One of the greatest threats to young startups is their burn rate — a term for how fast they spend capital every month just paying the bills. The most expensive things most companies do is employ people and rent offices, but many of them also overspend on legal fees.
Venture capitalists like Sam Altman, who leads Y Combinator, are losing patience with growing burn rates and have been addressing the issue in the press, even calling out Silicon Valley law firms for padding their legal bills for startups. Marc Andreessen famously stated in a stream of impassioned tweets last year that the next time the market turns, “we will find out who has been swimming without trunks on: many high burn rate [companies] will VAPORIZE.”
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José Ancer is trying to help with that. He writes a blog dedicated largely to persuading entrepreneurs to spend less on lawyers, which is interesting when you consider he’s a corporate lawyer focused on tech and venture capital.
“Startups can easily spend $50,000 to $100,000 per year if they’re doing complex stuff,” he said. “The fact that they could cut that in half is quite significant. You can imagine $50,000 saved could be an extra six months of runway to raise that extra round of funding to survive.”
Ancer is the CTO at Miller, Egan, Molter and Nelson, LLP, which uses SaaS and referrals in a network of specialists to keep costs low.
So if you’re a first time founder, how do you avoid making an expensive mistake?
Ancer advises entrepreneurs to focus on hiring specialists, and do your homework before you ask them to do anything.
“Don’t try to become an expert; that’s your lawyers’ job,” he said. “Think of it more like what WebMD is to healthcare. Learn the basic concepts and vocabulary beforehand so that your time with your lawyers—which is billable—is more effective.”
As for other ways to save, explore your options, but be wary. Some firms may offer fixed fees for basic tasks associated with forming a new company or bringing a new product to market.
He said larger, more traditional law firms sometimes charge four to five times what the lawyer is actually earning. Part of that overhead is referral fees for lawyers who keep the work in house by referring their clients to other attorneys at the same firm—whether or not they’re right for the job.
So in many cases, startups are paying more to use big firms, sometimes without significant benefit. Some entrepreneurs try to save money by hiring a generalist to handle all their legal setup work at once, but Ancer suggests that can be even worse, since legal mistakes early in a company’s life can be costly down the road.
Ultimately, it comes down to working lean.
"Be aware that the same dynamic economy that's lowering the cost barriers to entry in tech also applies to law firms."
If tech entrepreneurs only learn one thing from Ancer, it should be to hold law firms to the same standard they hold themselves: leveraging technology to work efficiently.
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