When I am having initial discussions with potential startup clients, they often say they’re looking for a firm that understands the particular challenges of running a startup. Perhaps this can be a reference to the substantive transactional matters that startups deal with – like negotiating an agreement among founders or raising capital using methods particular to early-stage companies – that attorneys who’ve been trained by representing Fortune 500 companies may not understand. But often the subtext of the question is that startups are frequently short of cash and may not be in a position to pay legal bills on a regular basis. The challenge for the attorney is to secure these sorts of clients and still manage to make a living after doing so.
Traditionally, those advising law firms on how to run their business focus on ensuring payment. For example, they’ll say to get payment in advance via retainers and/or cease working on behalf of a client, assuming it’s ethically permissible to do so if the client is in arrears. If followed, this conservative advice will in fact protect the firm from large unpaid invoices, but it’s impossible to calculate the income foregone from declining to take somewhat of a flier on an entrepreneurial client that ultimately succeeds and becomes the large and liquid client you eventually want. Ultimately, if you’re the kind of attorney who’s uncomfortable with accepting some risk, you’re not likely to succeed in representing startups. There are other firms who are dumber or more tolerant of risk (depending on your point of view) who will take a more flexible approach than you, and they’ll get the clients.
Firms representing a lot of startups will need to accept risk, then, but also need to manage it. You want to avoid working with clients whose default position is that law firms should get their invoices paid if and when the company is flush with cash. Those clients are asking the lawyer to accept substantial risk of delayed or complete non-payment, as if the lawyer was an equity investor, without the opportunity for unlimited gains that equity investors can obtain. (Of course, if a corporate client and attorney mutually agree on equity compensation for the attorney as a means of helping the company manage its cash flow, that’s an appropriate and fair structure.) The client should be understanding that the lawyer is running a business too and should be willing to meet the attorney halfway. There are a number of ways to get there – getting an initial retainer payment from the client that covers some costs and is a show of seriousness, agreeing on installment payments for a large bill over a period of several months, etc. When the two sides can work constructively with each other in an atmosphere of mutual respect for each side’s professionalism, there is a better chance of ultimate success for all, even if all risk is not eliminated.
When I am estimating costs for a project for prospective clients, particularly those new to the formation of business entities and deal-doing, a common source of confusion is why there needs to be a fee paid to my law firm as well as to a corporate service company like CT Corporation or CSC. So, I thought it would be useful to briefly outline the different roles that each of us plays in the creation and maintenance of entities.
So, the good news for the law firm of Andrew Abramowitz, PLLC is that business has increased steadily over the past few years. The bad news is that there has been somewhat of a greater tendency among clients to be slow in paying invoices. There is a hassle factor associated with this, as it requires frequent follow-up, but the real issue, as anyone who runs a small business will know, is that lumpy income creates financial challenges. My firm has regular expenses that can’t be contingent on the timing of my clients’ payments, and the owner of the firm (yours truly) has personal expenses that are equally not capable of being deferred while I wait for payment. (All of this sounds very self-pitying, but I’ll get to the point soon. I’ve been very fortunate in life and cannot complain.)
In a recent transaction that I worked on – obviously, I can’t give too much detail to protect client confidentiality – I noticed a weird dynamic. In a typical negotiation, when the lawyers from each side are speaking without the principals present, there is some degree of emotional detachment from the ultimate outcome, even though each attorney knows his or her role is to represent the client’s interest. Lawyers will say, for example, that it’s not worth continuing to argue about a particular bone of contention because it is a “business issue” that needs to be worked out by the principals. However, in this transaction, the other attorney, though he was unfailingly polite and even-keeled, would make fairly routine requests from our side seem thoroughly unreasonable, putting me on the defensive.
Carolyn Elefant, writing in Above the Law, takes to task those solo lawyers who, to use her phrase, 