Among the benefits of leading a small legal practice is that it keeps all of the relationships close and manageable. I know my clients well, and I serve them directly (not via associates, paralegals or other intermediaries). Larger law firms are, well, larger. This means that there are dozens, if not hundreds, of people affiliated with one another under the firm’s banner, many of whom don’t know each other particularly well. That is advantageous in some ways — especially financially for those at the top of the hierarchy. On the other hand, the partners are all responsible for each other’s work, legally and — as my tale below illustrates — in other important if less formal ways.
I recently asked some of my colleagues to send me recommendations for a superstar lawyer with a specific capabilities. I was given the name of one fellow and looked him up. Turns out, he is at a national law firm with a Chicago office that I encountered when I was general counsel at HighBeam Research. A corporate lawyer from that firm (not the Chicago office) was on the opposite side of the transaction from us when we were selling the company, and was one of those lawyers who gives lawyers a really bad name — overly legalistic, completely impractical, and lacking in any social skills on top of it all. (She would have been a great Dickens villain.) The deal almost didn’t happen because of her style of lawyering. I still have a physical reaction when I think of this — and it took place almost 4 years ago.
The lawyer who was recommended to me is probably very talented, but given his partners are, I will probably look elsewhere.
Lousy photo of Adrian Holovaty (right), with Alfonso Ponticelli
At last month’s Northwestern Entrepreneurship Conference, Groupon CEO Andrew Mason was a featured speaker. Mason, as many now know, was a music major at Northwestern. Peter Barris of NEA (one of Groupon’s major investors), who shared the stage with Mason, noted that musical talent seemed prevalent (in his experience) in technology entrepreneurs.
This observation came to mind when I went to see another fine Chicago entrepreneur, Adrian Holovaty, at the Green Mill last Wednesday. Adrian, the founder of Everyblock (now part of MSNBC.com) as well as the co-creator of Django (“an open source web application framework for Python”), is an extraordinarily talented guitarist, and performs each Wednesday at the Green Mill as part of the Django Rheinhart-influenced guitar group Alfonso Ponticelli and Swing Gitan. (Hmm, wonder where he came up with the name for that programming language of his.)
If you haven’t been to the Green Mill, it’s one of the famous music venues in Chicago, a must-visit. So go on a Wednesday and see Adrian play. I can’t say how Adrian’s software code his, but the man can really play guitar.
Lawyers, like everyone else working for a business, need to add value. I see so much legal work, however, that adds no value whatsoever. The economics term for it is “deadweight loss.” The client might as well just take out a few hundred-dollar bills and burn them.
This blog post is the first of what is sure to be a long series, shining light on things lawyers do, large and small, that are a complete waste of time.
Lawyers as a group too often ignore common sense, focus on form over substance, and fail to weigh the costs of an activity against its benefits. We have to get back to using good judgment, focusing on what’s really important, and abandoning the false idea that there is no risk too small to beat to death.
In my last post, I made a comment about startups not needing 45-page LLC agreements. I guess there’s even worse being perpetrated out there. A friend, who also represents startups, reports the following:
Apropos of your point, I am in the process of negotiating a 2-member, early stage operating agreement which spans 70 pages
I love Fred Wilson’s blog. Sure, he’s a smart VC, but he also writes well and believes in sharing his knowledge. I always learn something from his posts.
A little more than a year ago, Fred issued a challenge to startup lawyers: to keep legal fees down for startup investment transactions. Way down. In his view, when an entrepreneur sets up and raises $500K to $1MM, legal fees should be $5,000 or less. I completely agree with that. The fifteen or twenty thousand dollars that companies are paying for stuff like this? It’s nuts. Read the rest of this entry »
Here’s a lawyer secret: we recycle our documents. Over and over and over. We even have a fancy word for it – “precedent.” For the most part, the use of precedent is efficient and benefits the client. Few would want to pay for their agreements to be drafted from scratch, when a document from a similar transaction could be adapted. Read the rest of this entry »
UPDATED: The JOBS Act passed Congress and was signed into law by President Obama. Final bill text here.
I’ve previously posted (here and here) about the crowdfunding measures that have been working their way through Congress. The House has now passed the JOBS Act (text here, for the truly wonky), which contains these measures, and the Senate is debating the bill and some amendments as I write this.
If/when a final bill passes, I will review the final details and what they mean for entrepreneurs.
