An Entrepreneur’s Guide to Dealing with Lawyers

The relationship between lawyer and entrepreneur client is difficult, especially for less-experienced entrepreneurs, to master. Because lawyers are so important to the entrepreneurs, it is important for entrepreneurs to attempt to find ways of working successfully with the person on whom they depend so completely, particularly in the early stages of a developing business.

By:
Arthur Lipper, III
British Far East Holdings, LTD
(Forwarded by NASVF.org)

Why is the relationship so difficult? What makes the level of customer of client satisfaction frequently unsatisfactory, and what, if anything, can be done about it? First, let’s consider the psychological, intellectual, and financial self-interest points-of-departure distinction.

The relationship usually begins when clients contact lawyers for assistance in accomplishing a specific objective. Clients know what they want to achieve. If they are typical entrepreneurs, they want the objective accomplished very rapidly. Being controlling personalities, as are most entrepreneurs, they quickly become frustrated when confronted with obstacles and tend to blame the person pointing out the problems of the problems. Although intelligent entrepreneurs do not want a "yes" person for an attorney, they do not want to have to sell their attorney on their ideas or projects. The entrepreneur wants an advocate more than a counselor. Entrepreneurs usually see their situation with clarity, perhaps with oversimplification. It all seems so simple to them. They are frustrated when others cannot or will not see it their way. Remember that entrepreneurs, usually during the period they are spending the greatest amount of time with their lawyers, are in the fund-raising mode. In this mode, the entrepreneur is likely to frequently be on the more or less receiving end of rejection. Such rejection and/or waiting for responses from funding sources, that seem to move with glacial speed, do not put entrepreneur clients in the best of moods to be told why things can’t be the way they want.

Lawyers have both a responsibility and a possible liability to their clients. Lawyers may want to be an advocate and emotionally the ally of their clients but frequently feel they can best be of service by remaining aloof, identifying the problems, and thereby effectively saying "no" to their clients’ wishes. Lawyers have been trained to seek comfort only from precedent. They have been taught that if a body of competent authority, a court, has found a result to be "right," then it is right until a body of higher authority reverses the decision. Therefore, lawyers believe that what has been found correct is correct until otherwise decided. Entrepreneurs, of course, are in the business of looking into the future and feel they are very much a part of the future. They are more interested in causing future change than in being bound by the past. Almost by definition, lawyers and entrepreneurs are opposites.

Entrepreneurs must, to be successful, be creative; one has to reject established and authoritative source beliefs and, at times, facts. The creative person finds ways around obstacles, rather than simply identifying their presence and, perhaps, searching for paths others have used in circumvention. Lawyers’ successes depend, in part, on being well organized, on being able to keep many different matters neatly in their minds and files. Their businesses depend upon their reputation, and one of the prized kinds of reputations is for dependability and practicality. For lawyers, there is more to lose than gain in seeking the brilliant but very different solution; it may subsequently prove indefensible, and even if it succeeds, their colleagues are likely to describe it condescendingly, and perhaps a bit enviously, as an "aggressive approach that happened to work." Lawyers live in a community of peers, and peer judgement is important to them. Entrepreneurs have forsaken community judgement to pursue what they believe is right, acknowledging it to be different and therefore probably better. Entrepreneurs know intellectually they may fail, but believe the odds, due to their skills and superior vision, favor their success. Their failure is that of a businessperson in a business. It is not as fiduciaries giving clients who depend upon them advice that turns out to be wrong and therefore damaging to both the giver and receiver of the advice.

Now we come to another significant problem area: time. Time is the measure of the commodity the lawyer has to sell. Time, itself, has no relevance for the entrepreneur. Entrepreneurs are prepared — no, want — to spend every waking hour pursuing their destiny, developing their project, managing their company. They know not from hours or schedules. They are compulsive, driving, and driven. They have one project that is vitally important to them. They really don’t know psychologically how to deal with the professional who has other clients, especially during periods of their need. They view their attorney as their advocate, friend, ally, co-conspirator, father figure, and comrade-in-arms. It is therefore distressing to the entrepreneur when, at the end of the meeting, the next client appears, also demanding of the same intense attention.

On the subject of time, it should be noted that one of the problems is that some attorneys habitually underestimate to the client the complexity of an issue or process, partially as a means of selling their services. They recognize that the client wants the job done quickly and inexpensively. Therefore, a little like "bait and switch," they indicate that the process will be about 20 hours or $3,000, when indeed 100 hours is more likely to be the count and therefore $15,000. In all fairness, lawyers frequently have an almost impossible task in accurately forecasting the amount of time a matter is going to require. The client frequently withholds information that would have helped in the forecast, either out of ignorance or in an attempt to make the job look simpler than it is, and therefore less warranting of a high fee.

