The Wall Street Journal
By: Scott Austin
September 9, 2010
With Cash Tight, Lawyers Give Start-Ups Creative Payment Options, Opportunities to Hook Up With Potential Investors
Faced with cash-trapped clientele, some big law firms that cater to start-up companies are looking for ways to make their services more enticing.
Firms including Cooley Godward Kronish LLP and Wilson Sonsini Goodrich & Rosati LLP in Palo Alto, Calif.; DLA Piper LLP in New York; and Venable LLP in Washington are offering more creative payment options, and are making a bigger effort to hook up their entrepreneurial clients with angel investors and venture capitalists, some of which are also clients of the firms.
.Wilson Sonsini for the first time this year began offering legal advice for a flat fee to certain clients, rather than billing at the traditional hourly rate in the hundreds of dollars per hour.
"We're finding that companies that may have raised $5 million to $7 million in first rounds seven to 10 years ago are today raising $500,000 to $1 million," says Brian Beard, a partner at Wilson Sonsini. "It's hard to raise such a little amount and then spend $75,000 in legal fees, so we've had to be more creative around billing structures."
Other firms, including DLA and Cooley, offer fixed and deferred payment plans on a case-by-case basis, partners say, if they believe the company has a good chance of getting funded. And Venable started a program in July called Venture Services, where clients accepted into the program are able to defer half of their legal fees for a 12-month period, subject to a negotiated cap, paying the balance only if they win funding.
Venable says it is turning to its venture firm clients, asking them to encourage their portfolio companies to participate. "We're trying to pick the companies that are likely to be a good bet," said Chuck Morton, a partner at Venable.
DLA also runs an in-house division, called Venture Pipeline, dedicated solely to helping start-up clients raise capital. The firm, which represents hundreds of start-ups, says it handpicks only the most promising candidates for investor introductions to keep its network of 450 angels and venture capitalists tuned in. Of the 125 start-ups that DLA presented in 2009 to investors, 44% of those companies have closed a funding deal.
Last month, semiconductor start-up Smooth-Stone Inc., based in Austin, Texas, raised $48 million from several prominent venture capital firms and large companies like Texas Instruments Inc. after working with DLA.
Smooth-Stone's chief executive, Barry Evans, says he knew the odds were stacked against him, as he had never started a company before and didn't have the necessary Silicon Valley connections. Many venture-capital firms in the current economy have also been steering away from the capital-intensive semiconductor sector.
DLA, which was flexible with fees, eventually introduced Mr. Evans to a few relevant venture firms, three of which--Battery Ventures, Flybridge Capital Partners and Highland Capital Partners--invested.
DLA "helped rifle-shot our business plan to the investors that were most likely to be interested," Mr. Evans says.
Jeffrey Bussgang, general partner at Flybridge Capital, says a reference from a reputable law firm "certainly elevates our level of interest in the company."
Contact Solutions, a Reston, Va., software firm, says it won $46 million in funding from North Bridge Growth Equity after working with Cooley Godward. The deal, announced Wednesday, is the culmination of a seven-year relationship that began when company founder Paul Logan met Cooley partner Mike Lincoln at a networking event seven years ago.
Mr. Logan's company, which began using Cooley for service as needed, remained self-funded until this past June, finally hiring the law firm to make introductions. "When the time came, the process was very efficient," he says. "We didn't have to spend months kissing a bunch of frogs."
Not all venture investors believe start-ups need to work with large law firms early on to find investors. Jason Mendelson, a former start-up lawyer who is now a managing director at venture firm Foundry Group, says it's more acceptable for young start-ups, including those in his portfolio, to use smaller law firms because of the costs involved.
"All of my companies are slower to pick up the phone [to call large law firms] than they were five or 10 years ago," he said. "I applaud law firms trying to get companies to VCs, but for early-stage deals, entrepreneurs can come straight to us."
Mr. Bussgang, the investor in Flybridge Capital, also cautions that companies that hire law firms for fundraising should expect a long-term relationship. "The law firms want you to be a client for five to 10 years," he said. "Don't jump into it for short-term reasons."
--Scott Austin is editor of Dow Jones VentureWire.
Write to Scott Austin at email@example.com