Yes, You Can Afford an Attorney! Part Two

Earlier this week I wrote an article discussing how entrepreneurs and small businesses can actually afford to hire an attorney at the critical early stages of their business venture by working out payment plans to cover the full cost of an attorney’s fee.

However, I wanted to touch on the subject of affording legal services again to address something I’ve noticed in my years of practice — most people have absolutely no idea how much an attorney costs. This is likely attributable to both the wide disparity in what attorneys, even ones in geographic proximity and with similar experience, charge, as well as the large degree of secrecy some attorneys place on their fees. This leads prospective clients to have wildly varying expectations of what an attorney will cost. In my experience, I’ve had prospective clients absolutely sink in their seats when they hear that the hours of work they’re going to need is going to cost more than $200 (probably not realizing that at that rate I’d be working at slightly above minimum wage!), while other clients have near lept out of their seats in joy upon finding out that the contract they need drafted isn’t going to cost thousands upon thousands of dollars. 

Perhaps this is reflective of people’s various financial states — when $200 is a lot of money (and I’m in that camp too!) and you know that lawyers are supposed to be “expensive” you may set your expectations accordingly; conversely, when you hear of big law firms charging $500 to $1000 an hour and budget accordingly, you may not realize that a smaller law firm or solo attorney typically doesn’t need to charge that, because they don’t have the overhead that a large firm does.

Nevertheless, also in my experience I’ve found that some prospective clients are nervous at the mere prospect of what an attorney will cost, and will break off communication before even getting to the money question. When speaking with prospective clients, I am open to any and all questions they have, but only rarely in my initial communications will a prospective client ask me to at least ballpark what my services will cost. I’m happy to do so, obviously putting down a big caveat that I can’t give a solid fee quote until I’ve had some discussions with the prospective client and had an opportunity to throughly think about the scope of the matter; moreover, the less information I know about the matter when I get asked to ballpark, the bigger the ballpark is going to be.

So if you’re initial conversations with an attorney, don’t be afraid to ask for a ballpark. Of course, depending on how early the conversations are, the attorney may not have enough information to give an estimate; also, there are certain kinds of legal matters that are simply not estimable, such as litigation or bankruptcy. It may also be easier for attorneys who work by flat fee to give an estimate, than lawyers who work by hourly fee. Finally, remember that an estimate is just an educated guess based on the attorney’s experience handling similar matters — your matter, due to various factors, may end up costing less or more, particularly if the scope of the matter changes.

(As a final aside note, please don’t ask to negotiate our fees. If you simply can’t afford the fee, as my previous blog post suggests, try to work out a payment plan. If an attorney wants to give a discount for a repeat client or to get a payment-in-full, that’s fine, but asking us to discount our fees simply isn’t fair to our other clients who paid in full.)

Yes! You Too Can Afford a Lawyer for Your Business!

It’s an unfortunate reality of starting a business that legal expenses can often cost several thousand dollars, depending on the amount of work that needs to be done. As a result, many entrepreneurs simply decide to avoid that financial pain by either ignoring the legal work that needs to be done (such as drafting up a formal agreement between your company and a client or supplier) or doing it yourself. Of course, if you’re unfamiliar with the legal processes of starting a business, you may miss critical steps in the process and leave your business and/or yourself exposed. As a result, any entrepreneur looking to start a business should consult with an attorney who can identify the legal steps that need to be taken and assist with any of those steps that the entrepreneur cannot do herself or himself.

“But what if I don’t have thousands of dollars to pay an attorney?”, you ask. Fortunately, most attorneys who work with entrepreneurs and small businesses are flexible enough to work out payment plans with you. For added financial certainty, you can also try to find an attorney that is willing to handle your matter by flat fee, so that you can plan out your payments before you hire the attorney. Typically, even with a payment plan you’ll be asked to pay at least a portion of the fee up front (either as a retainer for hourly-billing or a percentage of a flat fee) — this is for the attorney’s peace of mind, so that he or she has a little bit more confidence that you will ultimately pay the full fee. It also goes without saying that you should be on-time with your payments as well; you don’t want an attorney who has to spend time trying to get you to pay your bill, rather than being fully focused on the legal tasks at hand. By not paying, you also don’t want to burn your bridges with the attorney who’s helped you get started and is familiar with your business; if you need an attorney’s help down the road, that attorney is not likely to want to assist you if you’ve ducked out on a outstanding fee.

