

Equity for lawyers? - tony_wonder

It seems that Silicon Valley attorneys typically work on a deferred basis, taking 1-2% equity for $10-20k legal work.  Does this type of fee structure work well?<p>I once remember reading somewhere (possibly by Paul Graham) that trading equity for legal work isn't ideal in many cases.<p>Additionally, what's the most cost-effective method for filing for a S-Corp/Delaware incorporation?  If I have existing incorporation documents, would I be able to go straight to Delaware authorities to apply for a business license?<p>Thanks in advance for the helpful insight.
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wayt
I'm a former lawyer (corporate, technology, IP) who started a s/w company in
2000 and sold it for $120M in 2005. So I've been there and done that. I help
(for free) Atlanta-based hacker teams think through the "legal issues"
involved in starting a business, but I'm not really a lawyer any more. It's
not that complicated:

(1) IMHO you should think first about the founder equity vesting issues. On
the one hand, it wouldn't be fair for a co-founder to bail out after 2 months
and keep all of her equity. On the other hand, it wouldn't be fair if her co-
founders kicked her out after 2 months for no reason and left her with almost
no equity. So there's a balance that needs to be reached, and the discussion
can be emotional. With the lawyer's help, the team can strike their desired
balance in an agreement that governs equity vesting, such as a restricted
stock agreement. I can send you a sample agreement to illuminate the trade-
offs. waytking AT gmail DOT com.

(2a) If all founders can't agree on the founder equity vesting balance, you do
not have a startup team. Form another one.

(2b) If all founders agree on founder equity vesting balance, your lawyer can
easily form your Delaware C-corp for a few hundred bucks. If you want ultimate
flexibility, he can form a Delaware LLC and create your LLC operating
agreement for around a thousand bucks. But a C-corp should be fine. Pay in
cash - don't pay in equity.

In any city with a decent-sized tech community there will be lawyers willing
to do the above for just a few hundred dollars, in the hope that you'll be
successful and get big and give them significant legal work later on. You may
need to dig to find such lawyers in your city, but they are there.

You will also be tempted to engage lawyers who promise to introduce you to
VCs, angels, etc. IMHO this is not that valuable. If you are smart and
resourceful, you will find the angels and VCs. If you are building stuff
people want, the angels and VCs will invest in you, especially if you make
them think you don't need their stinkin' money.

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adamsmith
The firm should do the work for deferred cash payment. I.e. they do $25k of
legal work, and you pay up when you get real money. You obviously need to look
credible / have good intros / etc.

They shouldn't get equity because they don't _really_ add that much value at
an early stage. It will also look bad to investors if you give equity to
people who shouldn't have it. Work on your product, ask questions later.

Set up an S corporation if you incorporate yourself.

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SwellJoe
No.

Lawyers don't get equity for a tech startup. Period.

If, on the other hand, your startup is in a heavily litigious or heavily
regulated field, you not only will want a lawyer involved from very early,
you'll probably want a lawyer holding a stake in your company.

So...for example, an equities or futures trading company: the lawyer gets
equity. Equities or futures social networking site: the lawyer gets paid a
fee.

Or, medical mal-practice hedge fund (I dunno, I'm just making up a phrase from
words that involves lots of litigation and huge smelly contracts): you need a
lawyer on your board. Medical Mal the Practical Hedgehog video game: the
lawyer gets paid a fee.

Got it? Good.

Incorporation costs a few hundred bucks (even if you get outside help), plus a
few hundred bucks for statutory representation in Delaware.

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tony_wonder
Thanks Joe. Do you have a suggestion as to where I should start with
incorporation? I have all of the necessary legal documents.

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epi0Bauqu
If you have the legal documents, which in this case means downloading them
from the web, then just send them in. Each comes with mailing instructions. If
you are incorporating in Delaware, you will need to get an agent to have a
mailing address there as well.

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epi0Bauqu
What $10-20K in legal work are you talking about?

If you are talking about incorporation, that costs next to nothing and takes
little time. Just do it yourself.

Other than that, it depends how you value your equity. That is, read
<http://www.paulgraham.com/equity.html>

~~~
tony_wonder
I'm actually not entirely sure about the $10-20k. This was brought up during
discussions with a couple of law firms. All of these firms want to jump
straight into VC introductions, so I would imagine most of this money would go
towards the legal work associated with raising a Series A.

Regarding incorporation, do you have any suggestions as where to start?

Thanks for responding.

~~~
jey
> _All of these firms want to jump straight into VC introductions, so I would
> imagine most of this money would go towards the legal work associated with
> raising a Series A._

Sounds like a red flag to me. It seems like they're looking out more for
themselves than for you and your business, unless for some reason they are
super excited about your idea and think it needs a lot of VC cash ASAP to move
forward.

~~~
tony_wonder
To clarify, we got very positive feedback from major law firms. Many basically
take the stance of trying to get us together with VCs/angels while they draw
up the incorporation paperwork, etc.

Frankly, I'd prefer to incorporate on my own and don't want to get too far
ahead (i.e VC meetings) while assuming the law firm will cover my ass.

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sanj
Lawyers do more than incorporate.

If IP is important, you can easily blow $40k on a reasonable set of patents.
That's a good place for a bit of equity.

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mattmaroon
Well, if your company is going to tank, then 1-2% is a deal. Otherwise pay
cash.

