Burned by the bubble, Silicon Valley lawyers rein in risk

Burned by the bubble, Silicon Valley lawyers rein in risk

Summary: As another tech bubble inflates, attorneys in the cradle of American technology aren't as keen on waiving their fees for startup companies.

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TOPICS: Legal
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As Silicon Valley matures, its appetite for risk is diminished.

Well, at least for lawyers operating in the region. The Wall Street Journal reports this morning that law firms aren't as keen as they were during the late-1990s dot-com boom to waive their legal fees in exchange for small ownership stakes in startup tech companies.

At the time, many firms got burned when their companies went bust. That was the name of the game, of course, but as today's tech bubble inflates once more, lawyers are still willing to take equity stakes -- but not waive their fees.

Those heady early days? Gone. In the end, it's all about business.

Timothy Hay interviews Bottom Line Law Group founder Antone Johnson:

"I charge a small retainer, and then defer billing until after the Series A" financing round of a company, the first funding from institutions, says Mr. Johnson. "I'll charge a special rate for start-ups, and in return I'll ask for equity of about 1%."

The going rates can be quite steep. Founders Space co-founder Naomi Kokubo elaborates:

The hourly fees are high in Silicon Valley. They usually range from between $200 per hour on the low end to $1,000+ per hour on the high end. Many Silicon Valley law firms realize that few bootstrapped startups can afford $600 or so per hour in legal fees, so they will offer discounts or other creative ways of helping you get started.

How much is that to a young startup, though? An AttorneyFee infographic from 2011 demonstrates:

That company estimated that Silicon Valley law firms generated some $37 million in revenue from startup dealings in 2011 -- though it fails to estimate the profit from those dealings, the ultimate indicator of whether a strategy is working over the long-term.

Law firms can't eschew the practice of legal fees completely, of course: competition for startup companies is steep, and the fundamental problem remains that young startups don't have the cash to funnel to law firms so early in their trajectories.

Will the practice slow Silicon Valley's innovation? It's unlikely, but it's clear that there's still room for invention when it comes to balancing the risk and reward of working with startups.

Photo: Håkan Dahlström/Flickr

Topic: Legal

Andrew Nusca

About Andrew Nusca

Andrew Nusca is a former writer-editor for ZDNet and contributor to CNET. During his tenure, he was the editor of SmartPlanet, ZDNet's sister site about innovation.

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