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Should Start-ups Utilize the Blockchain Over Deal Lawyers?

In the current model of American commerce, business attorneys are uniquely situated between firms and opposing parties. A great deal of an attorney’s utility comes from her experience with deals and position as a utility player. But have we considered how recent innovations potentially threaten this traditional model?

Blockchain is the generic name for the technology underpinning Bitcoin, the world’s most notorious cryptocurrency. It is a distributed public ledger system. Transactions are recorded on a comprehensive and always up-to-date public register that every bitcoin enthusiast can download and verify. Those familiar with cryptocurrency know that not even a single tangible bitcoin exists. Rather, “possession” of bitcoin is determined by a continuous barrage of 1s and 0s revolving around a common ledger. That’s about all one needs to know about bitcoin to understand how the blockchain could be applied to transactions generally.

Smart Contracts are another potential implementation of blockchain technology in addition to cryptocurrency. Blockchain software code can represents an arrangement or contract. The computer can make and execute automatically under conditions set in advance. It doesn’t end there — the system could execute bundles of agreements, all linked to each other, operating autonomously and automatically. The vanilla version requires that all the links in a contractual chain need to execute. For simplicity, I’ll focus on a simple one step transaction between a buyer and seller.

A case study for how this could work in practice is to look at Amazon smart lockers. When a consumer on Amazon’s retail store purchase an item and elects to utilize a smart locker, the item is shipped to a predetermined location — the locker — and the customer arrives, verifies his identity and takes possession of the good. The consumer experience could be identical with the blockchain. Rather than rows of computer hardware running Amazon’s web services, the decentralized ledger system could run a near constant accounting of who has paid for certain goods and services. For example, consider if the local ice cream maker needs to make monthly purchases of dairy from the dairy farmer several counties away. The ice cream maker can avoid the time spent physically contacted the farmer or an agent of the farmer every month to verify the deal is still on. Also, the ice cream maker could avoid any risk that the farmer could not deliver.

An example of how this could play out is like the Amazon smart locker solution. Consider the farmer usually delivers dairy to a group of merchants in Washtenaw County. Rather than verify every transaction, the farmer could arrange for a neutral site to store the commercial dairy. That site could be outfitted with locks connected to their own private blockchain. Once the farmer’s bank receives payment for the dairy it could send a digital receipt back to the merchant; this key would then unlock the merchant’s unique locker when she presented identification at the locker.

This is a simplified example and the point of service could look a lot different whether the solution is taken up by private companies like Amazon or municipalities consider operating their own blockchain infrastructure. The point is to consider where do lawyers fit into all of this? According to Jeff Garzik, co-Founder at Bloq, a blockchain services startue: none at all. “Smart contracts … guarantee a very, very specific set of outcomes,” he observed. “There’s never any confusion and there’s never any need for litigation. It’s simply a very limited, computer-guaranteed set of outcomes.” Mr. Garzik is undoubtedly discounting the propensity for things to go wrong in a deal, but there may be some potential for this to be the reality. It merits attention from the legal profession and law schools.

For low level, standardized agreements (like purchasing from a dairy farmer) the lawyer’s role would likely be one of overseeing the system and arbitrating any disagreements that may arise. This may require a baseline understanding of the technology in addition to solid understanding of commercial law.

The upshot: the end may not come swiftly. While this may eventually lead to a long run decrease in the demand for legal services for some types of transactions, it’s important to note that this is part of a longer trend of technology reducing transaction costs. Qualified lawyers will always be able to provide intangible services like effective counseling and guidance to small businesses. That will remain indispensable despite any foreseeable technologic advances. Corporate attorneys command high fees for the work they do with very sophisticated parties crafting bespoke agreements. At the low end, some contracts have been becoming more standardized, a la Legal Zoom. But nothing about smart contracts in its current form presents an issue for transactions driven by complexity.

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How to Avoid the Deal-Killer Attorney

I can only imagine the nightmares keeping entrepreneurs up at night…Cap tables, pitchdecks, and software, oh my! Not least among a founder’s fears is often the deal-killer attorney—the inflexible attorney who overlawyers, sweats the small stuff, and seems not to give a care about a startup’s wellbeing.

Some attorneys may deserve this “deal-killer” moniker due to their veritable rigidity, boneheadedness, or ungenerosity. But not all lawyers who are perceived as deal-killers are such inconsiderate dunces.

