This is a question lawyers often face if they do things the Matt Ritter way: freelancing, chasing their alternative careers, supplementing their main practice, etc. I am writing this post because I am on the verge of potentially getting a modest windfall for freelance legal work I did over the past two years to help launch a start-up. I referred to it as a windfall because after two years, I had pretty much considered it a sunk cost and now the start-up is actually attempting to cash out.
Start-up legal work is labor intensive
When you do freelance work for a start-up, you typically draft all of their start-up docs: LLC agreement, subscription agreement, employment agreements and various other ancillary documents. If it’s anything internet or tech related (mine was an entertainment venture), you will likely assist them both at start-up and throughout on a variety of copyright and other IP issues that come up. All told I probably did somewhere between 50 and 100 hours of legal work. Depending on the situation, you may have to do a lot more or a lot less in the first year. If you are not getting paid in cash then you are doing all of this in return for a percentage of equity in the company. Smaller startups typically have little or no cash to pay legal fees. You should research and consult some colleagues before settling on a percentage that seems equitable.
Don’t let their estimates of their success be your guide
When negotiating with the founders, remember that while they see their business as the next big thing, that doesn’t mean that you should too. In my experience, the founders will be optimistic (overly, as is standard for startups in my experience), so be careful not to let their excitement influence you in your decision to accept these terms. They will show you projected numbers for what your stake will become. Remember these are projections and estimates, based on a couple of people who believe in their product. Don’t assume you are going to become a rich man doing legal work for a startup, I have yet to hear a story where that happened. For me, I was also still working at a big firm at the time, so the idea of a large upside versus another paycheck was quite alluring. So in lieu of payment, I started cranking out documents. Once the excitement wears off, somewhere around 50 hours of legal work deep, you may start questioning your decision. But once you make the decision to forgo cash, you should hold steadfast in the belief it was worth the risk. There’s really no use in beating yourself up for an informed choice. If you do not think it’s worth the risk don’t take the job. Or demand partial cash payment, they probably have some money floating around or else they wouldn’t attempt to start a business.
Remember, the odds are always against you.
Startups fail at a high rate. So you may end up with nothing. However, you have a lot to gain, regardless of the outcome financially. You will at least be more experienced in dealing with startup issues, which are vastly different from big firm clients. You also may get referrals. The startup I worked for referred me to another startup, which I turned down because I was no longer at a big firm and therefore not in a position to work that many hours without cash compensation.
Even if you do end up seeing a positive outcome, it will take time. In my case, it’s been two years and the start-up is now trying to sell for a modest amount. Way less than they discussed when we started working together. If they sell for what they told me they were looking for my stake will end up being less than what I would have made if I had been charging them a bargain basement hourly rate.
So should you regret not demanding payment? Not really. Once you basically resigned yourself to having done the work for free, it is easier to let go and think of it as lottery ticket sitting in a vault. Don’t get me wrong: get paid if you can, but if you can’t then once you accept equity, don’t sit around kicking yourself. The idea that you could potentially scratch it off and win big, especially when your finances are not in great shape is something to be excited about. Hope for the best but keep expectations modest.