I recently watched a debate slowly unfold on a listserv. The issue was whether it is ethical to take equity in a company in exchange for legal services. Each lawyer’s response to the preceding comment was a little more personal and aggressive than the last. It was like watching an entire season of the Bachelor over a weekend. At first everyone was friendly and cordial, then people became slowly and increasingly more dramatic, until the thing culminated in a forced, fake resolution and everyone left pissed. Probably the best argument in opposition claimed it is unethical, and even immoral to take equity in a client, because an actual conflict will necessarily exist.

The ethics rules at play are 1.8 and 1.5. Rule 1.8 prohibits any transaction between the lawyer and client that would be adverse to the client without proper written disclosure, and 1.5 mandates that a fee be reasonable. The ABA ethics committee looked at this issue in 2000 and opined that such an equity-based compensation model is appropriate if:

1. The investment and its terms are fair and reasonable to the client;
2. The terms of the investment are fully disclosed in writing to the client in a manner that can be reasonably understood by the client;
3. The client is advised in writing that the client may seek the advice of independent counsel of the client’s choice and the client must be given a reasonable opportunity to do so; and
4. The client gives informed consent in a signed writing to the essential terms of the investment and the lawyer’s role in the investment transaction.

Obviously, this is not a new issue. Venture Law Group, for example, made a killing off of IPOs like Yahoo! by using this type of fee structure. It has been controversial since the start of the tech boom. The central issue is whether vested equity interest in the success (or sale) of the client business affects the attorney’s judgment as a lawyer. In other words, how can the attorney possibly fill the roles of both shareholder and corporate counsel? This is a good question and has been debated to death so I am not going to go into it. My contention is that the entire debate should take a back seat as a policy consideration. (GASP!)

The most important policy consideration in this debate is whether or not the consumer has a choice. Will the “next big thing” be able to benefit from legal counsel if they cannot exchange equity for it? In the early stages of a startup all it has is equity. Most do not have spending money until their seed investment. The catch-22 is that a lawyer is almost necessary in obtaining that first investment without losing the farm. If the startup does not have a lawyer advising it, it can make several mistakes that can cause it the vast majority of its equity in the future. Entrepreneurs are good at what they do, and that thing they are good at is probably not writing corporate bylaws to protect against things like equity dilution – for example.

The RPCs are very important. However, they do not do any good for clients who cannot get their foot in the law firm’s door in the first place. Below is a range of average lawyer fees in the D.C. and San Francisco area according to the Laffey Matrix. This is for all areas of law, and I would anticipate most tech startup firms charging more:

How are most start-ups supposed to afford $400/hr? We can still mandate that lawyers prioritize client interests above their own. However, doing so by prohibiting any and all temptation potentially causing more harm than good. What is more “immoral:” helping a client in the only way that they can afford after making full disclosure of what that means, or telling them you will only do it for an amount of money they do not have and then shrugging your shoulders?

 

Successful corporations are made up of several people who are all good at what they do. They probably are not good at everything, but they do not have to be. At law firms, lawyers have to be most things. ABA model rule 5.4 prevents the sharing of legal fees with a nonlawyer. Firms can still pay consultants or employees to perform certain tasks, but non-lawyers cannot own equity in the firm. According to the comments in the rule this limitation is “to protect the lawyer’s professional independence of judgment.” The policy behind 5.4 is to protect the consumer and safeguard the integrity of the profession. Good goals no doubt. However it begs the question: how is the industry supposed to evolve?

Lawyers are trained in reading and interpreting the law, and then applying that interpretation. They are not trained in marketing, management, technology, etc. They are also pretty damn cookie-cutter after they get out of law school. Every single one of them had similar, accredited education through the same Socratic method. We go out into the world, do what we are taught, and the profession is safeguarded from corruption. That same uniformity is why most lawyers reading this will have the gut reaction to disagree because I am hinting we tear down one of the ethics pillars.

But what’s the unintended consequence?

We have dismal access to justice. Self represented litigants make up more than 80% of the case load in some counties across the nation – and those are just the people who are going to court! Many people do not even make it that far. Opening up law firm ownership to individuals from the business world and other industries may spur the disruptive innovation the industry needs. The thing is, we can still have an ethics regime that mandates professional independence of lawyers. We can write a new rule that places that mandate on the individual.

