Audrey Roth, a 17-year veteran who leads Sullivan & Worcester’s private equity and emerging companies group in Boston, and Jill Fishbein, a 15-year veteran and a partner with Tomlinson Zisko in Palo Alto, Calif., both offer a few words of advice for VC firms who are thinking of changing counsel in 2004.
Changing counsel can have a tremendous upside for the VC, if done thoughtfully, Roth says. “VCs have an enormous amount of leverage when dealing with a new law firm,” she says. “If the firm is hungry for business, then VCs can negotiate low caps on financing deals and other work.”
“All legal firms promise partner attention,” Roth adds. “Make sure they offer you their cell phone number, and when you call it, make sure they answer, or get back to you darned quickly. Do it a few times over a few weeks. Often, their assistants will pass along the message to the junior or mid-level associate handling the transaction.”
Fishbein concurs and says that investors should ask who, exactly, is doing the legal work?
Fishbein says investors need to know that whoever is reading their documents needs to have enough experience to appreciate what the documents mean to the business and understand, for example, the intricacies of how intellectual property is dispersed.
“Over the last few years, the fee cap hasn’t kept up with the increase in lawyers fees,” Fishbein says. “As a result, it’s now even less cost-effective to have a senior attorney working on a project. So, often, junior attorneys wind up doing the brunt of the work – but how much can they know with their limited experience?”
“Indeed, a larger firm isn’t always better,” says Roth “The model for many large firms is to push the work down to subordinates. When you’re focusing on doing the deal right, is this what you want? You’re much more likely to have the consistent attention of a partner in one of the smaller firms.”
Roth also suggests that investors make certain that any new law firm they hire understands the industries of the portfolio companies in which they are investing. “Most firms don’t offer this kind of expertise, and it leaves the VC at a disadvantage,” Roth says.
“When changing firms, make it clear to the billing partner that the firm’s learning curve is on their nickel,” suggests Roth. “Frankly, they should be offering that to you anyway.”
Lastly, investors should ask how much feedback they will get during the due diligence stage. Fishbein says that a good attorney will call out business-related issues of note. “If your attorney brings no issues to your attention, you may want to ask yourself how savvy the counsel is?”
In terms of the deal, itself, investors should ask if their attorneys make sure that everything necessary is included at the term sheet stage. Fishbein says attorneys should suggest ways for investors to maintain control – and point out when they don’t have control.
“I would ask myself if my attorney points out any items that are in conflict with my fiduciary duty,” says Fishbein. “After all, attention to detail is one of the key requirements for any good VC-focused attorney.”