Fred Wilson, the always inspiring venture capitalist, posted yesterday A Challenge To Startup Lawyers:

We closed an investment recently. It was a seed round. Our firm priced the round and we were joined by a number of small VCs and a few well known angels. We agreed to close on a standard set of "light preferred" documents without negotiation. There was no investor counsel on the transaction. We just signed the standard documents which were tweaked to reflect the round size, share price, and board provision in the term sheet.

The legal fees for this transaction were $17,000. I talked this over with the entrepreneur and we agreed to pay the legal bill. We are both big fans of the law firm involved and felt they earned their fees on this transaction.

But I’ve been thinking about this situation over the past week and I’d like to issue a challenge to startup lawyers. When you have a seed stage company that needs to incorporate and close a seed round where all parties are willing to close on a set of standard docs without negotiation and where the investors agree to go without counsel, I think the legal fees for such a transaction should be $5000 or less. I just don’t see why it should cost more than that.

Down in the comments, DGentry asked:

Why have a lawyer involved?

If the documents are standardized and previously vetted, then what value does the presence of a lawyer provide?

To which Fred replied, "maybe that’s what we have to do. but there are filings to be made, the charter, the state forms, etc. i think you need someone to do this stuff for you."

There’s an unspoken requirement in Fred’s reply: Fred doesn’t want just anyone to do that "stuff," or else he’d ask someone at his office to do it. He wants a lawyer to do it.


Answering that "why?" also answers why it costs so much for lawyers to things that, on the surface, seems simple and routine.

Legal ethics and malpractice liability aren’t designed around selling specific, limited legal work as a commodity. The rules of conduct don’t talk about attorneys’ duties while they engage in narrow "tasks" or "acts" or "assignments" or "errands," they talk about duties for broadly-defined "situations" and "matters" and "representation." Moreover, if there’s some confusion between the lawyer and the client about the scope of the representation, then contract law and professional liability law usually defers to the client, and construes the scope of the representation against the lawyer.

Put another way, you can ask a lot of mechanics, marketers, plumbers, software programmers, gardeners, to take a quick look at something, and they can give you a quick answer (while grumbling, rightfully so, that you get what you pay for), but the same isn’t true of lawyers or doctors.

When you hire a lawyer, it’s like hiring a doctor: in terms of ethics and liability, the lawyer becomes responsible for most everything going on from that point forward. They thus have to go back through everything you’ve done to check for red flags, just like how a new doctor has to do a full history on you regardless of how many times you’ve told other doctors of your history, and then they have to speculate about problems that might arise in the future.

No offense to Fred intended, but I know his type. Just as lawyers have a tendency to be negative and to spend what seems to be too much time on details, entrepreneurs and investors routinely spend months or weeks hammering out a deal and then call a lawyer to "finalize" it in the next few days or hours, sending the lawyer scrambling to figure out what the deal is even about, not to mention do their job in reviewing the details and contemplating the consequences. Fred wanted a lawyer to do his deal because he didn’t want just want the secretarial task of filling out the documents, he wanted a professional to calmly review the situation, carefully consider possibilities, and then candidly advise on the matter — all of which, if done right, takes time and thus money.

Some lawyers are trying to change that and offer piecemeal representation (for a reduced fee), but the law governing their liability and their ethical duties hasn’t really changed. If you want something less than that degree of service and responsibility, then you need to do-it-yourself. There’s not much of an in between.

I am, of course, not the first person to comment on that sort of proposal, and there’s been a law blog debate lately over "Shpoonkle," a word I can’t even guess how to pronounce ("sh-POON-cull?" "SHIP-uncle?"), a law student’s vision of eBay for legal services. The ABA Journal has a good roundup of the comments on it by Scott Greenfield at Simple Justice, Susan Cartier Liebel at Solo Practice University, and Robert Ambrogi at LawSites, the latter of whom notes numerous failed attempts to pull this off in the past and how, “If we have forgotten them, it is because they failed.” 

I think they failed in part because of the absence of any genuine market for them. Who wants half-baked advice on an investment in a startup company, or, for that matter, a will, or a lease? It’s like asking who wants an operation from the discount surgeon. There’s a market for good legal representation on all of these matters; anyone unwilling to pay those market fees is probably well-advised just doing it themselves. It beats paying half-price for no-value.