Ask HN: My lawyer has asked for 5% equity. Is that fair?

https://news.ycombinator.com/item?id=9737222

by serialguy • 11 years ago

44 36 11 years ago

news.ycombinator.com

I'm about to launch our site for my funded startup.

I've worked with a senior lawyer on a previous project. Now he's asking for 5% and $1k per month retainer. We need some facilitation in negotiating with the investor, shareholder agreement, founder agreement, site terms, site privacy policy, single contract for all suppliers. He's also offered to give off the cuff thoughts on matters as they arise. We don't need per-supplier or per-client contracts.

He's indicated he's open to a lower %. What's fair? What do other startups give and what do they get in return?

pallian• 11 years ago

I've never heard to lawyers take equity for their services - is this common?

Lightningbear• 11 years ago

Depends What are you getting out of it?

asabjorn2• 11 years ago

A top law firm took 0.25% pre-funding with no retainer in a previous startup I launched, and with that they agreed to delay all bills until a funding event so they took on risk for that price. His ask is way too high and it would in my opinion be irresponsible for you to commit 5% + 12k/year as a retainer.

pbiggar3• 11 years ago

I was under the impression most top law firms would defer all bills for free.

asabjorn2• 11 years ago

I am sure that depends on your leverage and the terms. The equity can be used as leverage to avoid personal liability in the case where your track record is not strong enough to defer bills for free.

nmbdesign• 11 years ago

I wouldn't give more than 2% personally

scottydelta• 11 years ago

5% equity is high and unusual for a lawyer.

esquivalience• 11 years ago

If you do go this way, don't forget registering your trade mark and employment contracts.

If he will be available for a certain number of hours per month during the time that he is a shareholder, that could be quite valuable.

pm24601• 11 years ago

No. Don't do it. He is asking for money - which shortens your runway AND a significant chunk of equity. In other words, he is extracting money from the business and asking for equity for the privilege of doing so.

The items you listed are not worth having a lawyer at all.

Look on places like docstoc for standard boilerplate agreements that will work just fine.

Look at wordpress.com's TOS https://en.wordpress.com/tos/ which they have made available under CC license.

If you really feel like you need a lawyer to draft a document or two. Pay for it with cash and get it free and clear.

Ask yourself this: Which is more valuable, a lawyer which will not build the business or a sales person or a marketing person or.. or a developer.

A lawyer is the least valuable profession to bring on board. An accountant would be better. But a lawyer for standard legal agreements, examples of which are freely available? No.

But if you feel inclined to pass out money foolishly let me know; I could use some.

cactusface• 11 years ago

Ask how much he wants per month with no equity. If you give him equity, you have a strong incentive not fire him. Well, that sucks if down the road you want to fire him. Also, retainers usually cover billing by the hour and are not paid as a salary. There's more than one red flag here.

pbiggar3• 11 years ago

No, this is lunacy. Unless he's also providing a serious discount.

If the lawyer is also going to be an advisor, a typical advisor grant is 0.1% - 2% (depending on stage of company). Even then it would vest over typically 2 years.

I would find a new lawyer. As in, I wouldn't trust this lawyer, since he asked for this.

pbiggar3• 11 years ago

To reassure yourself that this is true, there's a dollar amount he's asking for here. If your company has $1m valuation, that amount is $50k. So he's asking for $50k as a signing bonus, in an arrangement in which he'll give you maybe 50 hours of advice over the year. In addition to fees. (And your valuation is likely higher, in which case his "fee" is too).

Run, dont walk, away from this dude.

Also, I heard advice somewhere to never ever give equity to vendors.

bsjolund• 11 years ago

It's quite common for a banker to have a % success fee tied to raising a round of funding. Retainers are also quite common during these proceedings. You have to way the options of taking him on as a shareholder vs. paying him an up front % for the success of raising a round with his help (if he's involved with this).

5% equity does sound like a lot, but then again it might be cheaper in the long run if you get a solid contract stipulating exactly what services (hours per month/for how long..) this will include. Beware of the 'I'll help you out every now and then" type of agreements.

interesting_att• 11 years ago

These terms seem absurd to me. 1k/month retainer for a startup alone seems awfully high. 5% equity is absurd. Get a new lawyer. If in SF, there are some great tech lawyers who won't rip you off.

madaxe_again• 11 years ago

0 is fair. Pay him with money.

jmedwards• 11 years ago

Unless you are getting into a business that would require constant specialist legal/compliance consultancy, and assuming it is for regular start-up type legal advice along the lines of what you've listed, that's absolutely outrageous - stay clear of the shyster.