I certainly agree that it would be great to make it easier for startups to raise limited amounts of capital, and to allow non-“accredited” investors to participate in these investments to a reasonable extent. I am not so sure about the other provisions, which may loosen some appropriate rules put in place in the wake of Enron and Wall Street conflicts of interest. The relaxing of those rules may help a few of the larger “small” companies, but if it comes at the cost of significantly increased fraud, that would not be a good thing for anyone. I’m just not convinced that the regulatory burden is really a significant cause of a reduced level of IPO activity.
I strongly suspect that a broken and abused patent system is a far greater headwind to innovation and drag on the economy than the IPO rules are. But I digress…
Portfolio.com has an update on today’s action, and a good round-up of some of the critics’ views.
By tomorrow, we may have a final bill and then it’s in the President’s hands.
A great many founders that come to me for representation want to split ownership 50-50 with their co-founders. I’ve been thinking about 50-50 issues a lot lately. These situations present interesting challenges for the attorney, in terms of how to construct reasonable, practical mechanisms for dealing with disputes that can take place between the founders, which otherwise can result in deadlock.
Before sharing some thought on that issue, I first want to explore the question, should founders even do this at all? This is a question that has always aroused significant debate in entrepreneurial circles, and I am sure it always will. Read the rest of this entry »
Here’s something that I’ve heard a lot over the years: “Most jobs are created by small businesses.” As a founder of a small business, who now represents them in my law practice, I’d like to believe that this is true. When I hear the same thing over and over again, though, I wonder. And then I research.
It was not hard to find an article taking the contrarian view of small business job creation. A recent Business Week piece questions the quality of the jobs created by small businesses. It notes, for example, that larger companies have more stable, better-paying jobs with benefits. The article points out that many small businesses are neighborhood stores and professional services companies – the kinds that are not trying to grow.
For the small business perspective, I visited the Small Business Administration website. On the SBA website, we learn that small businesses (the SBA defines a small business as one having fewer than 500 employees), though representing 99.7 percent of all employers, employ about half of all private sector employees. That’s not exactly a compelling stat for the dominance of small business in our economy.
Put the static numbers aside and ask, where does job growth come from? The SBA headline is that small businesses “generated 65 percent of net new jobs over the past 17 years.” A recent research study, cited in a Wall Street Journal article, supports the claim that small businesses create more net new jobs, per employee, than do larger businesses. However, the study concludes that the effect vanishes if you control for the age of the enterprise. It is young businesses, not small ones, that drive job creation. In other words: entrepreneurship.
The SBA data seems roughly consistent with this finding. The SBA overview concludes that much of the job growth is from “fast-growing high-impact firms, which represent about 5-6 percent of all firms.” So, who are these companies?
You might think that they would be Internet-age, entrepreneurial companies – Google, Facebook and the like. While these kinds of companies are certainly represented in this cohort, the SBA tells us that the fast-growing companies are older on average somewhat older than startups – 25 years old, in fact. Though definitely on the front side of the curve, they are not brand new.
Digging further, into a research paper called “High-Impact Firms: Gazelles Revisited,” I learned that of “high-impact firms” – those whose sales doubled over a four-year period and have high “employment growth quantifiers” – 94% of them were companies with fewer than 20 employees (based on 1994 – 2006 data). Score one for small business? Not so fast. Here again, as with the static employment numbers, small high-impact firms – though by far the most numerous – account for about half of net job creation, with large high-impact businesses accounting for the other half.
The Gazelles paper is interesting reading. What stands out is how hard it is to identify any distinguishing features of fast-growing businesses. The proportion of high-impact firms does not vary much by region, industry or city/rural density. (One metric that grabbed me, though, was the high proportion of high-impact firms located within 20 miles of a central business district: 44 percent. The peak seems to be within the 6 to 10 mile band, and it declines moving out from there.) Moreover, there seem to be no reliable signals of companies that are about to become Gazelles.
As a non-expert trying to make sense of this information, my conclusion is that small businesses are quite important – not necessarily to the extent that their boosters claim, but much more than their detractors admit. I get that new businesses – regardless of size – account for most job creation, but didn’t nearly every new business start out as a small one?
What this means to me is that entrepreneurship is critical. The drive to innovate and grow that I observe among the cross-section entrepreneurs that I represent tells me, in my gut, that these are the Gazelles of the future.
