David McMahon & Jeevan Subbiah
As we continue our startup blog series, How to Select New Counsel and Manage Legal Fees, we focus on law firm size in the process of hiring an attorney.
There is no “one size fits” for whether a startup company should select a big or small law firm. Strong arguments can be made for both. It is very important to prioritize your company’s needs, budget and comfort level. Common myths, such as big law firms have more expertise and therefore charge higher rates, or small law firms are more responsive and cost effective, are not always true. You should take advantage of free initial consultations with counsel to get to know potential attorneys, address key issues and find counsel that meets your specific needs.
Go Big or Go Home? All Services Under One Roof
Large firms may have the capability to handle multiple diverse projects for you at a quicker pace. They also may have the expertise to work on different types of projects such as real estate, employment law, contracts and litigation. This may be convenient for you and also assist you in managing your legal billing and accounting. However, the legal field has become extremely specialized and even large law firms do not always have all the legal services you may need under one roof. In contrast, lawyers at smaller firm may have a strong enough network of legal contacts to reference you to other capable lawyers. They may also be more objective in finding you appropriate help at other firms since they have no incentive to steer potential work towards their firm.
The hourly rates can vary significantly at different firms, and will dramatically affect the cost of your legal work such as entity formation. Large firms generally have greater overhead, including higher rent and salaries and more general expenses, resulting in higher billing rates (we will address the issues concerning hourly rates in detail in a future post).
Who Is Working on Your Case?
You should be concerned with the experience level of the attorney assigned to work on your case and transaction. It is important that you address this issue at the onset, especially with larger firms. At many firms, lawyers will jointly work on a case and bring in other partners, associates and paralegals to assist. Sometimes, you can save money by having talented novice lawyers working under the supervision of experienced attorneys. You can discuss these issues and even limit who works on your case, whether based on billing rate or simply due to experience. Senior lawyers at smaller firms may also have more time to work on your case due to smaller hourly billing requirements and less pressure to work on larger, high profile cases. In either case, it is helpful to get to know the attorneys who are representing your startup company.
National Reputation and Offices in Multiple States
If your company requires legal counsel with a national brand and name recognition or the ability to work in multiple states, it may be to your advantage to work with larger firms.
Raising Money - Name Recognition in VC and Investment Banking
With the newly passed Jumpstart Our Business Startups Act (the “JOBS Act”),startups may find it easier to raise money through public markets. Large law firms or specialized firms can help a startup raise money through introductions to key contacts in the venture capital, investment banking and finance communities. Some smaller firms may also have these contacts. Some firms may waive your legal fees until you raise money, especially if they work with you on closing a round of funding.
Reputation for Financing, Going Public or Partnerships
Large or specialized law firms may also have the contacts and reputation to help take your company public or to work towards selling your company to a larger company. The recently enacted JOBS Act may also allow a privately owned startup to stay private longer by boosting the number of investors allowed by the Securities and Exchange Commission (“SEC”) from 500 to 2,000 (excluding employees as shareholders) before the costly process of registering its shares with the SEC. Large or specialized law firms also may also be able to assist you in securing financing or developing partnerships. Once again, some smaller boutique firms may also have these contacts.
As you legal needs grow, it is prudent to seek advice from outside litigation management/transactional counsel (a different lawyer from your primary legal counsel) on how to select attorneys to handle your various legal tasks. While it may seem counter intuitive to hire another lawyer, even a few hours with an independent litigation management lawyer can greatly assist you. Their expertise can help you envision various legal scenarios, ensure that correct legal billing guidelines, budgeting expectations and technology are implemented, and manage your legal costs to save money in the long run.