Category Archives: Lawyering

Why I left a big law firm, but not BigLaw.

While I’ve devoted the majority of this blog to providing free resources on startup law and finance to startup entrepreneurs, I occasionally take the time to write about the economics of law firms and why entrepreneurs would be wise to understand it at a high-level.  This post will start out with a historical summary of positions I’ve taken on the subject, with links to applicable posts, and then branch into my decision to move my own practice and clients to a new type of firm – not BigLaw, but not quite traditional BoutiqueLaw.

  • The Economic Deflation of Startup Law – Early stage startup law, much to the benefit of entrepreneurs and top-tier lawyers, has become increasingly automated and commoditized. The end result is a form of “freemium” law practice, where (i) entrepreneurs can obtain quality representation for very little money, and (ii) quality lawyers can, thanks to automation, engage entrepreneurs early on without having to discount fees, defer, or any of the other old-school ways of obscuring the cost of legal services. Low-quality or narrowly focused “cottage” lawyers will struggle because their bread-and-butter work will have little to no margin, while higher-tier lawyers will thrive on their pipeline of later-stage, funded clients, which cross-subsidize early-stage work.
  • In Startup Law, Big Can Be Beautiful – Breadth and scalability are absolutely essential to the proper representation of a startup, and large firms have historically been where to get that.
  • Integrated Startup Law – Specialists Matter – Technology startups do not need and should not want unscalable, narrow “small business” legal representation. By their nature, they will need a broad set of legal specialties – Tax, Labor, IP, Regulatory, etc. – along the course of their business cycle, and failing to choose a firm at the beginning that can efficiently coordinate all those specialists will become a big problem. The analogy to healthcare is important. Also see – The Cost of “Staging” Your Startup Lawyers.
  • The Ad-Hoc Law Firm – The ability of networks of small law firms to coordinate efficiently will allow for (i) the replication of BigLaw’s breadth and experience, without its overhead and inflexibility, and (ii) the scalability that boutique firms alone can’t provide.

Nutshell Summary: BigLaw offers experience and breadth, but is largely over-priced and inflexible. Boutiques are cheaper, but often narrow and incapable of truly scaling, and their work is being commoditized.

BigLaw Beginning

So in my own career, I started out at a big firm with a group of fantastic lawyers whom any startup would be well-served by, but I increasingly butted heads against the firm’s (separating the lawyers from the institution is important) policies, including (i) IT policies with respect to new technology that needed to be adopted, (ii) billing policies around how to charge startup clients, and (iii) personnel that simply didn’t want to do things differently and weren’t incentivized to care anyway.

Your Boutique Can’t Scale

I watched the market, and had some overtures from boutiques in the area, but every time I came away underwhelmed:

  • Lower Pay, Lower Lawyers – Often the boutiques had very low rates, but their lawyers made a lot less income.  True innovation is about doing more for less while earning more – it should be win-win economically on both the client and the lawyer’s end. That’s why the most disruptive startups aren’t in it to make less money, they’re in it to make more money, but on a model that makes the end-price lower by cutting out fat, not bone. If your firm is built on paying lawyers less – guess what? You’re just going to attract lower-quality, less ambitious lawyers. Surprise, surprise. Anyone can lower their price tag.
  • Where are the partners? – Many firms were effectively run by senior “associates” (attorneys from big firms who never built the experience or client base to become partners) who started their own firms and donned the partner label.  Early-stage clients might not care about this because their interactions are usually with associates anyway, but they should if they intend to become later-stage clients.  A lack of true partner experience within a firm can mean (i) your late-stage startup is effectively funding on-the-job training, and (ii) that training can lead to mistakes.  A scalable firm needs true partners that have played the end-game and won, otherwise top clients will have to leave.
  • Where are the specialists? – No one had a good answer for how to efficiently provide full service legal representation to clients. Asking them to engage a dozen firms on a piece-meal basis and manage a dozen different bills is not the right answer.
  • Luddites – If you think a lot of law firms haven’t joined the 20th century with respect to technology, check out some boutique law firms.  A lower rate is often used as an excuse for being inefficient and taking longer to do something.  Smart clients realize that their legal bill is a two-part equation: rate * time spent.  And if their lawyer is taking forever to do basic stuff, the lower rate is a mirage.  Startup law is for technologists, not cottage industry practitioners.

