Question: I am considering two lawyers. Lawyer 1 resides in a different state but offers to incorporate my business for half the price compared to Lawyer 2. Lawyer 2 is in the same city.
Is it a good idea to use lawyer 1 for incorporation, since he is cheap and incorporation is a pretty standard process, and use lawyer 2 for regular ongoing consultation after incorporating, since it will be easier to communicate and set up meetings? What are the downsides of using two different lawyers?
Answer: First, I’m going to assume that by incorporation you mean a full-blown “formation.” The act of incorporation involves filing a simple document with the appropriate state, which for any attorney often means simply filling in your company’s name on a standard template, filing it, and charging you the actual fees that the state charges. There can’t be much cost-differential there. Formation means incorporation, electing officers, issuing equity, setting up an option plan, assigning IP, etc.
Here’s what goes into our formation package: http://www.andrewskurth.com/startup
Secondly, there are a number of reasons why we highly advise clients against taking this approach. Here are a few:
1. Early mistakes cost big money to fix
My mother once told me that she bought milk from a dollar store. I’ll let you guess how that went. Same goes for attorneys. Anyone can offer a bargain-basement price, but what are you giving up in going so cheap? When documents are signed, they’re signed, and they can be insanely expensive to fix later on down the road.
2. You’ll lose money in the long run because of transition costs
I work at a full-service firm, and our particular practice group focuses on tech companies, including startups. Our formation package costs a fixed $5,000 + filing fees, which will set 90-95% of companies up for an outside funding round. How much cheaper can an experienced firm or solo practitioner go than that? Let’s be generous and say they offer to do it for half. So the motivation for splitting firms would be $2,500.
Once you transition to firm #2, they will first have to review all of the documents that #1 executed. Because they’re completely unfamiliar with them, this will take hours. The further along in your trajectory that you transition to firm #2, the more expensive this gets. Add on the potential cost of having to fix anything that may have been missed or messed up by firm #1.
It’s important to keep in mind that law firms, at least in the tech space, build all of their documents to work in sync with one another. Defined terms have to match, references have to fit, etc. Our IPO docs flow from our funding docs, which flow from our formation docs.
So to work with your company, your new firm will have to do either one of two things: (1) completely replace the originally executed documents with their own forms, or (2) tinker with their own forms to fit the ones that you’ve already executed. See where this is going?
If they go the #2 route, they will have to do that every time that you progress to a different transaction. Additionally, because any associates who are later added to work with your company will be unfamiliar with your “unique” formation documents, or with the later ones that were customized to fit yours, they will alsohave to go back and review them. If you’d just started with the same firm, they could be confident that the earlier docs have everything that needs to be there, and that there won’t be any surprises.
I can go on, but my general point should be clear by now. Cheap incorporation services/firms can be fine for a traditional business that plans to form and probably never touch the formation docs again for years. But for tech startups, those docs will need to be reviewed, modified, etc. on an ongoing basis as the company takes on investors, acquires companies, goes IPO, etc. Whatever savings you may have seen at the beginning will be completely eclipsed by the cost of transitioning to another firm and working with that second firm on an ongoing basis. Do yourself a favor and find the right firm from the very beginning, and stick with them