Just because most startups can’t afford their own general counsel doesn’t mean they couldn’t use one.
That idea is the rationale behind many private lawyers offering what they call “outside general counsel” services. Attorney bios and law firm “About” pages are increasingly donning the label of outside general counsel, especially in the capacity of serving small businesses and startup clients that have a variety of legal needs.
Entrepreneurs have myriad legal questions spanning from business formation to trademarks to employment, but to hire a dedicated practitioner for each area can get cumbersome and costly.
To fill that market gap, many startup-focused lawyers, particularly solos and small-firm attorneys, have embraced the role of a GC-like generalist for these clients and at the fraction of the payroll cost.
WHAT EXACTLY IS AN ‘OUTSIDE GENERAL COUNSEL?’
But while a number of private lawyers say they can act as a company’s outside general counsel, what is that besides an outside lawyer who happens to catch most of a company’s legal work? There’s a distinction, according to Dan Fredrickson, a partner at Koenig Oelsner Taylor Schoenfeld & Gaddis in Boulder.
“In a lot of ways, the services that outside counsel provide are very transaction based,” Fredrickson said. “But from an outside general counsel perspective, I view it as a lot more strategic.”
Fredrickson works with companies of various sizes, but when smaller companies engage him as an outside GC, he often takes a more holistic approach to the relationship. Instead of just reviewing contracts, he might advise on ways the company can streamline its contracting process as a whole. He might proactively look at other aspects of the startup’s business to anticipate needs before they ask about them, like with data security.
“I try to become a part of a company’s team,” Fredrickson said. But what outside GC engagement looks like differs from client to client. “For many clients where I wear that hat, I’ll be on their Slack channels. They integrate me into their system rather than them trying to fit into a structure that I have set up.”
Sara Sharp, of counsel at Denver firm Sparkman + Foote, handles a range of legal issues for startups in her practice, so she ends up being a generalist much like a general counsel would be at a small company. That breadth of subject matter comes with the territory of serving startups, whose owners don’t often get hung up on the difference between what a business formation lawyer does and what a patent lawyer does.
“They view you as their lawyer,” Sharp said. “They don’t always appreciate the boundaries of your practice area, so you have to work at being more agile.”
Oftentimes startup clients will ask the outside GC questions that turn out to be more business- or ethics-related rather than legal, as is often the case for an actual in-house lawyer. But just like they would in an in-house capacity, outside counsel need to make it clear when they’re giving business as opposed to legal advice, according to Mark Spitz, whose Denver-based solo practice deals in business and cybersecurity issues. “You have to know what hat you’re wearing” in terms of what’s privileged and what’s not, he added.
Spitz, who spent much of his legal career in-house including as the GC for a publicly traded IT company, offers what he calls “fractional general counsel” services that include “proactive legal risk management.” He said, however, that there’s no bright-line definition of what an outside general counsel is.
If the outside counsel is going to simulate the role of a startup’s GC, that entails referring to other outside counsel for more specialized needs. Having a strong referral network “is critical because that’s the value you bring to your client,” Spitz said. “That’s part of the management function of an in-house counsel and part of what an outside general counsel should do, too.” While he is a solo, Spitz works out of the LawBank legal coworking space in Denver, which houses other solos with various practices.
Sharp is a member of the Independent Law Group, which has Denver attorneys in a variety of disciplines. That has been helpful to her as an outside GC, as the group members frequently call each other and meet regularly, sharing informal advice from patent law to tax law. It’s been a source for referrals for the startups, too.
LEARNING THE BUSINESS, EDUCATING THE OWNERS
The outside GC, while not having a desk at the client’s workplace, can sometimes have a presence there. Ryan Howell, founder of startup-centric Rubicon Law in Denver, said his firm’s attorneys make it a point to spend time on-site at the client’s workplace.
“There’s something about being in the place where the business functions where you’re able to absorb so much more that’s contextually helpful to providing solutions,” Howell said. It helped that he could visit an ice cream company client, for example, sampling flavors while walking the production floor and afterward meeting in the company’s boardroom. “Suddenly it’s all real,” Howell said. “I have a lot more context that makes the work product better.”
But the learning curve goes both ways when lawyers go in-depth on a startup client relationship. They aren’t working with an in-house attorney but rather an entrepreneur whose expertise is in software development, or engineering or some other non-legal field. The entrepreneurs likely aren’t used to dealing with lawyers.
“With startups there’s a lot more of what I’d call hand-holding, and there’s nothing wrong with that,” Spitz said. He added that the clients are smart and savvy people at what they do, from developing apps to coming up with food recipes, but they require education on legal risk management. Spitz, who used to teach math as an adjunct professor, said the startup lawyer should be comfortable in the role of educator in addition to legal counsel.
“These clients are running a hundred miles an hour, and that’s why they’re going to win,” Howell said. But that entails a need to slow them down sometimes as their legal counsel, and a lawyer should enjoy educating clients if they’re working with startups, he added.
FIGURING OUT FEES
One of the biggest challenges for startup-focused lawyers in general, let alone those who work closely with them as outside GCs, is making the numbers work on the billing. Startups are often cash poor and struggle to justify the expense of a dedicated lawyer in lieu of cheaper alternative legal services.
Sharp said clients often ask her if she offers a discount for startups. She has “probably tried every single thing out there” from split fees to flat fees. But works best, she said, is “to have an open dialogue the whole way on what things are going to cost” the client, whether it’s filing for a trademark or for common business formation documents.
“I’m always happy to try to find an arrangement that’s going to work,” Fredrickson said. He said that KO Law Firm has been trying to do more subscription services, figuring out the scope of the client’s legal needs and determining a monthly flat rate.
The flat monthly fee — and with various caveats — is perhaps one of the more common methods in which lawyers bill startups. This is one way they eliminate the billable hour that discourages clients from reaching out with questions for fear of what the phone conversation will cost them.
“Having been on the other side of the table … you hesitate and don’t call [your lawyer] because you know that as soon as they answer, the clock is ticking,” Howell said. Rubicon Law generally doesn’t bill for unscheduled phone calls. “That affects the bottom line, but we think it’s a net win because they pick up the phone a lot more. We probably get more work because of it, and the client is in a better legal position because of it.”
Startups like flat monthly rates so they can budget legal costs as a recurring expense. But the lawyers have to manage their own risk, too.
Before entering into a monthly fee arrangement with a startup, Rubicon vets the company to see if it will likewise be committed, Howell said. The startups’ founders need to be full-time, and they have to have a path towards funding, among other criteria. That screens out quite a few startups where the founders have day jobs and are just trying out the business to see if it can gain traction, he said.
However they made the numbers work, all of the attorneys interviewed said they genuinely enjoyed working closely with startups and the innovators who run them.
“I think it’s so exciting,” Sharp said of her practice. “You meet with these people who are taking on all this risk and have all this passion, and you get to help them actualize it.”
Howell said there’s a reason his firm focuses on startups. “In my opinion, if we wanted to have the most lucrative practice in the world, we would represent banks. But our lives would not be as enjoyable.”
— Doug Chartier