So why did I move my practice to a smaller firm (Miller Egan)?  Addressing the above issues in order:

  • The compensation structure is designed to attract top talent lawyers, not people who are looking for semi-retirement.
  • The firm is built and run by partners who were partners at the country’s leading law firms, but got fed up with the bureaucracy and inflexibility.  This means the firm can truly handle, and investors know they can handle, scaled, late-stage clients.
  • The firm has a well-developed network and process for coordinating specialist counsel for clients when needed, so clients can get the full service representation they’d receive at a big firm, but under a far more efficient model.
  • Technology? I’m CTO. #Howyalikedemapples

The above post should be read as a clear message to both traditional BigLaw and traditional BoutiqueLaw. Big can be important, and boutique can be cheap, but small and scalable may eventually eat your lunch.  And let me tell you, that lunch is delicious.

The Deflation of Startup Law Continues: Clerky

Almost exactly a year go, I wrote a post (The Economic Deflation of Startup Law) in which I (i) documented how the rapid adoption of technology and standardized contract language in early-stage startup law was dramatically deflating the cost of quality (crappy law has always been affordable) legal services available for founders, and (ii) made a few predictions about how this might affect the segment of the legal market that serves early-stage tech entrepreneurs.

Background

  • Contractual Changes – Standardization of contract language within law firms  & the emergence of universally standardized documents like the NVCA model docs, Series AA, and Techstars Docs, to name a few.
  • Technological Changes – Proofing software, Document Automation, Electronic Closing, etc. – reducing the amount of lawyer time required to complete a formation, bridge financing, etc.
  • Operational Changes – Technology and standardization simplify the labor input required to complete a transaction, allowing less trained, less expensive professionals to perform more of the back-end work.
  • Deal Platforms – Technology is moving from being merely a tool within the traditional law firm process to a bilateral platform that allows parties on both sides of a transaction to close, from beginning to end, with significantly less lawyer time required.
  • Freemium Startup Law – Very early-stage legal work (formations, bridge/seed financings, routine forms), once the bread-and-butter of solo lawyers and boutiques serving entrepreneurs, will no longer support those practices, no matter how efficient they try to be.  The margins will be too thin.  Those attorneys able to serve higher-quality, later-stage clients (those that make it to Series B, C, exit) where legal work will remain much more high-touch, high-margin will dominate the market and cross-subsidize their work for premium early-stage clients.  In short, Startup Law will move closer to a freemium model, where standard work is free (or almost-free) and being able to attract “premium” clients is essential for profitability.

The point of this post is not to comment on the accuracy of my predictions. One year is too short a time-frame to judge (we’ll see in 3-4 more years), though I will say that in Austin’s legal market I’ve seen a definite trend of solo and almost-solo lawyers attempting to expand their practices into multi-specialty firms, suggesting their desire (or need) to move up-market. Nationwide, I’ve also encountered a few small firms with much higher-caliber partners/associates, broad networks of specialists, and low-overhead platforms to compete head-on with BigLaw: this is where things will get very interesting.

Deflation 2.0 – Clerky

Instead, I’d like to talk about how the above developments have manifested themselves in the form of a Y-Combinator startup called Clerky. Details:

  • Founders are UPenn and Harvard (represent!) JDs of Orrick pedigree, and the head partner of Orrick’s Emerging Companies Group is an advisor; lest you question the quality of the drafting.
  • Appears to have handled formations for several Y-Combinator classes (note: classes – hundreds of companies) over the past several years; lest you think they haven’t been vetted and won’t get traction.
  • For formations, founders fill out online questionnaires very similar to those used by startup-focused law firms, and documents are automatically populated with the appropriate names, numbers, vesting schedules, etc.
  • There is a “reviewer” option where the founders can designate a person (an attorney) to review the final documents pre-execution to give a thumbs-up.
  • Execution is handled electronically on the platform.
  • Delaware filings and registered agent registrations are handled by Clerky.
  • Final executed documents are stored online.
  • Currently Available: Simple Incorporation (no equity, IP docs, etc.) – $99. Full formation (equity docs with vesting, IP assignment, bylaws, etc. – option plans and indemnification agreements coming soon) – $398.
  • Coming Soon (In Private Beta): Employee Offer Letters, Consulting Agreements, Advisor Agreements, NDAs, Convertible Notes., LLC to C-Corp Conversion

