Because an in-house legal department is commonly viewed as a “cost center” and not a “revenue generator,” startups are often advised that the answer to the question of “when should we hire an in-house counsel” is best answered by running a straightforward cost-benefit analysis. When that exercise demonstrates that the legal fees paid to outside counsel are greater than the cost of adding a lawyer to a company’s payroll, then it is time to bring on a lawyer to work in-house.
While this approach is appealing in its simplicity, it fails to account for a big portion of the value that an in-house lawyer (and ultimately, a legal team) can bring to a young company, the value that may be difficult to quantify. The right in-house counsel can be a strategic partner and a huge asset to a growing business. Here’s how to tell when you should bring on a full-time lawyer.
Save Yourself Headaches and Money, and Hire In-House Counsel Early On
Once the legal structure of a company (LLC, Corporation, Partnership, etc.) has been set up and the basic legal requirements for doing business have been met, many startup founders think of lawyers only as “clean-up crews:” people reluctantly hired from time to time when there’s a problem.
In fact, until confronted by a lawsuit or government investigation, many founders tend to view lawyers as obstacles to progress—people who are always telling you what you can’t do—and to want to avoid them for that reason. But lawyers can also provide useful perspectives to a founder strategizing how the company can achieve its goals while avoiding expensive pitfalls.
A good lawyer has been trained to anticipate issues that might arise and will put in place the safeguards that can help a company avoid those problems. Like the old adage, “a stitch in time saves nine,” this way of working obviously helps a company avoid extremely costly mistakes.
Learn From the Mistakes of Others, and Consult Legal Counsel Proactively
Protecting your business early on can save you 10x, 20x, or even 30x in legal fees if you have to hire legal counsel to clean up a mess. In Season four of HBO’s series “Silicon Valley,” an entire episode (“Terms of Service”) was constructed around a character’s failure to comply with the FTC’s Children’s Online Privacy Protection Rule (“COPPA”), estimating that that mistake—made without even realizing that a lawyer should have been consulted—left the company, Pied Piper, potentially liable for $21 billion in fines.
A quick consultation with a lawyer could have saved a lot of angst, even if it would have ruined the episode. As far-fetched as this scenario might be, it is unquestionably true that a lawyer can save a company money by minimizing its exposure to regulatory fines, along with lessening the likelihood of costly lawsuits and making sure the company’s intellectual property, reputation, and other valuable company assets are well protected—all of which add enormously to a company’s success.
Unfortunately, since these benefits represent savings that are difficult to quantify, they are not so easy to plug into a cost-benefit analysis, but that doesn’t make them any less important than the sum of all those law firm invoices.
“Can’t I Just Use Outside Counsel Instead of Hiring a Lawyer In-House?”
While outside counsel can certainly provide legal services, without context, a founder may miss the right opportunity to reach out for help (since you don’t know what you don’t know!). Even if you do think legal counsel would be helpful, the prospect of facing expensive legal fees may deter your from making the call until a concrete issue presents itself.
Giving an in-house lawyer a seat at the table early in a company’s development can mean fewer unpleasant surprises down the road. It can have other benefits as well, such as devising a strategy for utilizing outside law firms and judging when the most cost-effective choice is to consult outside legal experts, for example, to advise with respect to a specialized area of the law such as patent and other intellectual property matters, First Amendment issues, SEC regulations and the like.
When it is determined that outside counsel needs to be consulted, the in-house counsel team can manage that relationship, including negotiating legal fee rates and reviewing bills. If done right, this can also save a company money. Not only that, it will free up the team member who is currently managing outside counsel, which again can lead to cost savings or even revenue growth if that team member’s responsibility is normally to generate revenue for the company.
About the Author: Amy Rowland is the founder of Varia Search, a boutique legal recruiting firm that uses a bespoke approach to fill legal department roles. Prior to starting Varia Search, Amy was a recruiter at another legal search firm where she focused on recruiting for in-house legal positions. She has also held in-house roles at two international companies and a large New York City law firm.