Unfortunately, there really are many pitfalls for startups to fall prey to, creating insurmountable legal barriers. Although the attorney of course does not wish for a venture to fail, they must make a comprehensive analysis of several important factors. This post aims to explain how to avoid getting your “deal killed” by a lawyer.

 

Finding an Attorney

First and foremost, you must find yourself an attorney with whom you get along and feel you can trust. Not all legal tasks are so specialized, but with regards to startup law, it is critical to find an attorney who is experienced in this realm. If you don’t know where to start, try calling or emailing a nearby law school for recommendations or another disinterested source for reliable options.

 

Being an Attractive Client

Succeeding in finding this match is only half the battle; the lawyer must also see merit in you and your business. For some law firms (including legal clinics), acceptance can be quite competitive.

There are several strictly legal characteristics that a screening interviewer might require of your business.

  • Don’t infringe on someone else’s copyright or ideas, and use original material as often as possible. This not only applies to copying a business’s name or coding, but also smaller things like borrowing images. Even if someone gives you a photo to use, don’t assume they had the rights to give it to you.
  • Don’t have thirty founders. A company must be able to make decisions, and this is hard to do when it is impossible to get everyone in the room or on the phone at the same time. A tighter group of founders where each
  • Don’t do anything illegal. This one may seem obvious, but consider that it also applies to regulatory violations you may not know exist, and lawyers have an ethical obligation not to represent clients knowingly taking part in illegal behavior. Try to read up broadly on the regulatory issues of your industry to know what might apply to you.

There are several characteristics your screening interviewer might be taking special note of. Here are a few tips and tricks to understand before seeking counsel.

  • Be ready to tell your story. Know why you’re taking on a certain venture and be able to confidently and convincingly articulate this.
  • Have an idea of what you aim to achieve next, and express dedication to achieving that goal.
  • Although you don’t need to display impeccable business sophistication, a general understanding and concern for keeping the business end tidy can only work in your favor.
  • Do your research. Know what businesses exist with similar product ideas or names, and be ready to differentiate yourself.
  • Have more than simply an idea for a product or service; be able to demonstrate or discuss value the business has already created.

 

I’ve Got a Lawyer, Now How Do I Prevent Them from Killing My Deals/Ideas?

Finally, you need to have a sense of what your lawyer needs from you. If they have not communicated this, for goodness sake, ask them! Lawyers inevitably focus on different facts and circumstances than founders do, but there’s usually a reason for it. If it isn’t clear to you what issues your lawyer is prioritizing and why, it will be difficult to understand where the business is heading. Additionally, if you make your lawyer very aware your priorities and your level of risk tolerance, this open line of communication will promote an idea flow of flexible workarounds and creative solutions.

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The Pros and Cons of New Online Legal Services

It can be difficult to assess the credibility of the many available reviews of non-traditional legal service providers, as many critics, like law firms and established service providers, have a vested interest in discrediting the services. However, it is worth noting that the services have very real issues and limitations. Here we will consider two new types of legal services, non-firm affiliated online legal service providers such as Rocket Lawyer and Legal Zoom, and firm-affiliated online legal resources, such as Cooley GO, and assess their pros and cons for entrepreneurs.

 

Non-Firm Internet Legal Service Providers

In the last fifteen years, legal services have come to the internet. In 2001, LegalZoom, the first of these non-firm online legal service providers was founded. Rocket Lawyer, LegalZoom’s biggest competitor, joined the market in 2008. Both use similar models to offer three types of services. First, they provide document generators for a number of matters, from wills and trusts to entity formation. Second, they provide limited consultation services, connecting customers to affiliated attorneys. For the second function, the two companies differ slightly. Legal Zoom offers a subscription model matching you with a lawyer that you may consult with for a specified amount of time each month. Rocket Lawyer offers “on call” attorneys that will answer discreet questions at any time, for a fee. Legal Zoom offers an on-call service, but their service connects customers with “specialists” rather than attorneys. Finally, both services post articles on legal matters, such as articles detailing the pros and cons of LLCs and corporations.

The most obvious advantage of these companies over a traditional law firm is cost. Costs of these services are quite low. Formation of an LLC with LegalZoom, including filing fees, can be done for $149, and their subscription model begins at $31.25 per month. Hourly rates for lawyers at big law firms are usually several hundred dollars.