So what exactly has Clerky done? Once they get option plans and indemnification agreements up and running, they will have taken what would cost $5K-10K in legal fees at an inefficient law firm (or $2.5K-$5K at a more efficient one) and reduced it to $398 by going one step past building tools for lawyers to developing a platform that effectively replaces them – or at least ~95% of the work they do for early-stage clients. LegalZoom prices, but for premium, startup-focused documents.

What about free options?

Major law firms have attempted to address the large portion of the founder population for which even $2.5K-$5K is too high a formation price tag by offering documents online for free. I even wrote this post offering my own checklist for forming your own startup and issuing equity, lawyer-free, via publicly available documents.  But $398 is close enough to free that founders in this same category will be willing to pay for peace-of-mind, knowing that their docs are filled-out and filed properly, and that a reputable service is helping them maintain them. Plus it’ll save them hours of having to read the forms themselves.

Curmudgeon Criticism 1: Founders will want more customization than Clerky Offers

Yes, there will always be a segment of the founder population that wants high-touch, custom lawyering from the very beginning and will pay for it; just as there are people for whom Nordstrom or Macy’s isn’t good enough for their clothing and require tailors and boutiques.  But the reality is that for the large swath of the pre-funding founder population (95%+) that just wants to “get the job done” and focus on their product, Clerky, with its 80-90% discount on even the most efficient startup lawyers, will be a viable option. Those lawyers who’ve offered quality startup formations for $2.5K have themselves done so by limiting the amount of customizability and focusing on standard terms, so the difference in terms of documents between what you would get from a lawyer v. from Clerky will be very small.

Curmudgeon Criticism 2 Good lawyers will never accept a third-party service’s drafting language for their own clients.

After an inevitable phase of whining, kicking, and screaming, smart lawyers will accept whatever good clients and the market dictate, or they’ll just leave the space.  As stated above, there will always be clients who are willing to pay a premium for ensuring that all of their lawyering is 100% airtight, but those clients will be fewer and farther between.  And you can certainly expect a chorus of lawyers poking through the Clerky docs with a laundry list of ways their own documents are better. But like many disruptive innovations, it’s about the ratio of quality to cost, not absolute quality. At $398 for documents based on those used by one of the country’s leading tech firms and delivered by a YC company run by Ivy-League JDs, the value for founders is unquestionable. Quality, both in terms of legal drafting and user experience, will also improve over time.

Clerky will allow founders to engage quality, scalable lawyers earlier on.

Clerky’s “reviewer” option and its clear intent to incorporate lawyers in their processes shows that the goal here is not to completely replace lawyers, which would clearly be silly and reckless. The nuances of individual circumstances, the need for sound professional judgment that can’t be reduced to an algorithm, and the general realities of running a company will always require good, human legal counsel.

What a service like Clerky does is allow founders with very low legal budgets to stop having to settle for low-quality, mismatched lawyers who end up costing a whole lot more money (in mistakes) than founders expect. As I wrote in a previous post, a lot of founders know they need a lawyer, but can’t afford a good one, so they take the “staging” approach of going cheap up-front with plans to “upgrade” later. The consequences of this approach can be very expensive, and often disastrous.  Founders need lawyers that can serve them at all stages of development, not just when they’re tiny and the stakes seem low.

With Clerky, the “cost” of hiring a good lawyer at the very early stages of a startup can be the time it takes to quickly review some Clerky docs and answer any questions a founder might have about non-standard matters. For quality startup lawyers who stop pretending that all document drafting, no matter how routine, needs to occur in private silos, this is liberating. They can focus their practices on more complex matters that are far more profitable and interesting from a professional standpoint, while still maintaining relationships with early-stage clients who might one day require their skills. It also means the need for deferring fees will be dramatically reduced.

