What are typical legal fee arrangements for bootstrapped startups?

QUESTION:

I’m curious, what are typical legal fee arrangements for a bootstrapped California startup like mine.

ANSWER:

Naomi Kokubo

Naomi Kokubo

by Naomi Kokubo, Cofounder of Founders Space

I’ll talk about Silicon Valley, since that’s what I know best.

The hourly fees are high in Silicon Valley. They usually range from between $200 per hour on the low end to $1,000+ per hour on the high end.

Many Silicon Valley law firms realize that few bootstrapped startups can afford $600 or so per hour in legal fees, so they will offer discounts or other creative ways of helping you get started.

For example, law firms like Orrick (a sponsor of this site) offer seminars, workshops and group sessions where they give free legal advice, startup toolkits and templates.

Silicon Valley law firms may also defer all payments until you’re funded, if they believe that your startup has a very high likelihood of obtaining venture funding. They usually cap this at around $25k or so in legal services — sometimes less, sometimes more.

I hope this helps give you some idea.

You may also want to check out:

Orrick’s Startup Toolkit:

http://www.orrick.com/practices/corporate/emergingCompanies/startup/index.asp

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Comments & Advice:
  1. There are really two distinct models that have emerged for startup legal fees in recent years. As their billing rates have risen, roughly doubling over the last decade, large firms realize they can’t expect bootstrapping startups to pay their fees as they go. To their credit, firms like Orrick have shown flexibility by often agreeing to defer payment until the company has been funded (or generates enough cash flow from operations). However, when the bill comes due, it’s at rates that can range from $300/hour for junior associates to $600+ for partners, which adds up fast. For example, a traditional Series A financing round with VCs can run up a $40K legal tab using one of the big firms, and that doesn’t include investor’s counsel fees (which the company is generally asked to pay as part of a VC financing) that can range up to $25K or so.

    The alternative is to go with a smaller firm with a leaner cost structure that offers dramatically lower billing rates than the giants. There aren’t many of these firms out there with the breadth and depth of expertise in representing tech startups on par with the largest firms, but many of them (us) spent years learning the ropes at one or more of those firms before striking out on our own. There are many other tradeoffs than can be discussed here, but in terms of fees, the key point to make is that a smaller firm will generally cost founders less (often far less), and show more flexibility in terms of the actual cost of getting things done, but as a startup of sorts, a small firm needs to manage its cash flow carefully and may need to get paid something up front (or in the first few months) rather than deferring the entire tab.

    I suppose you could summarize all of the above in one very general sentence: “Pay more later (big firm) or less sooner (small firm).”

  2. DanaHShultz says:

    Antone’s comments are consistent with what I have seen and are well-stated. I will add a couple of thoughts from a different, but closely-related, perspective:

    As a solo, I am not competing with large firms. In my experience, startups that select solos and small firms do so because they are looking for a more-intimate relationship with legal counsel than typically can be achieved with a large firm.

    Conversely, there are startups that perceive that having a big-name law firm will increase the likelihood of being funded (especially by VCs) and of being taken seriously in the marketplace, so they have no interest in working with a solo or small firm, whatever the fees or payment plan.

    Summarizing in a more-abstract way, I believe this is an area where, as is generally the case when selecting a product or service, “People [often] buy on emotion and justify with logic.”

  3. Soody Soody says:

    What I recommend, is to think outside of the box. Many smaller firms work and have common clients with the larger firms. Each firm or service provider may offer a different advantage to you and your company and depending on who is on your team and you own business savvy, they can all work in synergy to your advantage.

    Often, smaller firms are funded by “partner” level experienced attorneys who charge at much lower rates were they still at the large firm. One obvious reason is that they have lower overhead so they can pass on the savings to their clients. Also, they are more flexible and depending on their work style, may choose not to nickle and dime you for every minute that they spend on your company’s business.

    As to deferred payment, one thing to consider is deferring for corporate work is different than IP work … most (not all) larger firms defer payment for corporate work and not necessarily IP work. And if they do, a single patent application may eat up all of that deferred amount. And given that a start up’s early innovations are, often, its most valuable asset, it is important that it is “very well drafted” with a lot of strategy in mind.

    Smaller firms, need (as stated above) cash flow but if you have a good business plan they may be willing to do a hybrid billing arrangement where portion of the fees are paid in cash and the other are deferred in exchange for equity as the consideration for that deferment and taking the risk. But then, your dollars will go a much longer way.

    Also, the practitioners from smaller firms are no less connected (due to their experience) than those in larger firms and have the flexibility to make similar if not more introductions for you.

    Remember, as stated above, there are many ways to get the best value for your company’s dollars while remaining fair to those who help you achieve your business goals.

    As an innovator who is starting a new business, apply the same innovative mentality in selecting your business partners.

  4. If you believe what is posted on VentureBeat, the average bill for series A financing is over $50,000 and Silicon Valley attorneys made $37 in 2011 from startups alone. This is YOUR money they are taking!!! Why aren’t you PISSED OFF?

    ………. http://www.Facebook.com/VentureDocs …….
    ………….Lawyer/10 = VentureDocs ………

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