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The Shift to Electronic Signatures on Contracts

It’s always entertaining to tell younger attorneys about the inefficient ways that lawyers did their jobs back in the day, without modern technology (and probably extremely boring for the younger attorneys to hear those stories). For example, as a junior attorney, I recall that email was just starting to come into common usage, and the job of the paralegal often involved early evening distributions – sending out FedEx distributions of revised drafts of documents before the 9pm overnight delivery cutoff. One aspect of current legal practice that will likely be looked at in the coming years as equally antiquated is the obtaining of manual signatures on contracts.

e-signaturesThis Slate Explainer has a short but informative history of the use of signatures on legal documents. Technology has made the process somewhat more streamlined (fax machine, then PDFs), but signatures remain a practical impediment to quick completion of agreements. In 2016, there are still delays when a party cannot immediately sign an agreement as a result of being, for example, traveling without access to a scanner. Attorneys with good organizational skills know to obtain and hold onto signature pages from a client who is about to travel ahead of a closing, but there is more stress and scrambling than there needs to be.

Fortunately, the technology is improving further, as we speak, via electronic signature services like DocuSign. The federal ESIGN Act, enacted in 2000, provided broad recognition of the validity of electronic signatures, which paved the way for these types of services. They allow parties to sign agreements easily via any internet-enabled device, without a scanner or fax machine, so really the only time an agreement can’t be signed is if the signatory is on a plane and doesn’t want to spring for wi-fi or is deep in the wilderness. My clients are increasingly requesting that these services be used, and I expect them to be widely adopted in the coming years. And the coming generation of new corporate attorneys can laugh at the likes of me for having spent time chasing down manual signatures.

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Does It Help Startups for Founders to Cede Control?

The Wall Street Journal reports on a study finding that startups that have a founder staying on as chief executive or chairman past the first two years following inception have a significantly lower valuation, on average, than companies who replace their leadership during that period. The study’s author attempts to explain the difference in valuation by focusing on the relative attributes of founders versus executives that are brought on later. In other words, founders may have the inspiration to get the startup conceptualized and off the ground, but professional executives have a different and necessary skill set that the company needs at a later stage.

Should vendors provide services in exchange for equity?

This may be part of the explanation, but it seems to me to be confusing correlation and causation. There may be a reason other than the qualities of the founders themselves that account for the different performance. One possible alternate factor is the manner in which startups are funded. Startups that receive venture capital funding are, in my experience, more likely to see a change in leadership, sometimes imposed by the venture fund as a condition to investment. On the other hand, startups that are funded by less heavy-handed capital sources (friends and family money, bank loans, etc.) are more likely to have the founders continue in their role indefinitely.

Venture capital firms can contribute far more to a company’s success other than providing new executives to replace the founders. Particularly if the firm focuses on a specific industry, the firm will have seen and invested in many similar companies and will be able to provide useful advice that would not be available to startups that rely on non-VC funding. Such expert guidance from investors could account for significant differences in company valuation. In addition, VC firms generally invest more than a startup needs to spend immediately, so the simple fact of there being more cash in the bank could lead a VC-backed startup to have a higher valuation than one that isn’t VC-funded.

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Whether to Pay Profits out to Shareholders

Whether to Pay Profits out to Shareholders | Andrew Abramowitz, PLLCMatt Levine writes in Bloomberg View about Facebook’s announced $6 billion stock buyback program (scroll down in the newsletter past the other topics). Basically, Facebook’s business generates far more cash than the company knows how to put to use anytime soon, so it is returning the cash to shareholders by buying back the shares of those who want to sell. This is the corporate finance version of a first-world problem – many of my early-stage clients burn through cash and constantly need to think about fundraising (Facebook was that type of company at one point) – but for those companies generating large profits, what to do with excess cash is an interesting issue.

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Crowdfunding as a Time-Saver

Equity Crowdfunding | Title III CrowdfundingErnest Holtzheimer blogs with some statistics about how the new JOBS Act-authorized forms of securities offerings are being used following enactment. Both the revamped Regulation A and new Regulation Crowdfunding have seen somewhat underwhelming use to date. The most common objection to Regulation Crowdfunding, the $1 million offering limitation, has led companies to consider using Regulation A, which is more involved compliance-wise. Legislation to increase the offering cap for Regulation Crowdfunding might have a better chance of enactment with the coming all-Republican government, with its anti-regulatory bent. Of course, companies that are willing to limit their investor base to all accredited investors aren’t subject to the offering limit.