A missing piece: what do the documents say?

One issue that has gone under-addressed in the startup legal landscape is how to make all these automated legal documents understandable to founders.  While no founder should care to understand all the nuances of their option plan, stock purchase agreements, etc., they should at last be able to grasp at a high-level the concepts that they contain.  And sitting down with a lawyer for every explanation is and always will be too expensive for most founders.

Offering lists of books and links to founders is very helpful.  A “customer support” model of cheaper professionals without JDs who can easily answer common founder questions will also likely emerge.

One startup here in Austin is taking an interesting approach: crowdsourced annotations of contracts (Lawful.ly). They call themselves the “Rapgenius for Law.” Imagine having all of the legal forms that your startup uses available online with annotations, so you can click around the document and get plain-english explanations of what a particular provision means. That’s what they are working on, and hopefully it (or something similar) will fill a gaping hole in the early-stage startup law landscape.

For lawyers who’ve built their practices on charging clients thousands of dollars for basically filling in forms and doing some cutting-and-pasting, the future looks increasingly grim. For those of us who love working with entrepreneurs and tech companies, but find cookie-cutter legal work utterly boring and a waste of our intellect, life is getting a whole lot better.

The Cost of “Staging” Your Startup Lawyers

An unfortunately common problem that successful startup entrepreneurs have to deal with is outgrowing their first law firm or lawyer.  The reason for this is two-fold:

  1. High-Growth – Unlike traditional “small businesses,” startups that seek angel/venture capital are by their nature meant to be very high-growth oriented: they start out simple and small with tiny legal budgets, but within a matter of a few years (sometimes months) they can be raising capital from sophisticated parties, striking complex commercial deals, developing valuable intellectual property, and otherwise requiring serious legal advice.
  2. Short-sightedness – Because startups start out so small and often with non-existent legal budgets, founders will often plan to go with an attorney or firm that markets itself as serving “small businesses” at very low rates. The problem, of course, is that a “startup” and a usual “small business” are not the same thing, because of the first point above.

My thoughts on the “go cheap at first” attitude are already articulated in another post. In a nutshell, I’m of the mindset that because of the high-quality DIY resources available online for startups, founders might often be better off going it alone, until they can afford real lawyers, instead of relying on a mis-matched provider whose mistakes can cost serious money to fix as the company scales.

But the goal of this post is really to emphasize a different, but related point: switching law firms can be a lot more expensive than you think.  Put differently, you might think you’re saving money by going with a “starter” attorney, knowing you’ll just “upgrade” if you’re successful, but make sure you understand the full cost of staging your legal providers in this way. It’s likely substantially higher than you expected. Here’s why.

Diligence Cost – What’s in that “other lawyer’s” contracts?

Startup-focused legal practices, particularly at large firms built to serve startups at all growth stages, will have their own set of contract/agreement templates that they regularly work with.  All of the attorneys at a particular firm will have deep experience working with those templates and know, without having to review them every time, what they do and don’t contain.  So if a new transaction ever comes up and an attorney ever has to make a decision or answer a question that depends on what a historical contract does or doesn’t contain, they won’t have to fully review (and hence you won’t be billed for) having to re-diligence all of the Company’s history.

Naturally, when you switch firms, you bring with you all of the legal foundation that you’ve built on someone else’s contract forms, but are now using attorneys who have no idea what those forms contain.  This means your new attorneys will need to fully review the work you’ve done in the past to be confident that the documents are kosher. On top of the cost of fixing any problems, this review process alone will carry a sizable bill.

Drafting Cost – Making everything fit.

On top of having standardized forms, properly run startup law practices draft their forms to integrate with one another. Defined terms, section references, and contract provisions are in sync between sets.  Formation docs -> Seed Docs -> VC docs -> Acquisition Docs, etc. This integration saves a startup money by allowing an attorney to pick up a set of, for example, venture capital deal forms knowing that it it’s designed from the get-go to sync with the Company’s previously signed contracts.  She can focus on the core deal terms instead of having to tinker with what should be standard language.