A good way to think about may be this: if you were to raise an angel round of $100,000, how much of a stake would you be selling: is that in proportion to what the lawyer is asking for?

When answering that question, I would also keep in mind: (1) is the lawyer's advice going to open up as much opportunity value as the angel coming on board ($1 != $1), and how much of a stake it would indirectly cost you if you were to simply raise an angel round and pay the lawyer money instead (which shouldn't be a huge amount; the kind of work you cited sounds like junior level work not much more than tailoring off the shelf agreements).

jbverschoor• 11 years ago

Just find a different lawyer. How are you even gonna sell this to the shareholder?

bsaul• 11 years ago

Unless the site has deep legal ramifications, the fact that someone just think about giving equities to a lawyer is a symbol of how rotten to the core the legal system is in the US.

The whole patents mess plus a huge culture of suing people and companies would make me want to think twice before creating a business there.

tddfuckwitz• 11 years ago

Can't blame him for asking. He has obviously sized you up correctly, given you didn't say no to him straight off the bat. Unless you expect lawyer cannons to be fired broadside at your startup on an hourly basis, how much involvement would you really need? There is your answer. Now, about my ten percent equity for the above advice...

kzhahou• 11 years ago

What would be appropriate for taking care of incorporation, pre-funding?

onoyoudont• 11 years ago

Wilson Sonsini took 1% back in the heyday of the dot-com bubble.

Things might be different now, but it's a Silicon Valley data-point.

hippieheadcase• 11 years ago

Don't give any equity to your lawyer. If you do, you'll have a shareholder with a huge conflict, and with the power to self-deal. Remember this is the person who's going to actually read the stuff you sign. I got burned by this. Your lawyer is the one person you want to pay in cash. And that's all.

meric• 11 years ago

Are you starting a patent troll company and need a lot of lawyering? If not, then that's too much lawyer you're paying for.

fpalmans• 11 years ago

If this lawyer is in the south-bay area, I might even know to whom you are referring. Unlikely though that might be, I wish to repeat the tone in the many comments you have received and strongly advice you retain different representation!

All the best with your venture! Frank

mdekkers• 11 years ago

No this isn't fair. Get a professional.

brador• 11 years ago

No skin in the game = no equity. No exceptions.

bsbechtel• 11 years ago

What's his name? I feel like he should be outed to the HN community so no one else uses him. I can recommend my lawyer if you need one, though he's based in the midwest, not SF.

A deal like this would up your risk by an order of magnitude compared to whatever legal services he can offer to lower your risks. The reason being was stated by others here that he'll shorten your runway and also have say over what you do as a company owner because he's a shareholder.

Keep in mind that legal agreements and compliance are just formalized ways of humans coming to an agreement to manage risks. Risks are not things that are actually going to happen, but most often have a very small chance of happening. Of those things that have a chance of happening, most won't actually kill your start up (though they could be expensive). If you haven't launched yet, your biggest risk is finding product-market fit, not legal compliance.

While I'm not at all advocating to break the law or be reckless in the area of legal requirements for your start up, keep in mind that what's more important is the quality (read: character) of the people you choose to work with, not the formality of legal agreements. This is most important with your first investor. If you need a lawyer to negotiate with your investor, this may not be the right partner, but I may be reading too much into that.

Your lawyer though sounds like a real piece of work...he's asking for 5% equity and a $1K/month retainer for legal services. The problem here is first, he's proven his 'off the cuff' business advice is useless because his $1K/month retainer is going to drain cash from your start up lowering the odds of long-term success, but he's asking for a 5% equity cut hoping to cash in on the long-term success of your company. Sorry, but this guy is a fin idiot.

