Technology

Show Them The Money: Why Lawyers Should Help Startups Take Cash Off The Table

What value can lawyers bring to startups?

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A longtime Biglaw partner and a close mentor of mine once told me, “Do you know why our clients pay us so much to do this work? Because it’s so #%^*ing boring, and they don’t want to do it themselves.”  Lawyers add value, he claimed, simply by doing their client’s legal work.  But, as more and more technology helps lawyers automate the tedious, administrative work, lawyers may have to rethink how they can add value for their clients, beyond just making their lives less boring.

Being on both sides of the table, first as a lawyer and now as a startup client, has given me some clarity on this issue.  I don’t need a lawyer who can do the work for me. Not only do services like Clerky automate startup documents, but law firms like Orrick have made all the legal documents for organizing and funding startups available on their site.  Documents are cheap, what clients need is a lawyer who can get them the best deal possible.

Here is a not so surprising secret: by the time startups make it to their seed and series A round, the founders are usually broke.  Many founders pay themselves a paltry salary and have been able to keep their companies afloat with a mix of credit card debt and digging into savings.  I recently spoke with the CEO of a startup that has raised over $25M in cash who told me that before his company raised their series A round, he hadn’t paid his bills on six different credit cards.  I have joked before that the thing I miss most about Biglaw is the pay check.  Startups are many things, but they’re not certainly not a good short term investment.

That is why some outspoken VCs like Hunter Walk are now advocating that founders be allowed to sell some of their shares in a series A round or, “take cash off the table.”  I could not agree more.  The problem is that startups are usually too frightened to ask for early liquidity themselves.  This is where I think lawyers can add major value.  Lawyers who negotiate founder liquidity are getting their clients the best deal possible.

The usual objection from investors is that they want the founders to be “all in” and selling shares shows that the founder is trying to cash out early.  This is a straw man argument, and you should reject it.

Startup founders can be “all in” without hanging by a thread financially.  The average startup founder has around 30% of a company that during a Series A round will be valued at ~$10M.  Allowing them to sell 2% of the shares for $200K gives your client enough money to put aside savings, put a down payment on a house and pay off debts while still maintaining 28% of their shares and all of their incentives to make the company as valuable as possible.

What is good for the founder will ultimately pay off for the investor.  Fear is a good motivational tool, but it can be crippling as well.  Investors do not want to fund people who are going to act out of fear or sell the company prematurely.  As a lawyer, you are in the best position to sell opposing counsel on that narrative and not make your clients negotiate that point themselves.  They will almost certainly fail.  Win this negotiation and every founder and their mother will refer you and give you more business.

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Are you a VC, angel investor, lawyer or entrepreneur who disagrees with my take? Email me, leave a comment or hit me up on Twitter, I would love to hear other perspectives.  Maybe we will even publish a conversation together right here on ATL.

Zach Abramowitz is a former Biglaw associate and currently CEO and co-founder of ReplyAll. You can follow Zach on Twitter (@zachabramowitz) or reach him by email at zach@replyall.me.

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