Introducing a foreign firm’s contracts into this “legal chain” produces a serious disturbance in “the force.” Everything on a going-forward basis will need to be tailored to fit the foreign legal docs that the Company executed with another firm.  And, unfortunately, that tinkering won’t be pro-bono.

Conflict Risk – Something lost in translation.

It’s also worth mentioning that by requiring your attorneys to engage in all this diligence and custom drafting that they otherwise wouldn’t have needed to do if you’d used them from the beginning, you are automatically taking on the risk that something will be messed up.  A provision in your old contracts might be missed (because your attorneys were working quickly to try to keep the bill low), or the “tailoring” to your old docs might not have been done perfectly (for similar reasons), and a straight conflict within your contracts will arise.  Hopefully it’s a small one. But it might not be. Just know the risk is there.

Think Ahead in Hiring Your Startup Lawyers

So how much can all of these “transition” costs add up to? It depends.  The longer you spend with your “starter” lawyer, the higher it will likely be, but it can easily reach 5-figures.  Keep that in mind when making decisions about how to provide for your startup’s legal needs.  For a successful startup that inevitably has to switch firms, the transition costs of staging, along with those of fixing the mistakes of “starter” lawyers, will likely eclipse what the startup would’ve paid if efficient and scalable legal counsel had been engaged from the beginning.

Integrated Startup Law — Specialists Matter

Without getting bogged down on details, you can largely categorize physicians as general practitioners and specialists. Generalists are the every-day doctors that provide primary care for more routine matters, and also (hopefully) coordinate care with specialists (cardiologists, neurologists, etc.) when appropriate. Unfortunately, the U.S. healthcare system does a terrible job on that second part, but this is a blog about startup law, not healthcare. End of digression.

The practice of transactional law, including startup law, can also be categorized in this way.  A “corporate lawyer” serves the role of the general practitioner. Her job is to handle the more common matters that a client is likely to encounter, and to coordinate with specialists (tax, labor, IP, etc.) when their input is needed.

Biology is Integrated

Anyone who’s studied health policy knows that, by far, the most effective and efficient healthcare delivery models in our country — Kaiser Permanente, Mayo Clinic, etc. — are what many call “integrated.” Specialists and generalists work under the same system, and share information with one another in as frictionless of a manner as possible. The reason for this is that the human body itself is an integrated system. The heart doesn’t operate in complete isolation from the brain any more than my macbook’s hard drive operates in complete isolation from the CPU.  So it makes little sense that medical practitioners who specialize in different systems of the body work alone, as if the knowledge of other specialists is irrelevant to their own work.

Startup Law is Integrated

What I try to ensure that our clients appreciate is that the law itself, including the law that affects startups on a daily basis, is also integrated.  Even at the most standardized of startup legal events — formation — there are at least half a dozen specialties of law that play a role in the steps a client needs to take.  Securities Law, Labor Law, Intellectual Property Law, Commercial Litigation, State Corporate Governance Law, Tax Law, etc.

A view commonly heard about early-stage startup law is that it’s all become so “standardized” that large, sophisticated institutions with specialists (not just generalists) are no longer needed to properly serve clients; the end-result being a retreat to a “cottage industry” mentality where small practices of generalists have set up shops pitching themselves as delivering the same service, but without all that unnecessary “overhead.”  Some have gone so far as to call this trend a “disruption” of law practice.

My response to this perspective is three-fold:

1. “Standardized” and “Simple” are not the same thing. Not even close.

Production of the iPhone is standardized; otherwise no one would be able to afford it. But that doesn’t mean the design and building of the iPhone is “simple” in a sense that it could be produced by a fragmented cottage industry lacking the resources of Apple.  In the same sense, the set of twenty or so documents that we produce for our startup formations has become standardized to the point that we can produce it quickly at scale, but the expertise of at least half a dozen specialties went in to producing it, and is required to constantly update it and ensure it fits the current state of the law.  A set of lone generalists, even brilliant ones, simply wouldn’t cut it.

