FAQ - Startup Business 003

Startup Law 101 Series - What distinguishes your "founders' firm" from large law firms offering startup business legal services?

Grellas & Associates is a "founders’ firm” providing startup business (and other) legal services - that is, we represent individual founders, founding teams, and their companies and do not represent or hold potentially conflicting interests in VCs.

Unlike many larger law firms, our law firm emphasizes flexibility in its relationships with startup business clients. If entrepreneurs have a business model that requires early-stage VC funding, the firm assists in that process. Many of the firm’s startup clients, however, do not want to be pressured into getting such funding in the early stage, as this often results in high dilution, loss of control, or both. Instead, many of the firm’s founders deploy a strategy that uses early-stage angel funding, or private funding from “friends and family,” or simply self-funding from operations, with the goal of deferring VC funding to a stage when it can be done advantageously from the standpoint of the founding team (i.e., on more favorable terms, with less dilution, fewer onerous “gotcha” provisions) because the company’s leverage is stronger and because its market cap is higher.

Our law firm also distinguishes itself from larger firms in that the large firms use a highly leveraged business model by which the firm may have as many as three associate attorneys for each partner. The associates have varying degrees of experience, ranging from virtually none at all to up to eight to ten years in some cases, with the average likely being two to five. This means that the majority of the day-to-day work on a typical startup business client’s matters will be done by attorneys having only modest experience, though it may be done under the supervision of an experienced partner.

Grellas & Associates uses a different model. Each of our attorneys has at least fifteen years’ experience as a California lawyer. There is no reliance in the firm on the work of green lawyers. The aim of this model is to attempt to bring a practical focus and increased efficiency to a client’s matters.

There are major differences as well in billing structures. The large firms have in recent years begun to bill even their most inexperienced attorneys at rates of $500 per hour and up, with partner rates topping out at near $1,000 per hour. The most senior attorney at Grellas & Associates will bill at approximately one-third the top big-firm partner rate.

What all this translates to is that big firms tend to target VC-backed companies as their base of startup business clients and, indeed, will use as a standard the idea that they must be “VC-fundable” before they can be “qualified” as prospective clients. If such a startup company client gets its initial fees deferred pending VC funding, and if a Series A round is accomplished within the near term, bringing a couple of million dollars or more into the company, the logic of the structure can support high-priced fee billings by what is often a team of lawyers working on the startup’s matters. If you are a Google-type startup, this model can work for you as a client. If you are any highly-funded startup, this model can work. Moreover, from the law firm side of things, if you are a large law firm, this model works because you have developed long-held and valuable relationships with prominent VC firms, and those connections are a valuable asset that your firm can leverage with a founding team that will depend heavily on near-term VC funding to succeed with its business model.

The large firms are hence fully invested in this model. They often have represented the VC firms themselves in either setting up the venture capital firm or in advising it in its internal business affairs or both. Moreover, once the VC firms take control of a startup, the VCs effectively become the decision-makers for the startup clients whom the firm represents, further solidifying the ties between the VCs and the large-firm lawyers. In recent years, the large firms have taken the added step of investing as limited partners in the VC firms themselves, thereby taking a direct ownership interest in the investors who will be funding their startup client companies. As these ties have become more and more intertwined, the law firms themselves have begun to see themselves almost as having a sort of “investment banker” role in this process. The straight practice of law has given ground in part to the allure of brokering heady deals with prominent Google-type startups who have essentially changed all of world commerce. They have thus shaped their business startup models with this brokering-type function as its focal point. That is why a startup needs to be “VC fundable” to qualify as a prospective startup client that might interest such a firm.

This, however, is a very inflexible model for an average entrepreneur or founding team attempting to launch a new venture if near-term VC funding is not foremost in their minds. It is precisely to such entrepreneurs and to such founding teams that Grellas & Associates most seeks to appeal.

Thus, the niche occupied by Grellas & Associates in the startup business legal market does not really compete with that occupied by the large law firms doing startup business work – it complements it. The large firms place primary interest in a particular type of startup (almost invariably referred to by such firms as an “emerging company”) which goes for VC funding right out the gate and which thus particularly values the important VC introductions it can obtain from the well-connected large-firm lawyers. Grellas & Associates, in turn, places primary interest in entrepreneurs and founding teams that may or may not want VC funding at inception and that seek to pursue a more flexible and independent path than that offered by the one-size-fits-all approach of the large law firms, whether it be an acquisition path via one strategic investor or via angel investors or self-funding or whatever other funding strategy appeals to the startup.

Grellas & Associates is a “founders’ firm” precisely because it occupies that complementary niche in the startup-business legal market appealing to more independent-minded founders as opposed to the larger firm niche where founders tend to plug in to a one-size-fits-all VC-based model of startup formation.

G.G.

(Follow George Grellas on Twitter for new articles)

Back to Startup Law 101 Series of tutorials for founders and entrepreneurs.