Most attorneys went to law school to help their clients; if we’re in the field of working with entrepreneurs and small businesses, we understand that money can be tight, but we still want to work with you to get your business started. So if you’re launching a new business venture, don’t avoid talking to an attorney simply because you think you can’t afford one — many attorneys are willing to help you set up payment plans in order to be able to afford their services

Asking For a NDA at the Wrong Time?

Lots of entrepreneurs feel the need to protect their business ideas and (what they feel are) their competitive advantages. As a result, whenever they go into meetings with people where they will have to discuss the details of their business, they feel it necessary to obtain a non-disclosure agreement beforehand. This often occurs in the context of meetings with investors, but it can also occur with other groups of professions such as attorneys (speaking from personal experience). The fact of the matter is that these entrepreneurs hell-bent on protecting their ideas are asking for NDAs at the wrong time and, frankly, can look a little amateurish for doing so. For example, there’s really no need to ask for a NDA from an attorney — attorneys are generally *required* by the ethical rules of their profession to keep the subject matter of discussions with clients confidential. An attorney isn’t interested in stealing a startup’s ideas, nor is an attorney willing to open themselves up to the risk of litigation in the event they end up working for a similar company. Absent a compelling reason, attorneys generally won’t sign NDAs because they are ultimately redundant, so please don’t ask us. Perhaps more importantly, it is largely becoming a faux paux to ask for a NDA prior to an initial meeting with an investor. Professional investors meet with dozens, hundreds, even sometimes thousands of entrepreneurs every year — some of these entrepreneurs’ business will be very similar to one another, and like attorneys, investors are not going to take the risk of litigation for a NDA violation by talking to someone with a substantially similar or identical business idea. And because investors may talk to numerous entrepreneurs, they have the luxury of refusing to speak with anyone who demands a NDA from the outset — there will be plenty more entrepreneurs who are happy to have an initial meeting without one. So when should you ask for a NDA? NDAs become useful when you actually have trade secrets to protect — these include formulas, software or other computer programs, product designs, or algorithms, and can also include business plans, supplier lists, customer lists, marketing plans, or finances. Trade secrets must not only be secret — that is, not publicly known or derivable from public information, but also provide value and/or competitive advantage to the trade secret holder *because* of their confidential nature. You can ask for a NDA when you begin disclosing the specifics of these types of information to an investor, which usually only occurs when a deal begins to seriously move forward. You don’t disclose the “secret sauce” of your business within the first couple of meetings with an investor, so there is little need for a NDA in the beginning. Once both sides begin to get serious about a deal, and once specifics start to be discloses, then might be the appropriate time to ask for a NDA.

Pre-Incorporation Founder Agreements

Myself and plenty of other startup attorneys and advisors have repeatedly advised the entrepreneurial community of the wisdom of co-founders getting the basics of their relationship down in agreement. Formally, this is done through the incorporation or LLC/partnership formation process, but founders should ideally come to some sort of agreement when they first start to work together. This is often the idea stage, before entrepreneurs know whether they have a valid product or business model. Not many entrepreneurs want to take on the time and expense of company formation before they even know whether they have a viable company. However, important issues still need to be settled when you start to work together with other entrepreneurs on an idea, including who will be contributing what time and/or funds to the development of the business idea or product, how decisions will be made amongst yourselves, and ownership of the fruits of your development (IP). This is especially important, since many entrepreneurs work on different ideas with different teams until an idea takes off into a potentially viable business, at which point they may decide to focus all their time and effort on that particular venture and have to leave the other ideas and teams they may be working with. Having an agreement from the get-go can resolve many issues that situations such as this creates, as well as the unfortunate situations where co-founders may end up getting cut out of the lucrative end of business ventures or where early-departed collaborators who contributed little to the final product seek to cash in on the work of the rest of the team. Putting the basic terms on paper early can avoid “he said, she said” later. And if you do decide to move forward with company formation, an agreement can provide a good roadmap for your attorney to structure the company. A New York law firm, McCormick & O’Brien, recently came up with a good template for an agreement they call a Founder Accord. McCormick & O’Brien’s template hits on many of the important issues founders should decide on when they begin working together, such as the equity split (and methods for altering said split based on vesting, milestones, or changing contributions, responsibilities, and roles), expected time and/or financial contributions, IP ownership, and management and decision-making mechanisms. Founders are also allowed to develop new categories in the Accord to address any additional concerns particular to the founders or their venture. Of course, the Accord does not take the place of formal company formation, and for liability and tax purposes the founders may be considered to be in a partnership, fully personally liable for the activities of the venture.