2. The exact same process, delivered from a smaller office, while wearing denim, does not a disrupter make.

Disruption of an established industry comes from delivering what consumers want, but in a radically different, often cheaper way.  Productizing the expertise of highly educated and specialized individuals and delivering it at scale so that far more people can afford it: that is disruptive – and it’s happening in startup law.  Cutting off the relevant expertise of a large portion of the profession, moving into a smaller office space, and continuing to deliver the product in the exact same way: t’is not disruptive.

Because smaller legal practices often do have salary structures that lower their labor costs, they do tend to have lower hourly rates.  But many (that I’ve encountered) use this lower labor cost as an excuse to avoid adopting the kinds of technology and practices that actually make the delivery of startup law efficient.  In other words, “our hourly rates are lower, so it’s OK if we take longer to do something.”  People operating in Big StartupLaw, particularly techies like myself, are often floored to see how backward some (not all) smaller practices are. This is not a space for “cottage” practitioners, though not all smaller practices fit that definition.

3. Specialists will need to be consulted.

Forming your startup or raising a simple seed financing might be thought of as the legal equivalent of getting a cold (simple service is fine), but actions taken at the not-that-much-later stages of the startup, like drafting executive employment agreements, developing and protecting intellectual property, issuing securities, negotiating commercial contracts to be enforced in multiple jurisdictions; these can touch on legal nuances that are a whole lot more like brain or heart surgery. Leaving everything in the hands of a generalist can end up ugly.  We’ve seen this happen many times.

The high growth nature of tech startups means they can go from playing legal tee-ball to the major leagues very quickly, unlike most kinds of businesses that utilize small firms.  Legal representation that can scale with the startup at all of its stages, rather than max out once the startup becomes successful, is extremely valuable; particularly because the costs of switching law firms are not insignificant. The key is to find a firm that packages and prices its services appropriately for each stage of a startup.

Fragmentation v. Integration

Many smaller practices are well aware of these limitations in their model and have developed informal networks of specialists from other firms to call upon in situations when their expertise is needed.  I’ve touched on this topic here.  While this is definitely a good thing, thus far I’ve been unimpressed with the mechanisms (i.e. none) that smaller practices have put in place for actually drawing upon their “network” in an effective and efficient manner.

Having to formally engage a new law firm (including running a conflicts-check) to ask a question that someone under an integrated system could get answered by walking down the hall doesn’t exactly smell like progress to me.  Even if it works for lengthy, project-based engagements, the kind of quick, 15-minute consults that are commonplace (and necessary) in an integrated firm will inevitably go under-utilized in a system with that much friction.

Some “multi-specialty” firms have done a little better and brought in-house the handful of types of specialists that are most likely to be needed by a startup: employment, tax, and IP seeming to be the most common.  But that’s a tough model to sustain because those specialists almost invariably need to also work for large non-startup clients (the kinds that don’t work with small firms) to keep their practice profitable.

Of course, as in other industries, at some point the right platform for allowing a fragmented system of specialists to coordinate ad-hoc may emerge in a way that can match the quality and breadth of the integrated system. But for now, this “PC” of startup law is nowhere to be found.  For matters beyond the absolute most basic, Apple-like integration wins.  Note, however, that a smaller footprint can actually be the optimal model for attorneys/firms with enough brand recognition (gravity) to dominate a particular niche specialty (not generalist) of the market.

Conclusion: Process efficiency and technology innovation will disrupt legal practice. A “cottage mentality” will not.

Progress and innovation in the startup law space will not come from doing things the same old way, while wearing jeans in a less fancy office space.  It will come from sophisticated parties that, instead of retreating from the web of specialties that make up the field, find smart ways to affordably package and productize their knowledge.  This process is well underway, and it’s incredibly exciting to operate in.

Form Your Austin Startup Yourself Before Hiring a Cheap Lawyer

Note to reader: Please share this with as many low budget startup founders (particularly in Texas) as you know. Friends don’t let friends waste money on crappy lawyers.

Update: If you’re looking for DIY-ish startup formation options, this is another viable alternative: Clerky

So you’re starting a company with virtually no budget for legal fees, and you just found a guy in Austin who’s willing to help you out on the cheap. He even bills $175/hr and seems to come well-recommended by other entrepreneurs. Awesome, right? For me it is.

