How Much to Pay Your Startup Lawyer

Think back to the last time you wrote a business plan for a startup. Do you recall your estimated expense for legal fees? $1,000? $10,000? $0?

How much to spend on legal fees is a common issue for startup companies with more than one correct answer. However, there are a few factors that suggest your startup should loosen up the purse strings.

Back in my college days (post-Prodigy, pre-Google), I wrote a business plan for a Web 0.01 startup company and allocated a meager $500. I had no idea what I’d be getting for that $500, but I figured my business plan software included the “legal fees” entry for a good reason and I did not want to leave it blank.

Fast forward to today. Going to law school, running my own startup company, and now representing dozens of other startup companies hasn’t led me to the exactly-how-much-to-pay-your-startup-lawyer magic number. Instead, I’ve learned to spot the issues that suggest a startup company should be spending more rather than less on legal fees:

(1) Number of Founders: If your startup is going to have more than one founder, this would indicate you’ll need to add to your legal fees total. Establishing and documenting the co-founder relationship is one of the most important aspects of a having a successful startup company. I wrote a previous blog article regarding startup co-founders.

(2) Raising Capital: If you plan to raise capital from any third party, whether from your mother or Oak Investment Partners, your must increase your legal fees. No exceptions.

(3) Public Company – No, I don’t mean a “publicly-traded” company. Rather, the more your startup will have a public presence, the more you will need to spend protecting your startup company from infringers (such as trademarks, etc.) and other 3rd parties.

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Guy Kawasaki provides us with a real-world example of how much startup legal fees may run. Guy paid $4,824.13 in legal fees when he started Truemors. And his legal fees included the following:

-Trademarking Truemors
-Drafting a Terms of Use
-Discussion of copyright, liability, infringement, IP, and insurance issues
-Organizational resolutions and bylaws
-Stock purchase agreements

Guy’s post also has some wise advice about how much to spend on startup legal fees:

You could do less legal work and do it cheaper, but if you ever want to raise venture capital much less go public or get acquired for more than scrap value, this is not the place to save a few thousand bucks.

While Guy paid $4,824.13, I do not recommend using his number as a benchmark for your legal fees. There are too many variables to consider which are both internal and external to your startup company. Thus, I am hesitant to even provide a range of estimated startup fees. But if you consider the three issues (number of co-founders, raising capital, and public company), you will know whether paying your startup lawyer a larger amount is warranted.

Startup Issues

9 thoughts on “How Much to Pay Your Startup Lawyer

  1. Very good information here as usual. Your site is one I look forward to checking out frequently.

    Having a Bootstrap start-up company myself, I can agree that the need for an attorney's assistance sometime is an unexpected expense.

    May getting your view on bootstrapping a start-up would be of benefit to me and your readers.

  2. Very good information here as usual. Your site is one I look forward to checking out frequently.

    Having a Bootstrap start-up company myself, I can agree that the need for an attorney's assistance sometime is an unexpected expense.

    May getting your view on bootstrapping a start-up would be of benefit to me and your readers.

  3. Thanks for the kind words, Scot.

    2 of my views on bootstrapping are:

    (1) Excitement is not a substitute for prudence–I often see people get so excited about a project or contract that they become blind to glaring red flags. Like them, I hope for the best. But I also understand bad things can happen to good startups.

    (2) Evaluate ROI in terms other than just a short-term cash increase–Obviously when you bootstrap, cash is tight but sometimes you can turn $1,000 spent into $100,000 (of savings).

  4. Thanks for the kind words, Scot.

    2 of my views on bootstrapping are:

    (1) Excitement is not a substitute for prudence–I often see people get so excited about a project or contract that they become blind to glaring red flags. Like them, I hope for the best. But I also understand bad things can happen to good startups.

    (2) Evaluate ROI in terms other than just a short-term cash increase–Obviously when you bootstrap, cash is tight but sometimes you can turn $1,000 spent into $100,000 (of savings).

  5. When we began our start-up, I set what I thought was a liberal budget of $25,000 which we put into writing. We were raising capital and had IP to secure. I also wanted to look at tax issues and make sure we were well structured for our limited partners. I interviewed a half dozen firms, all with established reputations in either Texas or internationally. Our final choice was an Austin-based firm with 100+ lawyers to feed and clothe. The first bill was $35,000. One month! I had one of partners scrub the bill and he found many, many billable impossibilities.

    At the end of the day, our total setup fees were $110,000. Any attempt to renegotiate or correct the billing was firmly rebuffed. Not all of this can be placed at the feet of our firm. Part of the problem was our blue-chip board who were sit-by-the-fire-with-a-cognac comfortable with large corporate legal fees. By the time I realized this, we at spent $65,000 exploring what/if scenarios – without one document getting completed. I immediately took over the project and severed our board's contact with the law firm.

    It was embarrassing for me but we paid the bill and moved on. However, the time we spent on nailing every issue from day one was ultimately our saving grace. We have carefully designed balance of controls and well-insulated IP. When rogue investors made several hostile attempts at take-overs and stripping IP, they ran into carefully integrated assignments, subscriptions, and partner agreements.

    I now take comfort in the time and expense spent on the start-up phase. We would not still be here today without it. However, I did take away a few lessons on managing legal fees: use capped project fee billing whenever possible; specify which of the firm's partners are allowed to bill; assign one person as their contact; and read (no, study) the bill as soon it arrives.

  6. When we began our start-up, I set what I thought was a liberal budget of $25,000 which we put into writing. We were raising capital and had IP to secure. I also wanted to look at tax issues and make sure we were well structured for our limited partners. I interviewed a half dozen firms, all with established reputations in either Texas or internationally. Our final choice was an Austin-based firm with 100+ lawyers to feed and clothe. The first bill was $35,000. One month! I had one of partners scrub the bill and he found many, many billable impossibilities.

    At the end of the day, our total setup fees were $110,000. Any attempt to renegotiate or correct the billing was firmly rebuffed. Not all of this can be placed at the feet of our firm. Part of the problem was our blue-chip board who were sit-by-the-fire-with-a-cognac comfortable with large corporate legal fees. By the time I realized this, we at spent $65,000 exploring what/if scenarios – without one document getting completed. I immediately took over the project and severed our board's contact with the law firm.

    It was embarrassing for me but we paid the bill and moved on. However, the time we spent on nailing every issue from day one was ultimately our saving grace. We have carefully designed balance of controls and well-insulated IP. When rogue investors made several hostile attempts at take-overs and stripping IP, they ran into carefully integrated assignments, subscriptions, and partner agreements.

    I now take comfort in the time and expense spent on the start-up phase. We would not still be here today without it. However, I did take away a few lessons on managing legal fees: use capped project fee billing whenever possible; specify which of the firm's partners are allowed to bill; assign one person as their contact; and read (no, study) the bill as soon it arrives.

  7. Jon- That's a lot of cash. I guess it depends on how much you raised, but just for setup. Wow.

  8. Jon- That's a lot of cash. I guess it depends on how much you raised, but just for setup. Wow.

  9. […] new company bosses will have to pay at least some legal fees. There is no getting away from the fact that you are going to need advice. Firms that trade abroad […]

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