Holtzheimer mentions an advantage of crowdfunding that is less remarked-upon than some others: that crowdfunding can help save company founders time, as compared to more traditional forms of investment like angel investment and venture capital. Traditional capital-raising involves spending an enormous amount of time with potential investors, explaining the business, responding to due diligence requests, etc. In addition, when there is an investor syndicate rather than just one investor, the different members of the syndicate may have different requests/concerns, so the process is like herding cats. In contrast, at least in theory, with crowdfunding and Regulation A, once the proper disclosure is prepared and posted for investor review, the investors make their choices, and if there’s enough interest, you just go ahead and close.

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Recent Trends in Financing Startups

start-up-financingThe Wall Street Journal recently detailed trends in how startups are financing themselves. If you don’t have a Journal subscription, this article will likely be behind a paywall, but to sum it up, young businesses are using bank loans and home equity loans less than in the past, owing to continued cautiousness from lenders following the Great Recession. Instead, they are relying on their own savings and family loans and high interest personal credit card debt.

Bank loans to businesses still exist, but they typically require two years of business activity. This is of course no help to businesses that require a cash infusion to get started, though it can be helpful for more established businesses who want to expand their business or to smooth cash flow. Personal credit card debt is relatively easy to obtain, but the interest rates are high, and if your business fails, you’re in a far worse position than when you started.

For those who want to start a business but don’t want to potentially blow their personal savings on a venture or be stuck with high interest credit card debt, the lower risk alternative is to sell equity to outside investors. You are giving up some of your business’s upside, but receiving financing that does not immediately (or perhaps ever) need to be paid back may be worthwhile for some companies. The Journal article mentions crowdfunding as a means to obtain equity capital, and while this is a young and developing form of offering equity, it has the potential to be a common and viable method for startups to finance themselves. Even when crowdfunding does become more commonplace, it will likely still be hard for completely new businesses to receiving financing, unless the founders have already had demonstrated success with other ventures. However, there is always the possibility of friends and family equity financing to jumpstart ventures to get to the point where they can then seek financing from the crowd.

Finally, even though there are many challenges involved with fundraising for new businesses, the silver lining is that in many cases, the cost of starting a business is far less than in the past as a result of recent developments in technology and the rise of the gig economy. Taking my own business of launching a law firm, in the past, I would have had to rent expensive office space, hire an assistant and full-time attorneys, etc., all of which requires a significant initial outlay. Now, a lawyer can run a virtual firm and have work performed on a pay-as-you-go, project-by-project basis. Pretty much the only significant initial outlay is the cost of a website. Accordingly, despite the challenges in raising funds in the current environment, it’s as good a time as any to launch a business because, in many cases, less financing is required.

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Should You Start Your Legal Career at a Big Firm?

John Balestriere, writing in Above the Law, argues that young attorneys should not feel bound to follow the standard advice to start one’s career at a large firm to get “training.” As someone who spent 12 years at large firms and the last (almost) seven running my own small one, I’m in a position to weigh in on this topic. Although in my current position, I often expound on the benefits of small law firms, both for clients looking at what type of firm to engage and for experienced attorneys looking for a better way to practice law, I would still advise young attorneys looking to end up in the private sector to spend some time in a large firm.

Optimal Law Firm Size | Andrew AbramowitzFirst, an important caveat. Balestriere is a litigator, and my understanding (not based on experience) is that in that area, small firms and governmental agencies kind of throw young attorneys into handling trial work pretty much right away, as opposed to the large firm experience of having junior associates handle more behind-the-scenes work. I can’t speak to that; my advice in this post applies to those thinking of becoming a transactional attorney.

Most of my early formative years were spent at Willkie Farr & Gallagher, a well-regarded “white shoe” firm in New York. Although I can’t say that all of my time there was used productively (I recall with non-fondness being asked by a quirky corporate partner to not leave my apartment on a Saturday and to wait for a call, which never came), I learned a huge amount, making me the lawyer I am today. My experience at Willkie, which I think is true of most big firms, had the following attributes that, I think, make the large firm experience worthwhile for junior attorneys:

  • Plenty of potential mentors – I took assignments at Willkie from dozens of partners and senior associates, allowing me to gain a variety of experiences. If you’re working at a small firm, your boss may be a good mentor, but you’re not getting the benefit of seeing how many different lawyers do their job.
  • High standards – I certainly don’t want to denigrate the many talented attorneys who work at small firms and for the government, and there are some real duds at big firms, but I was impressed with the intelligence and work ethic of the great majority of those I encountered at Willkie. They helped create expectations for my work that I still seek to meet.
  • Network building – By working with a lot of attorneys at a large firm (or, as in my case, at a few big firms over several years), you will encounter and hopefully impress people who may be, later in your career, potential referral sources for business or otherwise in a position to help you. Two of my most important current clients are (1) a public company whose CEO was once my boss when I was an associate, and (2) a promising startup whose founder was an associate with me at Willkie.

