Why lawyers are failing start-ups
The vexed issue of getting legal help often comes down to two key questions for start-ups – when do you get it and can you afford it? Unfortunately, the legal profession can appear weighted against new businesses.
If you’re a budding entrepreneur, the system is broken, according to Joel Cranshaw, a lawyer who has operated in the UK and Australia and now operates his own start-up legal business, Clearpoint Counsel, from Melbourne co-working space The Hub.
“Start-ups are very poorly served by the legal profession,” Cranshaw admits.
“It’s not the law firm’s fault, really. Charging by the hour is only about 60 years old. In the 1950s there was a big demand to value the services they have, so the big end of town demanded lawyers justify the amounts they charge.”
“The result of that is that lawyers at the big end of town charge by the hour. The big corporations have leverage to push that down, whereas start-ups aren’t in a position to negotiate.”
“The law firm will be conscious they can’t charge start-ups that much and the start-up will walk away with document which is one size fits all. The business will also probably pay more than they expected, too.”
As StartupSmart’s regular legal eagles James Omond and Craig Yeung have previously explained, it’s important to get a lawyer who understands your industry, as well as do lots of your own research to ensure you keep costs down.
But Cranshaw argues that the whole way that law firms – especially the larger ones – operate needs to change if they are to offer genuine support to new businesses.
He explains the new approach he’s devised for Clearpoint, which was launched in 2011, as well as gives some top tips on how and when start-ups should deal with lawyers.
Above: Joel Cranshaw.
Can you explain a bit about the background to the business?
Predominantly, I’ve been an in-house counsel, mostly in tech companies. About seven years ago in London, I became dissatisfied with being in-house so I moved to private practice.
On my return to Australia, I went to structure fees on an hourly basis. Which was fine, but there’s always a conversation over hours and value. This isn’t the same as in-house where you get paid an amount and you do everything.
I wanted to provide in-house service to a number of clients, as it’s more relevant for start-ups. I’ve now got four main clients, all fairly small and all have been going for a couple of years, so they can justify the service.
I have a free consultation to ask where’s the company at and if they are ready for legal help. If they aren’t ready I point them to all the free resources of information out there.
That just doesn’t happen at the moment in law firms – they don’t really look into the problems faced by start-ups and what they actually need. They just solve individual problems presented to them.
Start-ups want to know about employment arrangements and standard terms and conditions that require quite basic documents. I’m developing templates along with the consultancy, in order to fill that gap.
So how does the legal industry currently treat start-ups?
A lot of start-ups say lawyers don’t understand my business, because in this hourly rate paradigm, they just can’t afford to. It’s a cascade from large firms to small firms – that’s just how we do things.
It ends up costing the start-ups more than it should because when the agreements are badly put together, they have to go back to the lawyer and pay more to fix it. There’s no thinking about what start-ups need down the track.
What are the main legal issues faced early on by start-ups?
Intellectual property, employment issues, whether to use contractors or not, insurance, and standard agreements about the way you sell things.
Small start-up businesses have terms imposed upon them from a larger entity. They are forced into things and there’s an element of risk for a start-up.
Most businesses continue for the first year or two with these terms. It’s when they get to a turnover of $1 million, employing four or five people, they start to raise their head above the parapet.
Issues start to arise and they won’t go to a lawyer until there’s a problem. They might shy away because of the problems they had before with lawyers.
To be honest, there’s no good reason to have legal advice until that point. If you haven’t got the funding, you need to be careful with that money. But if you’ve got money, you should go to see a lawyer and ask what the issues are.
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But what kind of problems does this raise?
You need a few basic documents to get you started, but law firms just don’t work that way.
One guy went to a lawyer and they said that he needed a distribution agreement. Nothing about the incorporation of the business or anything else.
I’ve met people years down the track and don’t know what the shareholder agreement is! It’s an issue you need to address early on, but you can go on for two years without one.
As soon as you can afford it, you need to see lawyer. But you’ll stifle the growth if you spend too much too early.
There are lots of ways you can put things in place in the interim. I’ve seen multimillion dollar deals done on the back of napkins and that was enough to enforce a business’ rights.
A lot of SMEs get very excited about doing things to the ninth degree but then you have some millionaires who agree stuff over email. And they do get protection. People forget the law looks at all aspects.
So, you should chance it?
If you’re in the business of starting up, you’re in the business of risk. But you should only do what you can afford.
Once you start to think a bit larger, people think if they’ll actually get paid if they sue you. So hold off spending the money and make your business profitable. But don’t leave it too late – people come to me only after they’ve had a dispute.
You’ve switched around the standard billing arrangement with your start-up. Can you explain how?
There’s a real move in the legal profession to talk about how billing is done. Lawyers are sick of billing by the hour, while they want to bill on value. But it will take a while to filter down.
At the moment, two template-style agreements can cost you $2,000. To respond to a statement of claim, it could cost you another $2,000 or up to $10,000 once you involve a lawyer and then go to court.
The ideal service is an overview of your business. You should say ‘here’s my business, what do I need?’ And then take it from there.
Law firms should provide a fixed fee service that provide you template agreements and a consultancy. It doesn’t seem to happen now.
Start-ups hardly ever go to a law firm and they say ‘that was cheaper than we thought it would be’. It’s always more expensive. There needs to be a fixed fee.
I have four clients on retainers. They pay $2,0000 for a report where I do due diligence on them and agree a plan to meet deliverables to get them in A1 condition.
Also, lawyers sick of working themselves to death. They can get burnt out, so this model allows them to set the size of their business.
You need to justify 10 clients for a full-time job, five if you have larger clients. If a lawyer wants to work three days a week, they can have fewer clients.
Want seven new clients in the next six months, so there’s proof of concept of this. We almost want to crowdsource general practice counsel.
As far as I’m aware, I’m the only one doing this. There are a few innovative law firms out there, but they are again aimed at blue chip companies.
So, what needs to change?
My hope is that our business encourages other law firms to do the same to help small businesses grow.
I have a lot of contacts in big law firms and they are finding it tough at the moment. They are aware of lawyers going it on their own, but the danger is they set up in just the same way, which doesn’t suit small businesses.
But now things are tighter, they are finding it hard. They are looking at ways of doing things differently. There will be a change, but I can’t see the big firms moving quickly.