Friday, January 24, 2014

How Much Should a Startup Pay in Legal Fees?

A fair percentage of my legal practice consists of representing early stage companies (i.e., startups).  Many founders approach me because they want to form Delaware corporations and seek funding from VCs or angel investors.  The question of legal fees is often a painful one for these clients.  Many of them have already left their full-time jobs to dedicate themselves to their startups, others have switched to part-time work and make just enough to pay their bills.  Legal costs often come as a shock.

I fully understand the predicament of my clients, and yet here I am, trying to run a business (i.e., my legal practice).   So, this is what I think about the legal fees involved in representing startups.

First, I want to applaud those startups that understand that they should seek legal representation and not do it all themselves (for example, through Legal Zoom). Although many documents are standard, there are always modifications and special situations to account for.  Also, the value of a lawyer comes from advice rather than the preparation of documents that have already become pretty standardized.  A fair number of law firms and incubators have released their model startup and funding documents, so as I said, the value of legal representation is not in the documents, but in the legal advice that takes into account specific situations.

In case you are interested, here are several sources:

Startup documents - Docracy, Upcounsel, VentureDocs.
Financing documents - Y Combinator, NVCA, TechStars.      

Second, I believe that startup lawyers should offer fixed fee packages.  For example, I offer four.  There is a basic package that takes care of the incorporation and related matters, stock issuance, IP transfer agreements and invention assignment agreements, etc.  There is another package that includes the basic package plus employee incentive compensation plan and related documents (although not clear to me why a startup would need it right away).  The third package is the basic plus trademarks.  And the final, fourth package, includes all of the above. Offering fixed fee packages enables founders to control legal costs and takes away ambiguity.

Third, I agree with Fred Wilson here that basic incorporation and a seed financing round should not cost more than $5,000-$6,000 (unless of course the lawyer bills on an hourly basis at $600+/hour and/or there are complicated negotiations).  The $5K-$6K price is fair if the parties agree to use one of the sets of model documents I referred to above and if the investors do not have separate representation.  I was recently involved in a deal where the company had to pay a $20,000 fixed fee for a seed round of financing (below $1 million) that was done based on one of these model documents.  I think they overpaid.

Finally, I just want to say that not all deals and startups are cookie-cutters. Many companies face their specific issues (whether these are tensions among co-founders or something else) that do not fit into any fixed fee package.   I think of good business lawyers as "preventive care" specialists, who can anticipate and avert a problem and help ensure that your startup survives and succeeds.  In that case, legal costs are worth the expense.

 This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

1 comment:

  1. This year my boss has planned for our company to expand and to build all over the country. He has all of these things he's hoping he can do on the land, but needs help with answering some questions from a legal standpoint. What do you think he should do in order to get this help? It sounds like you've had a bunch of opportunities to work with business men, I was thinking maybe you could help.