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Increased Scrutiny of Non-Competes in New York

non-competition-laws-in-nysAlthough it has historically been relatively easy for companies to enforce non-competition agreements against employees in New York State, compared to, say, California, where such provisions are unenforceable, the New York Attorney General’s office has recently been cracking down on broad use of non-competes on lower-level employees.

Although the two types of provisions are often conceptually lumped together, it’s important to distinguish non-competes from non-solicitation agreements. With non-competes, although companies have valid business reasons for wanting their employees to refrain from leaving and starting a competitive business, potentially using the trade secrets they have learned on the job, as a matter of public policy, they are frowned upon for reducing worker mobility and harming economic growth. Non-solicitation provisions, on the other hand, which prevent departing employees from taking other employees or customers with them to their new venture, don’t raise the same policy concerns and, accordingly, are not the focus of the New York initiative.

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Startup Valuations and Plain English

Start Up Valuations | Andrew Abramowitz, PLLCWriting his usual daily roundup in Bloomberg View, Matt Levine, a former corporate attorney and investment banker who is perhaps the only person in the world who writes in a laugh-out-loud manner about securities law, raises interesting points on two unrelated topics: startup valuation and plain English writing.

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Elements of a Client Pitch

Gary J. Ross, like me a former BigLaw corporate and securities attorney who launched his own practice, writes in Above the Law about different types of client pitches, and which are the most effective. After detailing some lame and/or insufficient pitches, such as having gone to the same school as the potential client, he identifies the most effective pitch as being able to convince the potential client that you’ve successfully handled matters like the proposed one many times.

While I agree all of Ross’s points, there are two other elements to my pitch that I usually make:

Elements of a Client Pitch | Andrew AbramowitzPersonal Service – Many of my clients are referred from colleagues of mine, and the client doesn’t comparison shop with other firms before hiring me, but in situations where I find myself in a competition with another firm, that firm is often a mid-sized or large firm, rather than one with my profile. In that scenario, the appropriate strategy is to play up the differences between my way of doing business versus the large firm way. Accordingly, I emphasize the personal service that I provide. In a big firm (and I speak from much experience there), the pitch meeting will often be led by the senior partner, but after the deal starts, you find yourself dealing mostly with someone more junior. In contrast, I point out to the potential client that I am the sole point of contact, though I have experienced attorneys doing behind-the-scenes work to help me keep up with my workload and be able to be responsive to the requests of multiple clients.

Cost – I’ve received advice from time to time that small law firms shouldn’t emphasize price too much, because it seems to devalue the service being offered. However, legal services are really expensive, regardless of who’s providing them. It’s perfectly valid and appropriate for clients to be focused on these costs and, accordingly, for the attorney to seek to appeal to potential clients on these grounds. Therefore, I’m not at all reticent about discussing my fees early on in my interactions with potential clients, pointing out that my colleagues and I are the same people that had successful careers in prominent firms, but whose services are now available to you at a significant discount to the going rates. I further point out that this is made possible by my firm’s extremely low overhead, with attorneys working from remote locations. In other words, when you hire me, you’re not paying indirectly for expensive artwork on office walls and summer associate trips to Yankee games.

I don’t win all pitches with these arguments – the biggest headwind that I face is that hiring a big firm is a safe choice that won’t likely be second-guessed within an organization – but it’s a pretty compelling story (if I do say so myself) and works plenty of the time.

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Uber-ing Legal Staffing

Uber-ing Legal Staffing

Gaston Kroub, writing in Above the Law, features Per Diem Attorney NOW, an on-demand service for court appearance coverage needs. This particular service isn’t relevant to my corporate transactional law practice (I’ve spent more time in court as a juror than as an attorney), but it highlights a trend across the legal services industry: the increasing ease of hiring qualified attorneys on a project-by-project basis, rather than as a full time employee.

Some might see services like Per Diem Attorney NOW as nothing new, a legal temp agency dressed up with a high tech veneer. However, that would be like saying that Uber is nothing more than an on-call taxi service. Uber is successful not because of the quality of its cars or its drivers, but because of the ease of getting a car quickly with a couple of smartphone taps and paying for the drive. One can see a similar potential in services that allow law firms to be able to search for available candidates quickly, rather than calling a recruiter who may or may not remember an obscure specialty practiced by one of a thousand available temps.

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