Every once in a while, I’m reminded just how harmful overlawyering can be.  I just finished preparing an operating agreement for 3 partners in a new venture.  They have a promising startup with a couple hundred thousand in seed capital, seeking to raise maybe a half million more to fund their initial operations.  I worked with them to prepare a detailed operating agreement, standard founder intellectual property (IP) assignments, and consulting agreements to govern their go forward work for the company.  That’s about all they need at this nascent stage.

All was good until one of the partners decided it would be a good idea to have their personal counsel look over the documents to protect their personal interest.  (After all, I’m company counsel, not founder counsel.)  Unfortunately for the company, founder’s counsel is what I’ll call an “Overlawyer”.  Next thing you know, I have a seven page memo of comments on the operating agreement.  And that’s not counting the four page tax memo that followed.   Or the three separate counsel phone calls I fielded on a completely standard founder IP assignment.

Mind you, most of the memo was written by a third year associate in his vast business experience (nice guy though, kind of sad to see him indoctrinated).  It was then reviewed by a senior corporate partner, and I’d estimate the combined hourly rate of these two lawyers at about $1,000 per hour.  Needless to say, many hours and thousands of dollars later, we are all “agreed”.  About 15 minutes’ worth of the input from Overlawfirm’s tax counsel was helpful.  Aside from that, what do I think was improved in partner’s “deal” as a result of their hiring Overlawyer to represent their interests?  Zero. Nada. Zilch.  The company will function exactly the same as it would have otherwise.

So everybody talks (complains) about the cost of Overlawyers in terms of dollars.  And the financial cost is ridiculous, no doubt.  But people rarely talk about the nonmonetary costs of an Overlawyer approach, which in my book are just as, or even more, detrimental to an entrepreneurial venture.  In the current founder situation, Overlawyer scared its founder client into worrying that certain benign document provisions were detrimental to founder (and somehow only to founder—odd, since they applied to all the founders equally).  That needlessly instilled in Overlawyer’s founder a certain degree of mistrust in both company counsel and in founder’s partners.  That’s a crying shame, because we all will be working together for years to come to build the business, and that’s not the right way to kick it off.

Worse, the business partners have just spent weeks negotiating with one another, rather than working together to advance the business.  The other partners who didn’t hire separate counsel were frustrated by the delay, and they aren’t happy that their partner sought out special protections for themselves rather than just doing what’s best for the company like everybody else.  These things take a toll on founder relations.

Finally, by incessantly prioritizing individual founder interest before the company’s operations, Overlawyer missed the forest for the trees.  Had I not put my foot down, founder would not have properly assigned their IP to the company, and the company’s decision making processes would have been held hostage to founder.  That would have made the company less investable, less functional, and quite likely, less successful.  Ultimately, what serves the founder’s financial interest in the startup context is a well functioning company, and that is a fundamental business truth that remarkably few Overlawyers grasp.

I’d like to say that this experience was unique, but it’s not.  While of course there are Overlawyers at firms of all sizes, I find almost an inverse relationship between the size of the law firm, and how prone they are to utter nonsense like the above.   There are structural reasons for this.  Many lawyers at big Overlawfirms have never done anything in their professional careers but practice law, and as a consequence have little ability to distinguish between salient business risks and theoretical legal issues.  Every business lawyer I’ve ever met likes to claim that he or she is a “practical lawyer,” and 90% of them are full of crap.  The inefficient approach is also inherent in the internal Overlawfirm financial model, which relies on leveraging young, inexperienced associates to enhance revenues at the top of the law firm pyramid.  Indeed, Overlawfirm’s business model depends on its lack of restraint; if every hour is billable, every issue, whether important or not, is revenue.

On a less cynical note, there are many honorable Overlawyers who are not trying to churn billable hours.  They truly (but falsely) believe that they best serve their clients’ interest by advocating for them in this way.  I would like to see law firms teach their corporate attorneys that their number one goal is to facilitate their clients’ businesses, while acting ethically and protecting against undue (not all) risk.  Instead, big Overlawfirms tend to drill into their attorneys that their number one priority is to avoid missing anything, always turn over every stone, never make a mistake.  Risk avoidance at all costs.  This leads Overlawfirms to the conclusion that overlawyering is good lawyering.  It’s not.  And it can be fatal to an entrepreneurial venture.  Whereas Overlawyers seek to avoid risk at all cost, the very essence of all business, and most certainly venture backed business, is calculated risk taking.   Shy away from too much risk, and you choke the opportunity.

The Overlawfirm model is broken, period.  It works for few businesses at all, and almost never for entrepreneurial companies that must be nimble, practical and cost-efficient in their operations.  Entrepreneurs, if you find yourself with an Overlawyer, overfire.

Tags: Heather McCormick, Lawyers, Legal, Startup Companies

This entry was posted on Wednesday, December 9th, 2009 at 9:25 pm and is filed under Legal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.