How to Choose: A Sweat Equity Law Firm

Strategically planned sweat equity partnerships can help unlock the potential of an early-stage company, allowing founders to scale without traditional constraints. However, similar to choosing a lead investor during fundraising, making the wrong choice can severely hamstring a startup’s growth. This is especially pertinent when selecting your startup’s legal counsel. A good startup lawyer has the ability to understand the needs of your business and shape legal documents and agreements in a way that allows you to do what you do best while mitigating the risks associated with running your business (to the best of their ability). Working with sub-par startup lawyers will result in leaving meetings with more questions than answers, ambiguous guidance, and spinning wheels that produce nothing of substance outside of a large invoice. We understand any founder would have pause when juxtaposed between these two outcomes and the impact they would have on the success of their startup’s partnership. With that in mind, we’ve outlined a few key points to keep in mind when looking for the perfect lawyer (or law firm) to partner with on a sweat equity deal. We hope this framework will  provide you with the tools to confidently select the right lawyer to help you scale your business. 

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Shared Success Criteria

Although almost universally agreed upon as the most logical starting point when vetting potential employees, we often find founders skipping the most fundamental step when hiring external talent: ensuring alignment on vision and culture. Unlike most service relationships, where engagements are managed by committee or dedicated engagement managers, , the point of contact at your law firm will likely be the same person you met during the vetting process. Your lawyer will manage your work product, by either producing it themselves or disseminating specialized deliverables to their firm’s subject matter expert for the topic in question. This dynamic increases the importance of choosing a lawyer that sees the future the same way you do. Having your lawyer get the long-term vision and where the company is headed will help them better craft your documents and increase their proficiency when communicating your needs to the other lawyers in their firm helping to create your work product. This understanding has the added benefit of empowering your lawyer to not just think about the work that needs to be done today, next week, or even next year, but allow him to better understand the work that needs to be done to support where the company will be in 5 years. During the vetting process it can be helpful to Listen to your potential lawyer’s concerns around your vision of what will need to be done to achieve it. It will tell you a lot about how aligned they are with your vision and the work they perceive that would need to be done to reach that vision.

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As an additional benefit, having a conversation about vision and culture will help to show your sweat equity counterparty the places you plan to go and the potential value you see in your equity – which, as a shareholder, will help incentivize your service partner to go above and beyond their normal scope of work to achieve that value. We recommend starting these relationships over a coffee or a beer to both get a feel for your lawyer professionally and personally. You’ll likely be “in the trenches” with this person for the next few years, so you might as well enjoy their company! 

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Service Fit

When evaluating your potential lawyer's competency in a sweat equity investment, the most important question to ask yourself is “Does this service provider provide a service or skillset that is impossible to replicate with me or my core team”. Obviously, there are legal limitations for yourself and your team and certain tasks integral to starting a company that you’ll absolutely need a lawyer for, but this question has a two-pronged benefit. Firstly, and most importantly, any lawyer you partner with should absolutely “wow” you. Your business is such a major part of your life that settling for a lawyer that won’t add immense value to your startup will end up causing you more headaches than it’s worth. A good lawyer can tell you what the letter of the law is and what options you have to stay in line with those letters. A great lawyer, however, can do that while also providing unique insight on “if I was you” or “I’ve seen clients be extremely successful employing this strategy”. The distinction is small but when dropped into a world you do not routinely operate in it can make all the difference.

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The second is more logical and financial - your equity is extremely valuable. We understand the beginning bootstrapping stages of creating your vision can be extremely stressful and difficult as you navigate trying to create growth and traction with severely limited resources. That being said, as difficult as it may be, we advocate that you try to take a step back and think about things from the perspective of being 10 years and having reached a bunch of successful milestones down the road. How much is your equity worth? Does this lawyer have the potential to get you to this value in a way that would not be possible with bootstrapping alone? If the answer is “yes”, then start the negotiation process to get them working as soon as possible. Terms don’t matter (within reason) as much as closing a deal in a timely fashion and getting to work. A good legal partnership can drive growth more than almost any other factor (outside of maybe the core team). However, if the answer is “no”, or “no more than their competition” you should consider other options, such as deferred payments, that preserve your equity. Or, if you have to give up equity, try to limit the scope of services to put yourself in a position to renegotiate when your resources are less scarce - such as achieving a revenue milestone or closing a fundraising round.

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Vertical-Specific Experience

Lastly, and what seems to be the most intuitive but oddly overlooked - ensure your lawyer has relevant experience working with companies in your industry. You need your lawyer to be able to identify blind spots and potential issues that you and your team are not able to do on your own. A good way to evaluate your potential lawyers' experience is to ask them to provide you with some examples of similar companies they’ve worked with and how they were able to uniquely add value to these companies as they grew (they’ll have to reach out to a few clients and get their consent before sharing, but it’s well worth the extra time).. You should be able to get concrete answers that highlight their understanding of the landscape and needs of a startup as it navigates its way to being an established company. In the end, a great partnership feels like a no-brainer and should be extremely exciting - with both parties leaving the room feeling excited about the future. 

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