Lawyers as deadweight loss, Part II
I know it’s not front-page news that big law firms charge big fees. I should know; I worked at a couple of them. Still, I’ve been out of that world for a long time now, and one forgets.
So, without naming any names, here’s a story: A startup client of mine recently secured a significant equity investment from a major local private equity investor – a commitment in excess of $25 million. As is often the case, the investor dictated the lawyers that the company had to use. (Hint: it wasn’t me.)
The deal just closed, and I caught up with my client to get the lowdown. The legal fees on the deal were – wait for it – over $175,000. Now, if you look at that as a percentage of the total investment committed, it was less than 1 percent, which does not seem so bad. But still… $175,000!!! At my rate ($295 per hour), that would be about 593 hours of my time, or about 14 weeks of doing nothing else. Of course, at the firm they used, the first year associates probably charge $295 per hour. Let’s figure, for them, a blended rate of $600 per hour. Now that’s “only” 292 billable hours, or about 7.3 weeks of fulltime work, or three people doing nothing but this deal for 2.4 weeks each, or, well… no matter how you cut it, it’s just hard to see how numbers like that make sense on an early-stage equity deal.
The client reported to me that he had to raise a bit of a stink when he saw time entries for multiple lawyers “sitting in” on conference calls. I guess that’s one of the ways you can get a deal like this to 292 hours.
Hey, look – there are some matters where the resources of a big firm are truly necessary. The big firm I worked for did great work for huge PE funds. The fees were big. Really big. But the client didn’t bat an eye. The deals were big and complicated. Specialized expertise was often needed – tax, real estate, employee benefits, and all that. Maybe the client could have shopped around for a better deal, but the savings wouldn’t have been material and they knew my firm and its experience.
I just don’t think this applies to a modest-sized private equity investment like this is one. I could have easily done this deal. I am sure my bill would have been something like $25,000. The private equity guy has a lot of money, but I’ll bet he could have found something good to do with $150,000 in savings.
(For Part I in my occasional series about unnecessary legal expenses, click here.)