Besides, what are we trying to “protect?” What are we so proud of? Our profession is supposed to dispense justice – a thing of which we are the gatekeepers and ambassadors. We have built a system that for one reason or another precludes a huge percentage of the population. Yes, we protect, maintain, and administer our craft – to about 1/5 of the population. I suggest we climb down from our ivory towers and see what distribution ideas the Mark Zuckerbergs and Elon Musks of the world have in mind.

We need the legal equivalent of Tesla. That thing that just makes so much sense everyone will be doing it in five years. If we offer the most innovative brains of our time a slice of the industry pie they just may help us out.

 

The San Francisco based law firm, Smithline, PC has an extremely unique (and potentially extremely disruptive) pricing model. They provide transaction services to clients on an agreed upon, flat-rate monthly subscription. According to their website  Smithline provides the following services for a monthly price with no term commitment:

o             Negotiate an unlimited number of technology transaction deals

o             Provide product legal review

o             Draft and help you implement an open source policy

o             Invite your team to attend our training sessions without charge

o             Create and update your key forms

o             Create deal flow tools for your sales and business development teams

o             Attend executive staff, board or other company meetings

o             Provide unlimited counseling within the scope of our practice

Smithline’s unique model has apparently attracted attention from heavy hitters like Facebook, Adobe, and Yahoo – which are all clients of Smithline.

Refreshing. I know LAWntrepreneurs will be following this firm’s progression closely.

A blog post on out of control college tuition may seem a little out of place on a blog devoted to disruptive innovation in the delivery of legal services. However, given the current regulatory regime controlling who can practice law, it is a near certainty that lawyers reading this went to college and law school. The only exception may be the tiny fraction of lawyers who went through some sort of state specific apprenticeship program in lieu of law school such as this one in Washington. The chart below shows tuition in private and public universities from 1975 to 2016 represented in 2015 dollars.

As can be seen from the chart, tuition is f@#king out of control! Tuition is three to four times higher than it was in 1975 across the board after being adjusted for inflation. Some leading entrepreneurs have publicly stated college is turning into a giant scam and does not deliver on its promise. As a result, would-be college students in other industries are choosing to attend the school of hard knocks or choose an alternative route to success. Lawyers do not have that luxury. In most states it is a requirement that one attend both undergrad and law school to be eligible to sit for the bar. In 2015 the average law student was graduating with $140,616 in student debt.

THIS AMOUNT OF DEBT PREVENTS MOST LAW GRADS FROM INNOVATING.

If you come out of law school with that amount of debt you better pray to whoever is listening that you can land a high paying job at a firm. If you do, then it is very unlikely that you will ever effect truly disruptive innovation in legal services because you are indoctrinated into a system that will work pretty well for you. It is very unlikely that you will be too concerned with inadequate access to the justice system because you are doing well.

Similarly, if you do not land a high-paying job out of law school then taking a risk on an innovative legal start-up is extremely high stakes. Most disruptive companies are not profitable right out of the gate. As time passes on your student loans the interest compounds and what might have been a barely manageable mortgage-size number quickly gets out of control. Income-based repayment plans, contrary to popular belief, do not help this effect because of their dirty little secret that the “forgiven” amount is taxable income.

When you attend a law school open-house prior to choosing where to go all you hear about is income based repayment. An income based repayment plan just requires you to pay an amount that cannot exceed a percentage of your income for 20 years, then the remainder is forgiven. Sounds pretty sweet right? Wrong. The dirty little secret is that the “forgiven” amount after 20 years of making payments is considered income by the IRS and is taxed as such. Further, since almost nobody actually pays anything towards their loan principal on an income based repayment plan, the amount that is “forgiven” can be higher than the amount actually loaned! For example, a law student who borrows $150,000 at 6.8% and lands a job with a starting salary of $50,000 would repay $159,376 over the 20 year period with the amount “forgiven” being $215,272. Assuming that puts the student in the top earner’s tax bracket, their tax liability on that “forgiven” amount would be $85,032.44! Therefore, if you come out of law school you likely want to start making as high of payments towards that debt as you can to prevent as much interest from compounding as possible. Otherwise, you will have a completely crippling tax burden coming in 20 years.