Another problem is one of the entrepreneurs. They read situations quickly and focus on finding solutions rather than problems. In their own minds they become almost as or, at times, more knowledgeable about relevant law than their lawyers. Not unlike prisoners in jail, entrepreneurs will actually study the aspect of law that are important to them. They will be prepared to debate these aspects of lay, and frequently the supporting decisions for the position they want to take. It is almost inevitable that as the lawyer explains the law to the client and describes the rationale for the adoption of positions, the client becomes more educated, but having a different mind-set than the lawyer, reaches different conclusions.

The client is frequently in the position of the "wish becoming the parent of the thought" as entrepreneurs are only focused on achieving their objectives, and the basis for boilerplate is of little interest to them.

Finally, money is a problem. Attorneys have only their time and, of course, knowledge and experience to sell. The attorney is not usually, by choice, a partner or shareholder in the client’s business. This is not to say that attorneys do not frequently become interest holders in the client’s business. They do, but frequently as creditors. It is to say that attorneys, as professionals, want to be paid, in cash, and within reasonable time after presenting their bills for the services rendered. However, putting cash availability as an issue aside, entrepreneurs are only objective- and achievement-focused. They are concerned with their own personal sacrifice and therefore and not likely to be impressed with the attorneys’, or other of their associates’, sacrifices made on their behalf. The word "associate" is key. Entrepreneurs see all who work with them as being team members. In their minds, team members win when the team wins, and it is almost against the best interests of the team for any of the members to take assets out of the game before it is over.

Of course, most entrepreneurs are too sophisticated not to understand intellectually the difference between fellow equity-owning team members and a professional advisor. Nevertheless, what I have described is how most entrepreneurs really "feel" about the relationship with lawyers and, to a much lesser degree, accountants. It is the lawyer who becomes so vital as the presenter of the views and wished of the entrepreneur. It is the lawyer who is forced to be in the position of controlling people who have become entrepreneurs specifically, consciously or otherwise, because they couldn’t stand the thought of being controlled by an employer or circumstance. If only the lawyers understood never to say "you can’t" or "never" to their entrepreneur clients, they would keep some of those clients longer and the relationship would be more mutually productive.

It is really, however greatly accentuated, a case of entrepreneurs wanting to know "how" their wishes are going to be achieved, and not why they "can’t" be. Lawyers might be well advised to team-advise their entrepreneur clients, with one partner, wearing a white hat, presenting possible methods for progressing, and the other, wearing a black one, presenting the negative or "can’t do it" options. Of course, the firm should be prepared to supply a continuing progression of nay-sayers, because the entrepreneurs will usually wish to have "another" opinion and sooner or later another opinion-maker. The advocate is likely to keep the account longer even though they may not be as good for the client. The problem with the team approach is one of the increased hourly charges.

Incidentally, certain of the major Wall Street-type law firms have this gambit worked out to a science. During one negotiation, I remarked to a fellow board member that no one had ever seen a lone lawyer from one particular firm because they always traveled as a brace, pride, gaggle, flock, school, or herd. This law firm seemed to have a young briefcase carrier (and, at times, apprentice briefcase carriers) for each of their more experienced warriors, and also a senior medicine man for each of the specialty areas. Other than myself, no one seemed too upset by the specter of ten lawyers focusing on minutiae, because the company was publicly owned and responsibility was being shed at a fair price to those in the room.

In the case of public companies, where the owners are absent, the professionals have a field day, being able to exercise fiduciary responsibility in a most profitable manner. If senior management of publicly owned companies received bonus payments based upon professional fee economies, which are usually directly within their control, as opposed to being continually and willingly seduced by the professionals, fees would be much lower and the quality of decision making would remain at least constant.

The following suggestions are offered as a means of reducing the potential for friction and misunderstanding between entrepreneur and lawyer.

1. The entrepreneur should provide the attorney with a written statement as to what exactly is desired. The attorney then should respond, in writing, as to what is involved in accomplishing the desired result, estimating the associated costs. The entrepreneur must realize that additional work will incur additional fees and that changed or broadened assignments also change the original estimate. The nature of the relationship, being frequently dynamic and responding to unpredictable external stimuli, is one where hard estimates are difficult to obtain and should, in fairness, be viewed skeptically.