These companies may be especially useful to entrepreneurs with a broad variety of legal issues, not all of which relate to their company. Unlike the firm-affiliated services discussed below, LegalZoom and Rocket Lawyer also provide documents and information for personal legal issues. Like the services discussed below, these companies will also likely be useful to very early-stage companies wishing to get the lay of the land before proceeding with other types of counsel.

However, there are important downsides to these services that should not be dismissed. First, for entrepreneurs in relatively small legal markets such as Ann Arbor, the counsel accessible through these companies may not be able to provide market-specific insights, and will likely only be able to provide a national perspective. For example, LegalZoom’s subscription service is not available in Michigan at this time. This can be especially important when forming a company: if you choose to form an LLC, you will most likely form that LLC in the state in which you are located, and the laws relating to LLCs and other entities vary by state. Second, both LegalZoom and Rocket Lawyer disclaim all liability stemming from use of their documents. This means that if you use their document and later discover, for example, that a provision is unenforceable, you have no recourse against the company. This is not the case if you hire counsel to review or draft your documents. It should be noted that the accuracy of the documents may be a real issue. A number of practitioners have publicly criticized the quality of the documents, and the documents may not be updated promptly to reflect changes in the law or the market.

 

Online Firm Resources

Many law firms that service startups have responded to this increased availability of legal services on the internet by creating their own platforms for entrepreneurs to get information and begin building their business. One such service, Cooley GO, is provided and maintained by Cooley LLP, a law firm based in Silicon Valley that specializes in counseling startups. Cooley GO provides a number of resources, including articles written by Cooley lawyers on topics important to entrepreneurs and document generators. On Cooley GO, entrepreneurs can read articles answering questions on many aspects of their business, including “what entity form is right for me?” and “what factors do I need to consider when allocating equity?” and advice on seeking venture capital and other financing. In addition, Cooley GO provides a document generator that allows entrepreneurs to input their information into a form and generate documents such as the full suite of documents necessary to incorporate, and different employment documents.

These websites can be very beneficial to entrepreneurs because, unlike Rocket Lawyer and LegalZoom, these websites are tailored specifically to their needs and come from firms with particular expertise in their issues. Rocket Lawyer and LegalZoom both cover a broad range of issues and as such provide less industry-specific expertise, and in fact both websites were originally intended for personal rather than business services. However, the important caveat to this benefit is that services like Cooley GO only provide resources for entrepreneurs and their legal issues. Answers to other legal issues individual founders may have that are tangentially related to their business will not be found on Cooley GO.

In addition, as discussed throughout this article, the advice offered throughout Cooley Go and other similar services are not personalized, and no regional advice is available. Further, the document generators suggest you consult a lawyer and no guarantee is made as to their accuracy. Finally, unlike the online services discussed above, there is no instant way to consult a lawyer through Cooley GO. However, using Cooley GO can provide a gateway to engaging the services of a Cooley attorney. While engaging an attorney may be expensive, many startup-focused law firms offer deferred payment plans for early-stage companies.

 

Traditional Counsel

While these services provide a wonderful jumping-off point for entrepreneurs looking to familiarize themselves with the legal landscape, there is no substitute for counsel. While in all circumstances the judgment and expertise counsel can provide are helpful, there are some circumstances in which hiring counsel is especially important.

First, when you have questions relating to a very specialized area of law, such as immigration or tax law, counsel in those issues can guarantee the matter is handled correctly. Second, if you are negotiating an agreement or term sheet it is important to hire counsel to advocate on your behalf. In that situation, counsel can also assess whether or not the terms you are being offered are market and help you evaluate your options. Third, if your matter involves any intellectual property, you should hire counsel to ensure that you are legally protecting your intellectual property in both the short and long term. Unfortunately, some actions may void your rights to protections such as a patent, so involving counsel early ensures you keep all your options open. Fourth, if you are looking for connections to other resources in the community, such as incubators, financing, or other entrepreneurial services, hiring counsel can allow you to connect with those services more easily. Finally, if your situation differs from “the norm” in any way or specifically requires a judgment call, hiring counsel is critical. The documents provided both by services such as LegalZoom and Rocket Lawyer, and Cooley GO are sufficient only for the most basic and typical of situations.

