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.