2. The attorney should keep the client advised as to the state of the billing meter. How many hours were spent or invested by the lawyer each week? Was there more or less time consumed than had been estimated? Attorneys know how the meter is running. They should let the client know. This is not to say that clients should be billed weekly, but they should know their own "burn" rates. The client should be aware of the hourly billing rate, and of all associated expenses, of the various people working on matters for them. A client can be "associated" to death by permitting the indiscriminate use of associates to "research" peripheral elements of a transaction. It is wonderful training for the associate and may possibly be of value to the client. It is also possible to find oneself in the position of using a partner to do work which a paralegal could perform. The client is the master, or should be; and the lawyer should remember that the client is the customer, and as such, must be satisfied as to both result and process. If lawyers believed that clients could themselves be sources of repetitive business if treated fairly, the quality of the relationships would, in many cases, be different. How many entrepreneurs continue to use the first lawyer with whom they came into contact? Why haven’t they? The lawyer’s assumption that much of the business from entrepreneurs is essentially one-shot has something to do with the way the business is handled. Also, as the attorney is fully aware, once a matter has been commenced with an attorney, it is difficult for the client to move it to another lawyer.

3. There should be a specific understanding, committed to writing, as to any reduction or increase in fees if the desired result either does not occur or is achieved in some better-than-originally-expected fashion. Both project abandonment "kill" and greater than anticipated "success" fees are legitimate areas for candid discussion between client and attorney, before the event of representation.

4. The issue of attorney participation in the client’s business is a difficult one. I argue from experience that it can work to the client’s detriment to have the attorney as a profit participant, because then his focus is on the level of enterprise profit to be earned rather than on the level of risk being accepted. On the other hand, there are excellent reasons, mostly those of motivation, for clients to want their advisors to share in the same profit source as does the client. I think that it would be best to also use a non-profit-participating professional as advisor to the board in cases where there is an advisor involved who holds an interest in the company and who happens to be in that position due to having earlier performed professional services for the company or its principals.

5. Termination of service is also a fair subject for discussion between clients and professionals. The client should know if there will be any problems with changing lawyers of calling in other lawyers to help. Will the entrepreneur’s lawyer insist on being fully paid before releasing documents to the client? If so, then perhaps it is better to keep only copies of original documents with the lawyer. The originals can be kept by the client in a secure place. Will the lawyer want to be fully paid before cooperating with the successor counsel?

6. Terms of payment should be agreed to. The seeking in advance of credit for legal service is acceptable if there is a good understanding, on both sides, of the magnitude of effort their client expects the lawyer to invest and/or speculate. Although a lawyer’s bill does not necessarily have to be taken as the point of departure for a negotiation, the client should request a breakdown of the specific charges that went into the bill. Clients must come to understand how many hours they are buying every time they either make a request or permit the lawyer to "look into" something.

7. Entrepreneurs do not do a good job of interviewing prospective legal representatives. They frequently do not ask for references of current clients or the identity of prior clients. They should. The retention of a lawyer is a vital step, and lawyers are critical to the success or failure of the effort. Their records should be reviewed with the same diligence and concern that would be used in the hiring of a senior associate, or in a manner similar to what the prospective investor would use to investigate the entrepreneur. There should be a very clear understanding of the level of responsibility being undertaken by lawyers in advising the client. Do lawyers have specific expertise in the area of all or most of the client’s needs? How much experience have lawyers had in the required areas of the law? Will one or more specialist attorneys have to be used? Will they be from the same firm?

8. Conflicts of interest become increasingly prevalent in the case of clients wishing to use attorneys representing prospective investors or lenders, as well as competitive firms. The client should seek an understanding and possibly a commitment on the part of the attorney as to how conflicts will be resolved in case they arise. If the lawyer is offered the account of the bank from which the client is borrowing, will the accepting of the account give rise to a conflict? If so, which account will be cast aside by the lawyer?

9. I do not believe it unreasonable to request an undertaking from the professional to the effect that the professional agrees not to represent or provide assistance to any party with whom the client is litigating for a mutually agreed number of years after the attorney’s retention has ended.

10. It may be important to determine, in advance, if attorneys will agree to serve as members of the board of directors. As important, will they agree to retire as directors if asked to by the person appointing them?

The relationship between client and lawyer has the potential to be extremely valuable to the entrepreneur. The value will be influenced by the candor and intelligence used in establishing and maintaining the relationship.