The Michigan Law Entrepreneurship Clinic can be a perfect option for many area entrepreneurs. In addition to providing the benefits just discussed that come with obtaining counsel, the services of the Clinic are pro bono, meaning no hourly rate for the services is charged. Some matters are outside of the scope of the clinic, but in those situations the Clinic can refer you to local counsel that would be a good fit for those particular issues, allowing you to spend money just on those matters that really require it. Applications for Clinic services are evaluated on a rolling basis, and may be submitted here.

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SHARING IS CARING: Why you should share everything about your business if you care about it

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Note about the author:  David Lutz is a Student Attorney with The Entrepreneurship Clinic and the Founder of BriefCase. (www.thebriefcaseapp.com).  His dual role creates a unique perspective into attorney-client dynamics.  A special thanks to Jesse Thomas (@JESS3) for allowing the use of his Startup Mixology Infographic.

It seems obvious, if not downright unnecessary to discuss, yet attorneys often find themselves being the last to know about a new development with their client’s business.  In this post I will discuss some potential reasons for this ongoing conundrum and suggest why you, the entrepreneur, need to be proactive in your relationship with your attorney in order to receive the best representation.

Cost is no excuse in a clinic.

If you are being represented by The Entrepreneurship Clinic or another clinic for that matter, you are receiving legal services at no cost.  Our waiting list alone demonstrates how amazing that is.  I mention this because it is understandable that an entrepreneur paying for legal services may not want to share everything in an effort to save time and ultimately money.  However, “understandable” does NOT mean wise or prudent.  Furthermore, it is not understandable why a client of a clinic might not share all of the details of his or her business.

Excuses lead to consequences.

1) Entrepreneurs forget: I get it.  Entrepreneurial time makes dog years seem slow, so what happened months ago might as well have been years ago.  A good attorney will ask a lot of questions to understand the progress of your business and jog your memory.  Sometimes these questions will seem annoyingly detailed, almost painfully so, but often the answer to your question today lies within a decision made in the past.

Entrepreneur: “Can I issue restricted stock?”

Attorney: “What progress have you made since you formed your business?”

Obviously, the second question has many layers associated with it.  Trying to think back a couple months is extremely difficult, so the earlier you involve your attorney the better he or she can understand your business and answer your most pressing questions.

2) Entrepreneurs make decisions on what is important:  It is easy to think of an attorney as another service provider, but this would be unwise.  Some service providers have relatively un-nuanced tasks, the kind that can be completed with templates and set pieces of information.  When working with those services it is easy and understandable to try to anticipate what information will be needed to accomplish X task.  In stark contrast, legal services live squarely within the realm of nuance.  It is foolish to omit information about your business in an attempt to anticipate what is or is not important.  When in doubt: share.  The legal ramifications of an improper hiring decision, for example, can quickly snowball into a serious issue in the life of a young company.  So again, share early and share frequently.

3) Entrepreneurs are busy:  I am not sure which is more dreaded, meeting with your attorney or going to the dentist?  You’re busy, overworked and underpaid, so it makes sense that you might apply the “rip the band-aid off” mentality to meeting with your attorney(s) and try to make it quick.  Maybe you think that the legal issues your business faces are such a small part of your startup that they can be put off? See Startup Mixology Infographic above (http://jess3.com/startup-mixology-infographic/). While the olive sitting on the glass may seem somewhat insignificant, the foundations of your business, including strategy and problem solving, are affected by numerous legal implications.  Ever-present legal implications are enough of a reason to reach out to your attorney with new business developments as or before they occur.

4) Entrepreneurs are protective:  Information about your business and strategy could have a large impact if it were to find its way into the wrong hands, so it makes perfect sense to be cautious.  However, an overabundance of caution, especially in regards to your relationship with your attorney, can be harmful.  Fully understanding the attorney-client relationship and associated duties (ie. duty of confidentiality), should relieve your concerns about sharing.  There are plenty of blog posts explaining the duty of confidentiality (ie. http://www.sgrlaw.com/resources/trust_the_leaders/leaders_issues/ttl5/916/) and Student Attorneys with The Entrepreneurship Clinic spend a considerable amount of time early in any client relationship to clearly explain it.  As entrepreneurs it is important that you understand the dynamics of the relationship, its associated duties and that the ultimate client is (typically) the company, not you.  A clear understanding of the relationship in addition to an acknowledgment of the complexity of any legal question will allow your attorney to provide the best representation possible.