Staying Lean on Legal While Forgoing VC Funding
Selecting a more modern, efficient approach to legal counsel can make all the difference
The “be your own boss” trend is gaining traction across many roles and industries. Launching a successful business is no easy feat, so what entrepreneur would pass on the chance to gain a significant financial head start through venture capital funding? VC’s have provided many businesses the opportunity for growth that they may not have had otherwise, with some of today’s most successful companies benefiting.
So this may be surprising to most, but recently fewer and fewer businesses have taken on VC funding, and the reasons behind this are completely reasonable.
Venture Capital comes with compromise
Fundamentally, VC money comes with strings attached, both legally and psychologically. When you take in a large investment from a VC, you’re also frequently giving that VC a seat or two on your board of directors. This means that the company founder will likely feel significant pressure to make business decisions based on your VC’s advice. Some of these decisions may result in faster or accelerated growth in order to show a return on investment, which may ultimately mean sacrificing your more strategic, long-term visions and opportunities.
VC funding may also place your business’ focus on achieving short-term goals rather than striving for long-term benefits. Your investors want a return on their contribution, and they’d like it sooner rather than later. There’s also the unnecessary spending of capital -- now that you have it, you need to do something with it. Access to too much capital hurts the scrappiness of the business founders, as decision-making becomes hugely impacted based on what metrics the VC wants to see.
So what’s a scrappy, innovative entrepreneur meant to do when they have to stay lean while budgeting for one of the most notoriously exasperating business expenses -- legal? Risk is absolutely inherent to growth, and as such, legal counsel is a non-negotiable aspect of any successful business. The good news is that it is entirely possible to stay lean on legal while opting out of VC funding, and selecting a more modern, efficient approach to legal counsel can make all the difference.
Opt to Outsource
The overhead that comes with compensating executive officers for a non-VC funded company can be cost prohibitive, for sure. Many business leaders understand that there are a growing number of positions that can be outsourced, but few are aware that legal is one of them. Utilizing an outsourced general counsel allows you to take advantage of the flourishing “shared services” model, and “share” your in-house attorney with other companies.
Outsourced GC’s can offer your business real-time legal advice, industry-specific knowledge of your company culture, product, vision and team, as well as automated systems and workflow – and some even do so while operating through a predictable flat-fee monthly rate that won’t break the budget and allows you to plan your legal spend accordingly. Properly outsourced business counsel can help mitigate and supervise your business’ risk, all while becoming a transparent and flexible partner to your growth and success.
Another reason why outsourcing your legal counsel is often the smarter choice? The truth is, most companies simply don’t need a full-time in-house attorney. For most scaling and even mature businesses, there just isn’t enough work to support the accompanying salary. In fact, hiring a full-time GC can easily cost your business over $200,000 each year. Even in the event you can afford an in-house hire, you most-likely would have to find other things for that person to do in order to justify the spend.
Use legal resources intelligently
Something I’m very passionate about is the intelligent use of resources. As a practicing attorney, the “billable hour” has always perplexed me, and is still very much a part of most traditional law firms.
When you’re charged for every minute on the phone, every email exchanged and each simple task completed, your legal counsel is essentially being rewarded for inefficiency. The ugly truth is that attorneys are often taught ̶ and encouraged ̶ to bill as many hours as possible. At most law firms, associates are required to bill a minimum number of hours, at an average of 160 hours per month.
Competitive attorneys can and will create all manner of ways to bill more hours, from redlining a contract that didn’t need it to requesting meetings that could easily have been emails. The kicker is, it often doesn’t matter if the work being billed isn’t results-producing or even necessary, it only needs to be justified. These misaligned economic incentives promote a business dynamic that is less about being partners than a transactional relationship.
Luckily, there are plenty of great resources out there that can help reduce your legal spend and promote efficiency. For example, I like Contract Moxie for things like NDAs and independent contractor agreements, and they even provide helpful downloadable explanatory videos. Another favorite is Carta, which is a really a great equity management and corporate governance software. With Carta, you ̶ or your outsourced GC ̶ can easily issue stock options and draft board minutes in a templated manner.
The moral of the story is that you shouldn’t be afraid to utilize your legal counsel because you know the meter is running, and there are plenty of quality tools and systems that can help you tackle simple legal tasks while also promoting efficient legal spend. Your business shouldn’t suffer because you forgo VC funding. You’ve been astute and resourceful enough to get your business this far, and with the right outsourced legal counsel and tools in place, the next level isn’t far out of reach.
Beth Lebowitz is the founder and CEO of Auxana Inc., a marketplace for companies, attorneys, and executive resources, and the founding attorney of Nimbus Legal, an Outsourced General Counsel law firm.