Most fast-growing startups get by for long periods of time before hiring their first in-house lawyer. It’s not that startups don’t have important legal work that needs to get done. But in the early stages of growth, it almost always makes sense to outsource all legal work. It’s a matter of allocation of scarce resources, and most early-stage startups can get by with outside counsel alone.
So when is the right time to hire an in-house lawyer? There’s both an art and a science to the decision. Let’s dig in and consider some of the key factors.
Is there enough legal work to keep a full-time lawyer busy?
It may seem like your startup is dealing with a lot of legal work, but carefully consider whether it’s enough work (30 to 40 hours a week) to keep a full-time lawyer busy. And even if there is that much work at the moment, determine whether it’s driven by an atypical circumstance (e.g., litigation) that is leading to a big but temporary outside counsel spend.
It’s better to hire your first in-house lawyer when it hurts a bit — when you start to feel stretched thin — rather than too early in your business’ lifecycle.
It’s better to hire your first in-house lawyer when it hurts a bit — when you start to feel stretched thin — rather than too early in your business’ lifecycle. Unlike with some other roles that may need filling, you can find highly competent outside lawyers to bridge the gap as you grow into needing full-time support. But don’t wait too long – legal issues can impact an organization’s efficiency, with the burden being felt most acutely by the founder and key executives.
As a general rule of thumb, plan to hire when your outside legal fees reach approximately two times the amount it will cost to employ a good in-house lawyer, who should be able to take on quite a bit of the work currently being outsourced and more effectively manage outside legal support.
When evaluating your current legal spend, you should consider whether your company has been under-investing in legal issues such as contracts, intellectual property and employment policies. There may be more legal work than you think — it’s just being deferred, and an in-house lawyer will have to clean things up.
There’s also the work of building legal systems, processes and strategy that won’t get the attention it deserves until you bring someone in-house. Accordingly, when you’re trying to determine whether there’s enough work to support a full-time lawyer, take into account the work that may not be getting done but needs to be to support your growth.
Finally, evaluate whether you or members of your team are spending too much time “playing” lawyer. Even if you’ve managed to get by, at some point the volume of legal issues will catch up with you, and you won’t be able to keep up. And even if you could, your time is almost certainly better spent improving and scaling the business.
What specialties should we look for in an in-house lawyer?
It would be nice if hiring your first in-house lawyer meant that all of your outside legal fees would go away, but that’s not realistic. Startups that reach a $1 billion valuation are called unicorns because they’re like mythical creatures, and the same goes for an in-house lawyer who can do everything.
The reality is that your in-house lawyer will likely have expertise in a couple of key legal disciplines (e.g., transactions and commercial contracts), be competent enough to get by in a few others (litigation, securities law) and have little to no experience in many other areas (IP, tax, etc.).
In other words, the odds are that you won’t find a Jack- or Jill-of-all-trades (a unicorn) who excels at handling all the legal work you need to be done. What’s necessary, therefore, is evaluating the nature and composition — not just the amount — of your company’s legal work.
If it’s broadly distributed across many different legal disciplines, it means you’ll probably be holding off a bit longer before hiring a lawyer in-house. On the other hand, if the work is highly concentrated in one or two areas, such as IP, then an in-house hire may make more sense in the short term because one lawyer with relevant specialized expertise can shoulder more of the company’s legal work.
The only way to truly know how concentrated a company’s legal work is is to print off a year’s worth of legal bills and have them scrutinized to determine the nature of the work that underlies all those itemized time entries. When I conduct this sort of analysis for clients, they’re often shocked to learn how much they’re spending on legal, with whom and for what. The process can not only inform hiring decisions but also help optimize outside legal spend.
Perhaps most important of all, when thinking about the skill set you need in an in-house lawyer, consider what legal issues are coming in the future, not just those you’ve dealt with in the past. Legal challenges will change depending on where your company is at in its lifecycle and the execution of its strategy.
For example, if you’re running a ride-hailing startup that is operating in one city, but has plans to scale across the country, and ultimately around the world, litigation may not be consuming many of your current resources. You would be wise, however, as a company in a regulated industry, to anticipate all of those legal battles with local governments to come, and perhaps shift your in-house lawyer hiring strategy accordingly.
Is the volume of legal issues rapidly increasing?
One of the signs that you’re ready to hire in-house counsel is a steady increase in the number and significance of legal matters, such as lawsuits and contracts, that require attention. These issues can sometimes be framed as “good problems to have” — the cost of doing business for a high-growth company. But they’re problems that need to be addressed nonetheless.
One of the key reasons to consider hiring in-house counsel when there’s a steady uptick in the velocity of these types of legal issues is that a dedicated lawyer can help stem them. A good in-house lawyer will set up systems and processes, such as litigation avoidance and contract lifecycle management strategies, that serve as upstream solutions that prevent downstream legal headaches.
For example, in my experience helping startups to build out their in-house legal teams, I’ve seen what a big impact an in-house lawyer can have, in terms of bringing down costs and increasing efficiency, through the implementation of a more streamlined process for the negotiation, documentation and management of commercial contracts. An in-house lawyer can help a startup transition from an ad-hoc approach to contracts to a structured one, resulting in fewer legal fees, fewer risks and more deals getting done.
Is there institutional buy-in for an in-house lawyer?
When weighing the pros and cons of bringing on an in-house lawyer, don’t think about it merely in economic terms. Adding a smart, confident in-house lawyer to your team will necessarily change how you do business. The change should be positive, but you still need to make sure your organization is ready for it.
As discussed previously, a good in-house lawyer will start implementing more legal systems and processes in order to protect the business as it grows. They will ask lots of questions. They may slow certain things down — such as the review and negotiation of an important contract — when you and your team are used to moving really fast.
If you’re not ready to embrace this sort of maturation in the business, then you’re probably not ready for an in-house lawyer. The last thing you want is to bring someone on because it makes economic sense, but there’s no institutional buy-in to change how the business runs. If your company’s culture is one that believes that lawyers are obstacles to progress rather than enablers of it, you may have to work on the culture before making the hire.
Every startup needs a lawyer — but not necessarily an in-house lawyer from day one. A good deal of thought, strategy and analysis should go into the decision. When we help our startup clients prepare for their first in-house lawyer, we remind them that they’re not just looking for a great lawyer, but also someone who has the management and leadership skills necessary to make a positive impact on the business.
It’s not easy. It’s not to be taken lightly. It’s critical to map out needs and expectations in advance. But if done at the right time in the business’ growth, for the right reasons, and with institutional buy-in, a startup’s first in-house lawyer can be an asset that can help the business soar to new heights.