I Got a Copyright Infringement Notice — Now What?

So it finally happens to you and your startup — you receive a very menacing-looking package in the mail from one of those big stock image companies claiming that you’ve infringed on the copyright of one or more images owned or managed by them by using it on your website without a license. They demand that you take the image down, but more importantly, also demand a sum of money that can reach as high as $3000 or more in order to settle their claim against you without resorting to litigation. They even have a convenient online payment processing system for your to send them money in order to settle. Your first instinct may be to panic — how are you supposed to come up with thousands of dollars right now, when you and your company are surviving month to month?! Moreover, you don’t even understand how you got in this situation — you had someone else develop your website, or you did it yourself and were careful to use Creative Commons licensed or public domain photos. First things first — to quote The Hitchhiker’s Guide to the Galaxy….don’t panic. Look at that number being demanded for settlement. That’s probably as bad as things are going to get, and in all likelihood they’re going to get much, much better. Large stock image agencies purchase copyrights, licenses, or management rights from photographers or photo sites, and add those images to their catalog. They scan the internet to see if those images are being used elsewhere, and then send out boilerplate settlement demand letters. The hope is that the average person will pay the settlement simply to avoid the prospect of litigation, as their demands often exceed what they would likely recover in court, not to mention that the costs of going to court would likely outweigh their recovery. So when you get a copyright notice, if you stand up for yourself, you may end up saving yourself quite a bit of money. First, be sure to take down the image or images, even if you’re sure you did nothing wrong. If your case were to end up in court, the other party may be entitled to statutory damages, which can reach thousands of dollars. However, if you used the image without notice of copyright, you may be deemed an “innocent infringer”, which allows a court to limit statutory damages to $200 — so taking down the image allows you to preserve that defense. Otherwise, continuing to use the image(s) after notice of a (potential) copyright turns you into a willful infringer (of course, if you used the image(s) with knowledge of a copyright or potential copyright, an innocent infringer defense probably isn’t available to you). If you used a third-party developer and signed a contract with them to develop your site, check the agreement — the developer may be required to indemnify and defend you against IP infringement. If not, contact the developer anyway and let them know what happened (although don’t get angry and start pointing fingers). They may decide to indemnify and defend you anyway in order to keep you as a happy customer. If you have to handle it yourself or with the assistance of an attorney, the important thing is to ask that they send proof of copyright registration and of their right to enforce the copyright (and if there is a question regarding it, proof that the image they claim you’ve used is in fact the image you used). They will likely refuse to send such information, citing their confidentiality agreements with their photographers and arguing that registration is irrelevant since copyright attaches as soon as a work is fixed into tangible form. While that’s true, a registration is prima facie evidence of copyright ownership, and a copyright registration significantly changes the rights and options for both parties, so it’s reasonable to demand they provide proof of ownership in order to establish that you might actually owe them money as well as make an educated decision about how to handle things. For example, some courts hold that a registration is a procedural requirement in order to file suit for copyright infringement. Furthermore, if a registration exists, the other party could be entitled to significant statutory damages in court At the same time, try to find out how much they would have charged you for a license for the image they claim you’ve used. The actual license fees may only be a fraction of their settlement demand — to me, that’s negotiating in bad faith on their part, and if you point that out to them, you may gain the upper hand in the negotiation, and set the basis for a much lower number if you do end up settling. In the experience of many attorneys who handle these letters, the large stock image company tends to simply go away after a couple of rounds of correspondence — again, the more time and effort is required in order to obtain a recovery (either by settlement or in court), the less profit there is for the company. However, it isn’t exactly comforting to have a potential legal claim floating out in the woods. Accordingly, if you want to definitively resolve the matter, it will cost you. You can either negotiate a settlement with the image company; or, if the settlement numbers are exceedingly high and you are convinced (on a legal basis) that you did not infringe on copyright, you also have the option of seeking a declaratory judgment in court — in essence, having a court rule that you did not infringe on copyright, thereby invalidating the other party’s claim against you. ————————————– The FVL Blog is going on holiday break and will be back with a new article on Friday, January 3. I would like to wish everyone a pleasant holiday season and a happy new year!