It’s difficult to overstate just how often clients end up paying our firm more to close a transaction, sometimes substantially more (think 5-6 figures), because we have to clean up a mess created by some cheap local lawyer with “startup friendly” (read: questionably low) rates.  Garbage sold at a low price is just expensive garbage.  There’s one solo practitioner in particular who’s done work for two people I know, separate companies, and screwed up big time on both of them (2/2).   One ended up closing a VC round at 2-3x the usual fees in order to clean up the disaster he created. Cheap is awesome until real investors hire real lawyers to actually read the documents your cheap lawyer drafted… or failed to draft.

I’ve previously articulated my views about going alone on startup legal issues, including a discussion on the growing number of DIY tools available online.  There are so many multi-specialty legal issues that come into play in forming, growing, and financing a company, that I highly advise against trying to do things yourself, at least if you expect to raise professional venture capital and scale your business. The stakes are simply too high.

But, the reality is that no matter what every lawyer with a blog says, founders will keep trying to form their companies on their own.  Given this reality, here’s my suggestion to all of Austin’s startup founders with zero funds budgeted for legal fees (and who can’t find a decent attorney who will be flexible):  meet Docracy, read this post, and follow everything very carefully.

Lawyerless > Crappy Lawyer

The beauty of quality DIY online resources is that, while they will never provide the level of service that an experienced, quality attorney will provide, they sure as hell are better than relying on a crappy one.  With the right contracts available for free online (via Docracy), the right guidance (via blogs, articles, etc.), and the patience to seriously read the instructions, you can stand a much better chance of not screwing your company up by doing things yourself versus hiring an incompetent attorney, trusting him to do things correctly, and then finding out two years later that he didn’t.

So here’s my free guide for using the power of the internet to form your own Delaware C-Corp based in Texas. If you are forming an LLC instead of a C-Corp, then for the love of all things good and holy, please get a competent lawyer.  And again, let me reiterate: I do not think you should try to form your startup on your own. My desire here is to simply provide a helmet and a flashlight for those who are going to do it anyway, so that if they are ever able to afford a real attorney and raise serious funding, their legal history won’t be a complete nightmare.  You will screw some things up, but hopefully the clean-up costs will be much smaller than those caused by Austin’s crappiest lawyers.

DIY Startup Formation – Powered by Docracy, Orrick, and “the Internets”

Background Reading:

Requisite Formation Docs:

Steps (Order is important)

  1. Read all of the Background Reading – very very carefully.
  2. Figure out your Founder Common Stock distribution and Vesting details
  3. Execute and File the Charter in Delaware
  4. Execute the Action by Incorporator
  5. Execute the Board Consent (Make sure you designate at least a CEO and Secretary)
  6. Execute the Common Stock Purchase Agreements for each Founder, including all exhibits. – Set
  7. File your 83(b) Election immediately
  8. Fill out Common Stock Certificates
  9. Execute the Stockholder Consent
  10. Have the Secretary execute the Bylaws
  11. Did you file your 83(b) election yet? (30 days within Stock Issuance, or your toast)
  12. Apply for an EIN at the IRS Website
  13. Have officers and directors execute Indemnification Agreements
  14. Have all founders execute a Confidential Information and Inventions Assignment Agreement
  15. Register as a Foreign Entity in Texas.
  16. Keep digital copies of everything in a safe place.

Useful Forms to Possibly Use Later:

The above does not cover granting options to employees via a formal option plan, because, frankly, by the time you are granting equity to non-founders you’re insane for not having hired a lawyer – and the legal issues around options are complicated – real complicated.

Disclaimer: As I said before, you will screw some things up. And yes, trying this yourself is silly and irrational – much like a lot of things entrepreneurs tend to do.  The above steps and documents might not even be the right ones for your startup’s context.  I did not draft the above-referenced documents, nor do I vouch for their legal enforceability. You absolutely should hire a lawyer before trying to form your startup. But, putting all that side, if you read carefully and follow the above instructions, you will be probably be on better legal footing than 99% of the startups formed by terrible lawyers.