements

It is a good idea to keep the attorney informed of important business issues related to the startup even when they seemingly have insignificant legal implications because:

Not only might the entrepreneur have failed to recognize the legal implications but also, more important, keeping the attorney informed about the company’s progress keeps him or her excited about the client and keeps the entrepreneur’s business in the forefront of the attorney’s mind

Especially when first starting to work with a law firm, the client should ask for:

a price estimate or upper price limit on the proposed assignment

Why is asking for an estimate important?

• First, as when making any purchase, it is always a good idea to get a sense of how much it will cost.

• Second, it forces the attorney to work up a reasonable price. To stay competitive, a law firm will not quote an outlandish price for a given transaction.

• Third, if the task takes longer than anticipated, the law firm may absorb the extra costs rather than charge a higher price than originally quoted.

When first negotiating the fee structure for the business, the entrepreneur should ask to see a:

sample bill

Ideally, the sample bill should:

be detailed enough to show the client for what he or she is being charged — The descriptions of work performed should not be vague, such as “produced documents,” but should contain specifics about the types of agreements being drafted

What is the standard billing time for most law firms?

in tenth-of-an-hour increments

The entrepreneur should examine each invoice closely:

If the amount of time billed for a particular task seems out of line, the entrepreneur should challenge the bill

The client might also specify that the firm will:

• not bill for telephone calls shorter than a certain number of minutes

• not charge for express-mail or air-courier costs unless such services were requested by the client

• provide a detailed description for any charge over a certain number of minutes.

What are the parts of working cost effectively with an attorney?

• organization

• drafting

• being proactive

• the billing process

Communications between a client and a lawyer are generally protected by the:

attorney-client privilege — when the client is seeking confidential legal advice

in the event of a legal dispute, a 3rd party cannot:

compel the client to disclose privileged communications through discovery or testimony

in order to qualify as “privileged,” a communication has to meet certain requirements, including:

being between a lawyer and that lawyer’s client

Accordingly, when retaining an attorney, it is important to be clear about:

who the client is

If the client is a corporation, then:

the privilege belongs to the corporation and not the officers, other employees, or the directors

The corporate privilege protects the lawyer’s communications with any company employee as long as:

the subject matter of the communication relates to that employee’s duties for the employer and the communication is made at the direction of a corporate superior

under the Sarbanes-Oxley Act, attorneys representing public companies are required to:

report evidence of a material violation of securities laws or a breach of fiduciary duty to their client’s general counsel or CEO

The attorney-client privilege applies only to:

legal advice, not business advice

• It also does not protect client communications that are made to further a crime or illegal act

attorney-client privilege can be lost if:

the client shares the attorney’s advice with outsiders or permits outsiders to listen in on a discussion between the client and the attorney