The second problem is lawyers are hired to offer legal counsel, not business advice. I don't know what the laws are in this area, and I know many lawyers offer 'business advice' as an extra selling point to win clients, but offering business advice to a client who is paying you for legal advice and not clearly defining which is which seems like a good way to get yourself sued for malpractice. The odds of this actually happening may be small because most people who take bad business advice from lawyers would go out of business and then not have money to sue, but I can't see malpractice insurance companies liking the fact that lawyers do this. Maybe it's legal to do this, but it sure seems like the practice is muddying boundaries in a domain that specializes in setting limitations and boundaries, clarifying expectations, and crystalizing the unclear.

If your lawyer is mixing legal and business advice, I would take it as a sign that he's a bad lawyer as well. In my experience, this has proven to play itself out in real life many times.

I know I had a hard time figuring out what makes a good lawyer when I was first getting started, but here are a few things I figured out along the way: -Obviously recommendations and awards for the firm, but only as one data point. -He/she can offer up templates for just about every contract you listed above. If his firm doesn't have a standard one on hand, he can reach out to his network or recommend someone for you instead of charging you to write a new one. Obviously this is cheaper and will save you money. -He/she refers you to others for knowledge outside of their area of expertise. -The standard contracts the firm has on file have been proven to stand up in court. Also, the lawyer knows how the local courts will rule on situations not covered in their standard contracts. -The lawyer is straight forward in his answers and doesn't pontificate on legal theory. This is a waste of your time and his, and what matters is if a judge is going to rule you owe someone $100,000, not legal theories. -The lawyer doesn't try to sell you on extra services, most especially 'business advice' bs. -The lawyer is more interested in building long term relationships, and shows it by undercharging you for the first few bills you receive from him. In the early stages of trying out any lawyer, keep a very close eye on the time he spends with you and audit his bills. I had one accountant try to charge me triple the time we actually spent with him. This holds true for any professional consultant you hire.

Good luck!

codegeek• 11 years ago

As many others already said, this is just crazy. Don't do it. Also, Equity should be like children. Protect them with everything you got and only let very important people access to it who make a core difference

grizzles• 11 years ago

He's open to a lower %? How nice for him. I'm open to taking 1-5% too for this comment. Seriously though, if you don't treat your company's equity as precious, who else is going to?

As pbiggar said, this is lunacy. Taking a lawyer on as an investor in any early stage company is extremely risky. You have no idea the trouble they can stir up as a shareholder if they feel like it. The fact that he wants cash on top? This guy should be offering you his first born son for you to even consider it.

Read this (they got off cheap): https://battlehardened.wordpress.com/2012/02/07/a-5000-chair...

Nadya• 11 years ago

Those words “without prejudice” are lawyer speak for “I’m not going to do anything now, but I retain my right to sue you at any time in the future for any amount”.

Learn something new everyday.

However, he had given the chair as a gift of his departure by saying they could keep it. It doesn't sound like he'd be able to sue for the chair. In fact, under what grounds did Bill have the right to sue at all or ask for any amount of money or be required to sign papers if he was never officially signed in to the CEO position?

I feel a lot of information from that story is missing.

nakedrobot2• 11 years ago

F* this scumbag and run away fast.

Rainymood• 11 years ago

I don't see how all this 'advice' is less than hypocritical.

I keep hearing 'overshoot' your salary range when negotating by X... and then when this lawyer does it OP should suddenly "run, dont walk, away from this dude"?

Strange crowd ...

danbower• 11 years ago

There's overshooting and there's asking over an order of magnitude the going rate. That suggests a lack of moral fibre to me.

gesman• 11 years ago

5% AND $1k/month?

Doesn't make sense. I also envision if you refused - he'll retaliate with exhorbitant fee for past, unpaid services to make you "change your mind".

Let him know that you need to think about, clear all bills with him and then fire him.

Someone needs to go back to school to learn a few lessons.

egusa• 11 years ago

if you're looking for another data point, when I raised funding for my 1st startup in the valley I believe the lawyer (this was from a top-tier firm), offered to defer the first $60,000 in fees (until we raised funding) and they asked for a 1% equity stake. It seemed like this was the policy for most of the firms I spoke with.

justonepost• 11 years ago

In negotiating it's always about BNA. Best Negotiable Alternative. Get a competing offer from 2 more lawyers, pick the best one.

Ask HN: My lawyer has asked for 5% equity. Is that fair?

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