Why lawyers are failing start-ups

The vexed issue of getting legal help often comes down to two key questions for start-ups – when do you get it and can you afford it? Unfortunately, the legal profession can appear weighted against new businesses.

If you’re a budding entrepreneur, the system is broken, according to Joel Cranshaw, a lawyer who has operated in the UK and Australia and now operates his own start-up legal business, Clearpoint Counsel, from Melbourne co-working space The Hub.

“Start-ups are very poorly served by the legal profession,” Cranshaw admits.

“It’s not the law firm’s fault, really. Charging by the hour is only about 60 years old. In the 1950s there was a big demand to value the services they have, so the big end of town demanded lawyers justify the amounts they charge.”

“The result of that is that lawyers at the big end of town charge by the hour. The big corporations have leverage to push that down, whereas start-ups aren’t in a position to negotiate.”

“The law firm will be conscious they can’t charge start-ups that much and the start-up will walk away with document which is one size fits all. The business will also probably pay more than they expected, too.”

As StartupSmart’s regular legal eagles James Omond and Craig Yeung have previously explained, it’s important to get a lawyer who understands your industry, as well as do lots of your own research to ensure you keep costs down.

But Cranshaw argues that the whole way that law firms – especially the larger ones – operate needs to change if they are to offer genuine support to new businesses.

He explains the new approach he’s devised for Clearpoint, which was launched in 2011, as well as gives some top tips on how and when start-ups should deal with lawyers.

Above: Joel Cranshaw.

Can you explain a bit about the background to the business?

Predominantly, I’ve been an in-house counsel, mostly in tech companies. About seven years ago in London, I became dissatisfied with being in-house so I moved to private practice.

On my return to Australia, I went to structure fees on an hourly basis. Which was fine, but there’s always a conversation over hours and value. This isn’t the same as in-house where you get paid an amount and you do everything.

I wanted to provide in-house service to a number of clients, as it’s more relevant for start-ups. I’ve now got four main clients, all fairly small and all have been going for a couple of years, so they can justify the service.

I have a free consultation to ask where’s the company at and if they are ready for legal help. If they aren’t ready I point them to all the free resources of information out there.

That just doesn’t happen at the moment in law firms – they don’t really look into the problems faced by start-ups and what they actually need. They just solve individual problems presented to them.

Start-ups want to know about employment arrangements and standard terms and conditions that require quite basic documents. I’m developing templates along with the consultancy, in order to fill that gap.

So how does the legal industry currently treat start-ups?

A lot of start-ups say lawyers don’t understand my business, because in this hourly rate paradigm, they just can’t afford to. It’s a cascade from large firms to small firms – that’s just how we do things.

It ends up costing the start-ups more than it should because when the agreements are badly put together, they have to go back to the lawyer and pay more to fix it. There’s no thinking about what start-ups need down the track.

What are the main legal issues faced early on by start-ups?

Intellectual property, employment issues, whether to use contractors or not, insurance, and standard agreements about the way you sell things.

Small start-up businesses have terms imposed upon them from a larger entity. They are forced into things and there’s an element of risk for a start-up.

Most businesses continue for the first year or two with these terms. It’s when they get to a turnover of $1 million, employing four or five people, they start to raise their head above the parapet.

Issues start to arise and they won’t go to a lawyer until there’s a problem. They might shy away because of the problems they had before with lawyers.

To be honest, there’s no good reason to have legal advice until that point. If you haven’t got the funding, you need to be careful with that money. But if you’ve got money, you should go to see a lawyer and ask what the issues are.

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