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What Are Standard Legal Fee Arrangments For Un-Funded Startups?

Q:  My question is “What is a reasonable compensation package for a startup lawyer/firm”?  I’m now starting a company in Seattle and have been talking with an attorney in Seattle.  After 2-3 meetings, we got around to his compensation proposal and I was a bit shocked. I thought it would be a reasonable equity piece (0.5 – 1.0%) in exchange for deferred/reduced compensation.

The proposal was:

* A max monthly fee ($4k/month, if expenses warranted, with excess carried to future months)

* 2.4% Equity, vesting monthly

He told me that both were negotiable, and that the 2.4% was usually for people where he’d need to make all of the funding introductions, and where the founders were less experienced. But, still, it makes it hard to negotiate.

If there’s a standard/reasonable level, I’d love to know what it is, to save time on this point and get to the important matters (quickly raising angel round, and building product/shipping gauging customer interest)

Thank you for any/all help,

A: (Jason).  This is shocking – I agree.  I took the liberty of checking in with a Senior Managing Partner at a major Silicon Valley firm (which presumably has higher costs of operations, not lower) and her was his response:

“Jason,

First, $4k max a month is hardly much of a deferral. That is a pretty high legal run rate for a non-VC backed (presumably Web 2.0 or 3.0) early stage company.

My package is usually the following:

If you are looking for VC money to get it started, don’t incorporate or incur any legal costs (hence no deferral needed) until you get a term sheet. Then, standard rates, no deferral.

Assuming you are self-funding/angel-backed for a while and are really tight on cash, and I think you are worth the risk:

1. Fixed fee for incorporation, founder issuance, all initial stuff $5k.

2. Actual costs, usually not more than $3-4, for the angel bridge note financing.

3. Deferral of up to a set amount, perhaps $15-20k, until the earlier of a VC financing, sale or some future date, usually 9-12 months out.

4. In exchange for the deferral, we get 0.30-1.00% of the fully-diluted equity, at founder price.

5. If we need to continue to defer after the set date arrives, agree in advance that they will give more equity 6. Also get right to invest alongside the VCs.

VC introductions, thoughts on the business plan are included, obviously.”

- So it looks like your lawyer is above market.  The person who sent me this note competes with all the other big named silicon valley firms and knows what the competition charges as well. 

June 2nd, 2007 by     Categories: Advisors    
  • http://venturehacks.com Nivi

    I think a lawyer is entitled to ask for whatever he wants in return for deferring comp.
    But I generally don’t like to give them common stock. I think a right to co-invest in the current or next round is sufficient.
    Entrepreneurs should also understand that the lawyer is also doing himself a favor by making intros to VCs.

  • http://www.ibakesale.com JTreiber

    first response: WOW! this is pretty ridiculous. When we selected a law firm for OnCard Marketing, we interviewed a bunch of firms out in CA, NYC, and VA. The consensus was that the NYC firms simply don’t work with start-ups or just bill them whatever they’re billing GE or IBM. Not ideal. We ended up going with Perkins Coie out in Menlo Park because the lawyer on our account is a rock star and their deal, much like that of other Silicon Valley firms, was no minimums and deferred comp up to $30k when we raise our series A. We’ve had them do a bunch of work on employee agreements and partnership/licensing agreements, which we settled up for, but most of the expenses have been deferred. They are asking for no equity in the company in exchange for deferred comp, since that’s just standard operating procedure for SV law firms. They do reserve the right to invest along with VCs in our series A, which we are hoping to do mid-summer. I think the guy in this post was getting hosed, period. Look for another lawyer, preferably one that actually works with start-ups like Cooley Godward, Wilson Sonsini, or Perkins Coie. Good luck!

  • http://www.nosnivelling.com Dave Schappell

    Thanks so much for this posting, and for the digging you did — I’ve been searching for very similar information as of late and wasn’t able to find it on any of the leading blogs/boards (this one, Startupping, etc.).
    Hope you’re having a great weekend!
    Dave

  • http://slashstar.com/blogs/tim Tim Marman

    Obviously equity is a big piece of early stage assets, but on the legal side there can be conflict of interest issues with taking it in lieu of payment. My professor in a course specifically about representing technical startups strongly advised us never to take equity stakes.
    Obviously, that’s not always going to be the case, but perhaps you can at least factor this info into negotiations.
    2.4% equity does seem incredibly high for basically just putting a high $4k/mo cap on fees. You should have a carefully negotiated shareholder’s agreement – and obviously this is one place where the conflict of interest is clearly evident. (I.e., you probably want different restrictions than issuances to founders and employees, different vesting schedules, etc).

  • http://www.medicalspamd.com Jeff Barson

    Seems like lawyers counting on inexperience and a small market. It also seems to me that the lawyer is completely writing this business off as a no-go. Certainly I’d never do business with a lawyer who wasn’t completely on my side from the get-go.
    (Seems Ilove the hyphen.)

  • Chris Rowan

    Emotions about this dubious legal fee arrangement caused someone to take their eye off the ball on an important issue here:
    Waiting to file the corporation is a very bad idea.
    If you start the company concurrently with receiving a term sheet with an implied valuation, that makes cheap founder stock invalid.
    File the company ASAP. It’s cheap and anyone can do it themselves.
    The more time between founding the company and getting that first term sheet, the better in terms of justifying cheap founder stock.

  • Chris Rowan

    Emotions about this dubious legal fee arrangement caused someone to take their eye off the ball on an important issue here:
    Waiting to file the corporation is a very bad idea.
    If you start the company concurrently with receiving a term sheet with an implied valuation, that makes cheap founder stock invalid.
    File the company ASAP. It’s cheap and anyone can do it themselves.
    The more time between founding the company and getting that first term sheet, the better in terms of justifying cheap founder stock.