Ultimately, the vast majority of students coming out of law school have a debt that forces them to keep their head down at whatever job they can get to start digging through their mountain of debt with a spoon. This is not a fertile environment for disruption of the legal industry.

The bar for innovation in the legal industry is low. Davis Wright Tremaine won the Ilta’s Distinguished Peer Award in 2015 for innovative law firm of the year for its research and development arm DWT De Novo. According to its website, DWT De Novo has three main components: (1) a client portal, (2) data analytics, and (3) a streamlined document review service that leans heavily on technology. These are GREAT things to come to the law. However, they are not innovative features in almost every other industry. Innovations like these are low-hanging fruit that better serve an existing market. Commendable and important? Sure! Award winning innovation? Only in legal.

The innovations of DWT De Novo also will largely serve consumers who already have access to the justice system. Innovation to better serving existing clients is tinkering in the margins of reform in the industry. There is opportunity for truly disruptive, revolutionary innovation. Say what you want about companies like Avvo and Legal Zoom, but those companies have tried truly disruptive innovation. Sure, they have problems and are hopefully not the last generation of the services they have created. However, they have validated a market that previously did not exist. Before Avvo the top lawyer rating system was Martindale Hubbard. The vast majority of potential clients have no idea what that is. Whatever your opinion about Avvo, they brought lawyer ratings to the masses and validated a market that previously did not exist. Similarly, before Legal Zoom nobody had tried to provide bulk, volume, large scale transaction services. Again, regardless of you opinion of the effectiveness of the work Legal Zoom does, what cannot be denied is that they have validated the market for such a service. The lawyer, firm, or other company that can improve the service provided to these newly validated markets will effectuate true disruption in legal.

Social entrepreneurship is a relatively new concept. In 2011 Forbes produced its first Impact 30 list, which consists of the top 30 social entrepreneurs. Forbes defined a social entrepreneur as “a person who uses business to solve social issues.” At the top of the 2016 Impact 30 list is Scholly. Scholly matches students with scholarship opportunities. Its founder, Christopher Gray, created the site after spending 12 hours a day searching for scholarships so he could attend college. Scholly boasts it has helped its users receive over $35 Million in scholarships. The legal industry needs social entrepreneurs.

According to an American Bar Foundation study approximately 78% of people with legal issues do not have a lawyer. It is widely accepted that the U.S. has a serious access to justice problem. The problem is so prevalent that President Obama recently formed the Office for Access to Justice, a department of the DOJ. Shining a light on access to justice is good – actually it’s great. The problem, however, is that the conversation to find solutions revolves around tried and failed approaches such as non-profits, pro bono time, court facilitators, etc. The most cutting edge proposals involve non-lawyer practitioners like Washington State’s Limited License Legal Technicians (LLLT). These are great approaches for serving the very poor, but 78% of the population spans a huge number of people who do not qualify for legal aid. A problem of that size needs a much more powerful tool. Private industry is the only tool with enough force to forge a solution. We need social lawntrepreneurship.

Most of us in private practice face many challenges that our government attorney colleagues do not. For us, time is money – our clients’ money. We need to be cognizant about how much time we are spending on projects, business development, accounts receivable, ethics, paying overhead, and practicing law. Most government attorneys only need to worry about that last one. Interestingly, most law firms only want their associates focusing on practicing law as well. They want their associates learning their practice area. Often billable hour requirements do not leave them room to do much else. A more productive approach may be to give associates other responsibilities from day one.

This does not mean that associates should have an equity vote in the partnership, but assigning them business development goals and small management tasks can pay larger dividends in the long run. Firms focus too much on attracting “rain-makers” instead of creating them. Creating an associate culture that encourages them to take responsibility for their own practice can bring in more clients for the firm as a whole, and it can help make the associate more productive. More billable hours does not necessarily equal more money. More collectible billable hours equal more money. Most associates will simply bill time on cases to hit their hour goals. They often are not paying attention to the business realities of paying v. non-paying clients. A sort of “not my job” mentality sets in regarding collections, business development, and firm processes because most firms frankly do not want associates worrying about those things. If associates feel a sense of responsibility, or in other words if it is part of their job to help run the business of the practice associates are more likely to focus their time in more productive ways.